Franklin Street Properties Corp (FSP) 2014 Q1 法說會逐字稿

Good day and welcome to the Franklin Street Properties Corp. 1Q 2014 results conference call and webcast. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Mr. Scott Carter, General Counsel. Mr. Carter, please go ahead.

Good morning, and welcome to the Franklin Street Properties' first-quarter 2014 earnings call. With me this morning are George Carter, our Chief Executive Officer; John Demeritt, our Chief Financial Officer; Janet Natopoulos, President of FSB Property Management; and [Wolf Rand], Vice President, Regional Director and Asset Manager.

Before I turn the call over to John Demeritt I must read the following statement. Please note that various remarks that we may make about future expectations, plans and prospects for the Company may constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2013, which is on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today, April 30, 2014. While the Company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statement should not be relied upon as representing the Company's estimates or views as of any date subsequent to today.

At times during this call we may refer to funds from operations, or FFO. A reconciliation of FFO to GAAP net income is contained in yesterday's press release which is available on the Investor Relations section of our website at www.FranklinStreetProperties.com. I will now turn the call over to John.

Thank you, Scott, and good morning, everyone. Welcome to our first-quarter 2014 earnings call. On today's call I will be giving a brief overview of the first-quarter results, after my remarks, our CEO, George Carter, will provide more detail on the events of the quarter, our operations and strategy as we look ahead at 2014 and beyond.

As a reminder, our comments today will refer to our earnings release and our supplemental package and 10-Q all of which were filed yesterday and can be found on our website.

For the first quarter we reported FFO of $0.29 per share which is an 11.5% increase compared to the first quarter of 2013 and flat from the prior quarter. The increase in FFO per share was driven by higher property income as a result of three acquisitions we completed in 2013 and some rental increases along with occupancy gains in our portfolio. These increases were partially offset by increases to interest expense and G&A expenses.

Turning to our balance sheet and current financial position at March 31, 2014, we had approximately $937 million of debt outstanding on our balance sheet and a total market cap of about $2.2 billion. From a liquidity standpoint at quarter end we had cash on hand of about $20 million and $184 million available on our $500 million unsecured credit facility. So we have a total of $204 million of capital available at quarter end.

Our debt to total market cap was 42.6% at the end of the first quarter and our debt service coverage ratio is approximately 4.9 to 1. Approximately 66.2% of our debt is at a fixed rate. We believe leaving a portion of our debt at a floating rate helps provide us flexibility if we pay down debt as we can avoid incurring prepayment penalties or the need to break swaps. Floating debt also provides ready capital for acquisitions.

As a reminder, remain a totally unsecured borrower and no property in our portfolio has any secured debt. We believe this approach gives FSP a lot of flexibility to manage and grow our portfolio and, as a consequence, is a conservative balance sheet that will serve us in various parts of the business cycle.

Finally, as announced in our release, we are updating our guidance for 2014 based on our current outlook. For the full year we anticipate FFO in the range of $1.09 to $1.12 per share diluted, and our guidance excludes the impact of future acquisitions, dispositions and capital markets transactions except those we have already announced.

That concludes my comments and there will be time for questions at the end. As a reminder, all this information, including our supplemental, is available on the website and we're happy to answer your questions after George's remarks on the portfolio and the results. Thanks for listening. George?

Thank you, John, good morning, everyone, and thank you for taking the time to listen to Franklin Street Properties' first-quarter 2014 earnings call. My prepared remarks today will follow my written commentary and yesterday's earnings press release and after my short comments we will open the call for questions.

For the first quarter of 2014 FSP's profit as represented by FFO totaled approximately $28.8 million or $0.29 per share. As John said, that is essentially flat when compared to fourth quarter of 2013. Dividend distributions declared for the first quarter of 2014 were approximately $19 million or $0.19 per share. And as John said, we are updating our full-year guidance on the lower end of the range to $1.09 to $1.12.

Our directly owned real estate portfolio of 39 properties totaling approximately 9.7 million square feet was approximately 94% leased as of March 31, 2014 and that is up from approximately 94.1% leased at the end of the fourth quarter of 2013.

Our property markets are generally performing well with increasing occupancy and increasing rental rates, that is particularly true of our five core markets, Denver, Dallas, Atlanta, Houston and Minneapolis. Every property and every submarket is different, but generally speaking we are quite positive about growth, rent roll ups and good occupancies, particularly in our five core markets.

Our property portfolio of primarily urban infill office assets has relatively modest lease expirations during the balance of this year and we continue to work on reducing those coming lease rolls. As of the end of the first quarter of 2014 about 4.8% of our commercial square footage is scheduled to expire during the balance of 2014. And our tenant improvement, expenditures and leasing costs do continue to moderate in relationship to the level of rental revenues being achieved.

Organic same-store rental growth increased about 2.9% in the first quarter; however, we made no new property acquisitions in the quarter. Potential new property acquisition possibilities are actively being worked on as well as selected property disposition opportunities. And we would anticipate both property acquisition and disposition activities this year to result in some level -- potentially meaningful level of asset recycling.

On the property acquisition front our potential pipeline is fairly significant. It keeps ever changing and updating and it is the same situation on the disposition side as well. There are, we believe, some accretive opportunities for asset recycling and we are working on those quite hard at the present time. Raising new capital for additional property acquisition activity without recycling will be subject to the broader capital property market conditions.

In addition, we are announcing this quarter that at the end of TCF Bank lease in Minneapolis -- that lease actually ends December 31, 2015, so we will be talking about a 2016 event -- we are planning to redevelop one of our properties there, 801 Marquette Avenue in Minneapolis. That is a four-story office building and we are planning to redevelop that at this time.

When we acquired this asset in 2010, as a part of a two property purchase, the opportunity to pursue this development was our primary long-term objective for that particular site, that particular property, as we believe it is one of the most underdeveloped locations in the central business district of Minneapolis, which is one of our core markets. This property is known as 121 South Eighth Street for those of you that look at our property list on page 10 of our earnings release.

As the second quarter of 2014 begins we continue to be very optimistic about our continued growth during the course of the year. With that I will open it up for questions.

(Operator Instructions). Dave Rodgers, Robert W Baird.

Maybe George, or maybe even Jeff, you could give us a little bit more color on the acquisition pipeline. I appreciate the commentary in your prepared remarks, George. Obviously it was a quiet quarter on that front after a pretty active year last year.

Is the issue just kind of timing? Is it more cap rates and the availability of assets? Is it a funding issue on the FSP side in trying to line up financing? Maybe give us a little bit more color on the quietness in the first quarter.

Sure, Dave, this is George, Jeff is not with us today. We have acquisitions totaling -- acquisition opportunities that we are pursuing totaling almost $1 billion in seven different properties. These properties are all located within our five core markets.

The primary objective here has been to buy properties that we think we can add some level of value to sort of the last mile value equation, which we have I think very successfully done the last couple of years with our acquisitions. And to with that last mile value add be accretive relative to some property potential dispositions in those markets that we think we can make.

So we're talking about a recycling situation when we are doing our underwritings both on the acquisition and disposition. The capital markets right now -- broader capital markets are not cooperating with us enough to do new capital acquisitions. We are not interested in increasing our indebtedness, we are interested -- more interested in decreasing it, therefore equity is the most important thing and our equity price is not acceptable at this point.

So we are looking a lot at organic growth disposition acquisition within our five core markets. And I will tell you that it is very interesting our -- we feel very fortunate to be positioned where we are in these markets. And the good news is that when you add the value to these properties we are really getting some very interesting interest at very low cap rates on disposition of some of these properties.

The flip side of that coin of course is because the markets have heated up the acquisition opportunities also are having lower cap rates and higher prices per square foot associated with them. Again, unless there is this value add last mail component, which the markets will judge relatively price sensitive to the risk and reward aspect of it. And if we think we have an angle there that we can work that is where we want to be.

But that is really a situation -- the acquisition pipeline, Dave, just keeps changing and updating. We have missed some properties because we simply were not going to pay the price that they finally in fact traded at. But we do have an ongoing I think significant pipeline and I'm very confident we will make some acquisitions this year that will be right in our wheelhouse.

As a follow-up to that, George, when you talk about asset recycling and we think about the future -- I know it is not in your guidance, but how do you contemplate either accretion or dilution on the immediate going in a trade from the recycling? And I realize longer-term if you add some value to it it will move up. But what does the initial trade look like in your mind right now?

Well, we are certainly trying to be initially accretive. We were very initially accretive last year in our acquisitions. It had a huge impact, it was one of the reasons we were one of the top growing FFO office REITs in the market last year.

And we think we can do that again. But there is -- you would be willing to make the trade if you really thought that you had sort of in your hip pocket some fairly quick leasing to do to move the needle on an acquisition which might initially not be accretive. But I think the bulk of our acquisitions would be accretive in the first year.

Great. And then a follow-up maybe. I think last time on the call we talked about one near term exposure, was it RGA? I think you indicated that that might be leaving. It is a nine-month out, I think, exposure. Have you had any discussions for that space and can you give us a sense of kind of what that re-tenanting costs and re-leasing costs would be on that space?

This is Janet. I don't know that you are familiar with the building. RGA is planning to leave, they built themselves a campus down the road after having renewed with us in the past in the building -- they are just bigger than the space that we have. Any of those buildings have great highway access, great highway visibility.

We're one of the only buildings in the suburban St. Louis market that can handle a large tenant and some of the other medium-term space requirements. So we've got two buildings that they are in, one whole building which would suit a single tenant user and then they have spread into a multi-tenant building. So we are leasing or we are marketing to both markets at this point.

We think the rents are about market, I don't think there is any roll down. And I think how much higher will obviously depend on the PI package. But the buildings are in good shape. St. Louis market doesn't have excessive CapEx requirements and the leasing commissions obviously are going to depend on the length of the terms that we get.

So, I think -- RGA is still in the space. We have no indication that they are going to leave one minute before their lease expires. So we are marketing but it has been difficult to get people through the space, RGA is allowing us for big users, but we we'll probably -- the real leasing will probably start hitting at the very end of their term.

Okay, great. Thank you.

(Operator Instructions). Dave Rodgers, Robert Baird.

Well, I didn't want to hog the floor but I will take a couple more. I guess along the same lines as the discussions you are having or will have it RGA, can you talk about I guess your three big exposures which seem to be kind of Interlocken, Seattle and Baltimore? Talk about any activity. You have done a great job of keeping portfolio lease percentage very high, but you have any additional opportunities to push that?

I'm sorry, are you talking about vacancy in Seattle and Interlocken? Or are you talking about people expiring in the --?

Sorry, the vacancy that you have there and the activity on that space.

Seattle is Federal Way and we are making slow progress. That market still hasn't rebounded the way that the Seattle market has. So we are covering our expenses and we are gradually leasing that back up. Interestingly enough we have renewed every tenant that has been put in there. So we think with good a good asset for that market.

The Interlockens are interesting because I don't know if you noticed, we had a big bump up in one of the Interlocken buildings from an expansion in the existing building. So that is another market where what we saw this quarter was that our increase in occupancy was really driven by expansions in the -- from our existing tenants.

Which I think is probably not surprising given the economy, that it is the people who feel comfortable with where their finances are right now that they're willing to jump and take that extra space. That market, the Interlocken market, we think we will see something similar happen to the building which has low occupancy right now.

And then lastly I guess -- thank you for that, Janet. I guess for George. At TCF, and I know it is still a couple of years away -- are they in a couple of different buildings there? And it sounds like you indicated maybe we development of one. Are there broader plans there for the balance of that space?

Yes, Dave, if you will allow me, I know Matt Spencer had asked me a couple questions about this and I sort have put him off to this call. If you will allow me just a minute, maybe I will give a broader context to this. And then I think that will maybe give you some metrics to think about and give everybody some things to think about if that is okay.

We acquired this property in 2010 from the Ryan Companies. And Ryan, so you know, is a very close friend of FSP, they are a significant developer. They are based in Minneapolis, the corporate headquarters is in a building they built for -- that they built that one of our affiliates owns, this is the Target building, 50 South 10th Street, so their corporate headquarters is in one of our affiliates' buildings.

Brian owned this property and had -- they are peer developers and a note was coming due and they had owned these properties primarily for potential further development. They contacted us as friends and convinced us that they were a good buy. And when we did our underwritings we underwrote these properties with the idea that the smaller of the two properties would be the one that we very well might like to develop if the market got right at the end of the TCF lease.

So this was purchased and underwritten by FSP in conjunction with the Ryan Companies. Ryan will, in all likelihood, be very involved in the development, they are very involved right now in us doing the pre-work on the possibilities for this location.

There had been architectural pre-work done before we bought the property so we knew the scope of what was potentially available there. And while Ryan won't have necessarily a financial interest they will have a general contractor type position and we will be a close advisor and partner on this whole situation.

There are actually two adjoining properties one is a low rise 170,000 square foot property, that is the property we are talking about redeveloping. And the other is a 17 story tower, about 305,000 square feet. We bought these two adjoining properties for $85 per square foot or about $40.5 million in 2010.

The bigger property, the tower, the 305,000 square foot 17 story tower, our objective, which was a B property when we bought it, was to bring it up to B+, A- and hold it long-term. It was a multitenant property, we did lobby skyways and conference centers and redid the elevators, parking ramps, modern electronic directories, management offices, a lot of improvements on that property which are just about completed. And again that is a long-term hold in a multitenant property.

The smaller building, which is the 170,000 square foot building, is a four-story brick building and that was built, that building was built actually in 1923. And that is the building that is at 801 Marquette Ave., right next to the historic Foshay Tower if you know Minneapolis which is now a W Hotel, and right kitty corner to the IDF center which still in Minneapolis for office is sort of the center of the universe.

And this is the property we originally purchased to potentially redevelop in the future, and the one that we now plan to redevelop beginning in 2016 upon the expiration of the major tenant's lease which is TCA. And we believe it is the best development location in the entire Minneapolis CBD. So how is TCF involved? And let me give you a few bullet metrics which maybe will help you think about this whole picture.

So TCF Bank is in both buildings, the tower and the low rise. In the tower they are one tenet of many, many tenants, but they have the largest position in the tower, they have about 32% of the tower or about 98,000 square feet of the 305,000 square foot tower. And that tower is getting net rents of about $11 to $11.50 triple net per square foot.

TCF basically has of the entire smaller building, the low rise four-story older brick building, about 97% of that building, in fact. And that rent in that building is $4.50 triple net per square foot. So that is sort of a building that we view as sort of just a way to land bank the land and we bought it as such -- our basis in that building is about $4.2 million.

If you take the entire NOI drop, assuming that we never leased a square foot of the TCF space that would hit in 2016, you would have an NOI drop of about $1.8 million. And if you look at page 19 of our supplemental you will see that TCF actually is the number one tenant in terms of square footage in our portfolio of 263,000 square feet, but it is actually number 19 on the gross rent list.

So when you gross up that NOI you gross that NOI up to about $2.9 million. And so, if you look at our largest tenant in terms of rent it would be Quintiles at about $8.8 million. And 19 on the list would be TCF at about $2.9 million. So the $2.9 million gross rent number I think is -- again, the one to sort of keep in mind.

And while we have no specific plan as yet, the pre-work before we bought and underwrote these properties really shows quite a range of potential bookend opportunities all the way from simply continuing, if that is what the market dictated, sort of a land bank with the small building, leasing it to another tenant or tenants to complete redevelopment of that building.

So the smaller building which we are talking about re-leasing has gotten an NOI in it from TCF of about $745,000. And the potential high rise office development for that location can be as high as 600,000 to 800,000 square feet. You are talking about exchanging potentially on the one bookend side, the high side of life here $745,000 of NOI for upwards of $16-million-plus of NOI. Obviously there would be substantial cost to that.

But we have such a low basis in that land and that net property that I think that what the market bears and what the studies show will really dictate what we do. So the high side of that is a new office tower, the low side of that is simply a redevelopment of the existing building and getting a rent after that redevelopment that is not just a land bank but is a meaningful rent.

So we absolutely think about the tower is very competitive, we will re-lease the 98,000 square feet. We have prospects already for the TCF space in 2016. So we think what we are really talking about is the 170,000 square foot for the low rise building. And we have such a low basis in that and such low rent that we really think we can add tremendous value there depending upon what the market allows us to do.

Again no specific plan yet, we will announce it to the Minneapolis market and to our investor community as soon as we have it finalized. But I can tell you that we will do no spec building, we will have substantial pre-leasing before we turn a shovel and the earliest that we can turn a shovel there is 2016.

Appreciate all of the detail. Thanks, George.

This concludes our question and answer session. I would like to turn the conference back over to George Carter for closing remarks.

Well, thank you, everybody, for tuning into the call. I hope we will see a lot of you at REIT Week in New York the first week in June. Look forward to it. Thank you again.

The conference has now concluded. Thank you for attending today's presentation and please disconnect your lines.