Franklin Street Properties Corp (FSP) 2014 Q4 法說會逐字稿

Good day and welcome to the Franklin Street Properties Corp fourth-quarter 2014 results conference call and webcast. All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Scott Carter, General Counsel. Please go ahead.

Good morning and welcome to the Franklin Street Properties fourth-quarter 2014 earnings call. With me this morning are George Carter, our Chief Executive Officer; John Demeritt, our Chief Financial Officer; Jeffrey Carter, our Chief Investment Officer; Janet Notopoulos, President of FSP Property Management; and Toby Daley, Vice President and Regional Director. 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, 2014 which is on file with the SEC. In addition these forward-looking statements represent the Company's expectations only as of today, February 18, 2015. While the he Company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so.

Any forward-looking statements 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 in the Investor Relations section of our website at www.franklinstreetproperties.com. I'll now turn the call over to John Demeritt. John?

Thank you, Scott, and good morning, everyone. Welcome to our fourth-quarter 2014 earnings call. On today's call I will begin with a brief summary of our quarterly results, a financing update and I'll cover some other topics. And then after my remarks, our CEO, George Carter, will discuss the quarter in more detail and provide an update on our operations and overall strategy as we look ahead to 2015.

As a reminder, our comments today will refer to the earnings release supplemental package and 10-K, all of which were filed yesterday and, as Scott just mentioned, can be found on our website at www.franklinstreetproperties.com.

For the fourth quarter, we reported a decrease in Funds From Operations or FFO of about $1.7 million, year over year, to $27.5 million for the fourth quarter. The decrease was primarily from lower property income as a result of a decrease in our average space leased during the fourth quarter of 2014, which was 93% compared to 94% in the fourth quarter of 2013.

We also had higher personnel expenses and IT costs in the fourth quarter. These costs increased some as a result of the growth of our portfolio from acquisitions made in 2013 and to have infrastructure in place for the future. The impact of these decreases was partially offset by lower interest costs for Q4, and our FFO per share was $0.27 for the quarter, compared to $0.29 for Q4 of 2013, as a result.

For full-year 2014, FFO was $1.12, representing an increase of about 4.7% over our results in 2013 and was primarily driven by higher property income from those acquisitions I mentioned that we had made during 2013 at different points during the year. We had those properties for the full year of 2014, so that was the reason for the increase.

This increase was partially offset by higher personnel expenses and IT costs as was the case with the fourth quarter, and we also had higher interest costs comparing the two full years and, the reason for that is, in August 2013 we did a seven year term loan that's at a higher interest rate than our floating rate debt and was outstanding for the full year of 2014, where it was only outstanding for about four months of last year -- of 2013.

These results were in line with the guidance we provided to you for the year. Turning to our balance sheet and current financial position at December 31, 2014, we had approximately $888 million in debt outstanding, all of it unsecured and our total market cap was $2.1 billion. From a liquidity standpoint, we had cash of about $7.5 million and had $232 million remaining available on our $500 million line of credit, which gives us about $240 million worth of liquidity at year end, which is up about $26 million compared to our position at December 31, 2013.

This increased availability will help support our capital needs and growth strategy as we look ahead. We remain comfortable with our leverage and our debt-to-total market cap ratio was 41.9% at the end of the fourth quarter and our debt, service coverage ratio was about five times for the fourth quarter and for the year.

Our debt to adjusted EBITDA ratio was at 6.7. We remain an unsecured, rated borrower, and about 77% of our outstanding debt is not affected by changing interest rates. Given that we are currently in the process of executing an asset recycling program, we believe this balance sheet strategy provides maximum flexibility to opportunistically allow us to sell assets and reinvest proceeds to grow our portfolio. I'd like to note that as of December 31, 2014 we have modified our definition of AFFO.

Our portfolio has become more of a value add when you look at our last five acquisitions. These were the larger, more multi-tenant buildings and CBDs, compared to some of the older properties we have that were smaller, more suburban and less of a value add. We evaluated how we underwrite an acquisition, how we spend capital and, also, looked at how some of the other office REITs define AFFO. There is a comparison of the new and old definitions on page 29 and 30 of the supplemental filing from last night that you can look at.

We show the various buckets which include second-generation [tee eyes], leasing commissions, and non- investment capital when calculating FFO, and we exclude first-generation leasing costs and investment capital from AFFO like the other REITs do. We disclosed the five, capital expense buckets on page 23 of the supplemental for you so you can see it all there, too. We think this makes sense to us and is more comparable to other REITs. The change resulted in higher reported AFFO for Franklin Street of about $0.01 per share per quarter, for both 2014 and 2013.

Of note, the dividend was covered under either definition, this year, anyway. Our year-over-year growth rate on AFFO decreased a little as a result of the change, when comparing 2014 to 2013. And as I said, we think the new method makes more sense. Before I turn the call over to George, I'd like to note that we are introducing guidance for 2015, with FFO in the range of $1.03 to $1.08 per share.

This guidance takes into account our recent disposition and loan pay-off activity and, as reminder, our guidance excludes the impact of future acquisitions, dispositions, and capital market transactions, except for those that we have already announced. With that, I will turn the call over to George. George?

Thank you, John. Good morning, everyone, and thank you for taking the time to listen to Franklin Street Properties' fourth-quarter and full-year 2014 earnings call. My prepared remarks today will follow my written commentary in yesterday's earnings press release. After my comments and others from FSP executives present at this call, we will open the call for up questions.

As John said, for the fourth quarter of 2014, FSP's Funds From Operations, or FFO, totaled approximately $27.5 million, or $0.27 per share. For the full-year 2014, FSP's FFO totaled approximately $112.5 million, or $1.12 per share which is a 4.7% increase per share over full-year 2013. FSP has grown its per-share FFO over 33% during the last four years.

Our directly-owned real estate portfolio of 38 properties, totalling approximately 9.6 million square feet, was approximately 92.8% leased as of December 31, 2014, and our comparative same-store growth totaled approximately 2.2% for the full-year 2014. During the fourth quarter of 2014, we completed the disposition of our Centennial property, located in Colorado Springs, Colorado, for approximately $15.5 million. Centennial is a 110,000 square foot, single-story, flex, suburban office property that has been owned by FSP or an FSP affiliate for over 14 years.

It was our only property in Colorado Springs. Currently, we are considering disposition of several other of our suburban office assets that we believe are no longer core to our long-term strategy, and Jeff will talk about those in a few minutes. Also in the fourth quarter, a single asset REIT affiliate of FSP, FSP Highland Place 1 Corp, or Highland, completed the sale of its suburban office property located in the greater Denver, Colorado area.

We had an outstanding loan with Highland, this is one of our single asset REITs, totaling about $3.395 million, which was secured by a first mortgage on that property, and that loan was repaid in full. We acquired no additional office properties in 2014, primarily because market pricing metrics on properties we were interested in were too elevated to conform to our underwriting criteria. However, as 2015 begins, we are actively pursuing a number of new property acquisition opportunities within our primary markets. Again, Jeff will give more color on this in a moment.

We anticipate additional property acquisitions this year, and we are also very busy trying to finalize some potential anchor tenants and leases for our anticipated 2016 development effort in downtown Minneapolis, Minnesota, at 801 Marquette Avenue South, and, again, Jeff will talk about this. As we begin 2015, as John said, we are again giving full-year FFO guidance for 2015. Last year 2014 was our first year of guidance ever, and our guidance at this time, last year, was $1.08 to $1.12, about a $0.04 spread on FFO for 2014 guidance.

And again, I want to reiterate, our guidance really completely excludes any acquisitions, dispositions, debt financing or other capital market transactions. So when you look back at 2014, you really saw, in our FFO performance, sort of a static run rate of our in-place property portfolio. And after a very busy 2013, we really, in 2014, had no acquisitions or new development and no big dispositions.

We did actually dispose of about $32 million of revenue-producing assets during the course of 2014, again, which was very small, and came in sort of three main pieces, the Centennial project in Colorado Springs for $15.5 million, I just talked about, and Highland Place loan repayment of $3.4 million, I just talked about. Also earlier in the year, another single-asset REIT, Galleria, was sold and our $14 million loan, there, was repaid. So about $32 million of revenue producing assets were disposed of in 2014 and, to date, we have only reinvested about $11 million of that, and that has been redeployed primarily into some of our sponsored REIT lines of credit loans, et cetera.

So about $21 million has not yet been reinvested of the proceeds that we received from those dispositions or loan repayments. Even with the relatively or even with that, just, small transactional activity, we really did have a static run rate, and we were able to come in the range of our original guidance in 2014, all we did during 2014 was simply tighten that initial guidance range as the year went along, good news from the bottom to the top. As we look at 2015, which is our second year of guidance, we're talking about $1.03 to $1.08, about a $0.05 range in FFO guidance.

And again, just to reiterate, that's a static run rate, just like 2014 was at the start. And you will notice that drop in FFO from 2014 to 2015. That drop in FFO guidance is primarily from existing vacancy that we know of, and have planned for and certain leasing velocity assumptions surrounding that. Janet will talk a little bit about that in a moment. It is also from disposition proceeds which I just mentioned that we did get our loan repayment proceeds in 2014, which are not yet reinvested.

We put in some assumptions for some higher interest rate costs in 2015 on our outstanding revolving line of credit and, as John mentioned, as our portfolio has grown larger, we have upped G&A costs and certain IT costs, and so on, to handle that increased portfolio and again to position for the future. The one thing that I wanted to make sure that the investors and market understood is, that, while 2014 was sort of non-eventful in terms of transaction and a fairly static run rate scenario, we do not anticipate that in 2015.

We expect more dispositions and acquisitions in 2015 and, of course, there is always the possibility of capital market activity, if growth opportunities we see warrant and, obviously, if the capital markets were in line. We would expect in 2015, to adjust our guidance ranges when and if transactional events occur and those guidance ranges could definitely move either up or down based upon transactional activity, and we will do that as soon as we get a handle on what transactions are being completed and what effect it would have on guidance.

The other point I want the market to understand is that our Company is in a process, a continuing process of really transforming our property portfolio from, mostly, at least originally acquired, stabilized suburban office asset portfolio in numerous markets to a value add, urban infill, CBD office asset portfolio, primarily within our five core markets of Atlanta, Houston, Dallas, Denver and Minneapolis.

Our move, which will be unending to complete this transformation of the portfolio, to reposition our portfolio, is as I mentioned before, on numerous occasions, is surrounding our view of the US economy's future, which we believe is going to be quite different from past cycles. We strongly believe that the US economy is in a very long, slow growth up-cycle, and we are still in the relatively early innings of that long slow growth up-cycle.

And we think it will be longer and slower than most typical real estate cycles that we have seen in the past. And consequently, positioning our portfolio's properties in more long-lived assets that are positioned in our five core markets, where we believe there are very strong long-term, macro growth drivers of employment and where we believe the in-place infrastructure surrounding these assets that we are acquiring, and in-place infrastructure including transportation and housing, shopping, entertainment, all the things that go into infrastructure, is really a way to position for this long, slow growth up-cycle.

And we will -- as I said, we will continue that effort in 2015 and the coming years. With that, let me turn it over to Jeff Carter, our Chief Investment Officer, to talk to you about some dispositions, acquisitions and development. Jeff?

Thanks, George. I'm going to walk through FSP's current investment activities. I will start with dispositions and then move to acquisitions and conclude with development. As far as dispositions are occurring, FSP is actively engaged in disposition efforts, at this time, in several of our non-core assets.

FSP had indicated the potential for dispositions of non-core assets of up to $150 million to $200 million and, as reported in our fourth-quarter filings and as George just mentioned, on December 3, 2014, FSP sold Centennial Technology Center in Colorado Springs for $15.5 million, at an approximate 7.6% cap rate. Colorado Springs represents a non-core market and a non-core, single-story flex product to FSP and it was originally acquired back in 2000.

In addition to the $15.5 million Centennial Technology Center sale, FSP currently has three further properties under purchase and sale agreement at this time that reflect an aggregate purchase sales price of just about $80 million at an average cap rate of 6.75%. If successfully closed, these would then reflect total dispositions of approximately $95 million, including Centennial Technology Center.

More specifically, Willow Bend office center in Plano, Texas is one of these three further assets under contract and as referenced is subsequent event in our just released 10-K, FSP had entered into a purchase contract for this property in January of this year and on February 6 of this year, the deposit for this transaction of approximately $300,000 went non-refundable, and we expect to close during the first quarter of this year subject and conditioned upon customary closing conditions. The sales price equals $20.750 million and reflects an approximate 6.7% cap rate.

Willow Bend is a non-core asset. It is a two-story, class-A-minus property originally acquired back in 2000, but it is in a core market to FSP in the greater Dallas Metroplex, and our desire is to reinvest into more urban infill class-A Dallas properties as we remain highly committed to the Dallas market and are underwriting several potential replacement assets at this time. The two other assets referenced that are under purchase and sale agreement, in addition to Willow Bend, are within their respective inspection periods and therefore remain subject to due diligence completion and normal closing conditions and so will not be discussed in further detail at this time.

FSP currently has several other assets in the marketplace seeking out price discovery which in aggregate could further represent up to approximately $145 million in additional dispositions. Whether or not any or all come to pass will remain to be seen over the coming months. As George also mentioned. FSP received a mortgage repayment during the fourth quarter from Highland Place 1, one of our sponsored, single-asset REITs, in Centennial Colorado, that returned mortgage loan proceeds of approximately $3.4 million to FSP, which loan had been at a 4.55% interest rate.

Moving on to acquisitions, after a quiet 2014, FSP expects to complete acquisitions in 2015. We are internally targeting between $150 million and $300 million in acquisitions during 2015, which is not, as George mentioned, in our FFO guidance. FSP is actively working on several specific opportunities at this time that we believe could contribute meaningfully to our future growth and profitability.

We will keep the market apprised of any specifics when and if appropriate to do so. We continue to seek urban infill and CBD office assets in the strongest and most amenity-rich locations within our five core markets of Atlanta, Dallas, Denver, Houston, and Minneapolis. We favor below replacement cost assets that have a range of opportunities for value creation associated with them.

These include assets with significant vacancy as well is more stabilized assets that have below market rents in place and the ability to create value in the near and intermediate term. As indicated in our prior quarterly conference call investment pipeline updates, FSP has been actively seeking out opportunities, but in several instances market pricing was too elevated for our comfort and did not conform with our underwriting criteria.

Our underwriting criteria is truly dependent upon the nature of the investment in question with variance between larger value add and more stabilized assets. We continue to have a very healthy acquisition pipeline, at about $720 million currently, with about half of that being off-market and unlisted deals. The majority of our most promising acquisition prospects and underwriting at this time are in the Atlanta and Dallas markets with nothing being underwritten currently in Houston, as that investment market is frozen up at this time.

Moving on to development and our 801 Marquette Avenue South site, as opposed to our adjacent tower at 121 South Eighth Street, at 801 Marquette Avenue South we are currently contemplating two developments scenarios, one, an office only development and two, a larger mixed-use development that would contain or could contain hotel, office, and residential components or some combination thereof. FSP reports growing interest in this site at this time. The interest is coming from perspective office customers. Our leasing team from CB Richard Ellis is tracking approximately 1.9 million square feet of active office prospects in the market that could be a potential fit for the new development at our site.

Interest is also coming from perspective and premier hotel groups. FSP has, through CB Richard Ellis, been engaged in active discussions with hotel groups interested in 250 to 300 room four-star, full-service hotels on our site. Interest is also coming from perspective and premier residential groups. FSP has met with several premium residential developers who have significant interest in building between 220 and 250 rentals or condos on our site and strong experience in mixed-use development.

So where are we now? Our studies have shown that approximately 200,000 square feet of office would best serve the demand that we see in the marketplace. This could fluctuate upwards but seems about right at this time. We have begun discussions with one specific tenant interested in approximately 100,000 or half of the 200,000 square feet of contemplated space.

It is still too early to tell whether or not this discussion will lead to a positive conclusion, and so we are unwilling to speculate beyond that we are encouraged by the interest. Our work with our development team at Ryan Properties and Perkins and Will have indicated that depending on which scenario is selected, costs could approximate roughly $325 to roughly $400 per square foot in total cost for the office portion to FSP, or approximately $65 million to $80 million in very rough numbers.

These are still preliminary, and so please expect variance. More specifically this breaks down to roughly $325 per square foot or $65 million for a new, six to eight story, class-AA building that utilizes some aspects of the existing structure and is without any associated mixed-use components or, in the alternative, approximately $80 million or $400 per square foot for approximately ten stories of office within a potential 45 story, mixed-use development that would contain or could contain a four-star, full-service hotel at the base, our approximately 200,000 square feet of class-AA office space in the middle and 220 to 250 residential units in the top.

Under the mixed-use scenario, FSP would likely only invest into and own the office portion of the tower, and the respective hotel and residential groups would own and fund their respective portions of the tower. Although the high-rise, mixed-use scenario would represent a higher total cost per square foot than the low-rise, office-only project, it is likely that FSP would receive cash and/or construction credits from its co-developer partners for the air rights/land contribution from FSP. Such credits would serve to adjust the $400 per square foot estimated cost [that] FSP downward.

Additionally, a high-rise, mixed-use project with office would also command a higher rental rate in return for superior views from the high-end superior amenities. We will keep the market apprised during the course of this year as these conversations develop further. Now at this time I'd like to turn the call over to Janet Notopoulos, our President of Asset and Property Management to discuss leasing.

Thank you, Jeff. I know there may be some questions about leasing and about our oil and gas exposure so I'll try to add some color to the fourth-quarter leasing numbers. Then I'll address the leasing progress at the Timberlake in St. Louis which has the RGA tenant, and then I'll turn it over to Toby Daley, our Vice President and Regional Director for Houston to talk about the Houston portfolio.

As we reported our lease occupancy declined from 93.4% at the end of the third quarter to 92.8% at the end of the fourth quarter due to scheduled lease expirations and the exercise of early termination options. Lease expirations in 2014 including early terminations were weighted towards the back half of the year. So we collected most of those termination payments in the front half, and we suffered the vacancy in the latter half including the fourth quarter.

We've not least all that space back up yet partly because we got back in the last half of the year. Most of the space we got back is desirable space that we expect to be able to lease back relatively quickly assuming the market stays the same. And in most cases we expect to lease the space at the same or higher rents reflecting the increase in market rents in our various markets. The existing vacancies are spread fairly evenly across our markets and roughly correspond to the market's percentage of square feet in our portfolio.

The 2015 scheduled lease expirations were spread in a similar fashion across our portfolio with the obvious exception of the RGA lease at the Timberlake property in St. Louis. RGA's lease expired December 31 and is included in the square feet expiring in 2015 in our lease-maturity schedule. I just want to make sure that people understand it's not in the vacancy, it's in 2015. Using rough math the RGA vacancy would reduce our occupancy by about 2% from 92.8% at the end of the year to around 90% during the first quarter.

Depending upon our leasing success throughout the portfolio we would expect that percentage to climb back up over the rest of the year. Obviously any new acquisitions or dispositions as well as unexpected leasing events could change that. Now let me give you some specifics about RGA and the Timberlake building. Let me start by saying that we are encouraged by the leasing activity at the project to date.

The Timberlake buildings are located right off Interstate 64, Highway 40 west of St. Louis. They have great visibility from the highway and one of the best locations for easy ingress and egress from the highway. The projects consist of three separate, class-A buildings, each containing approximately 116,000 square feet. The first two buildings were purchased in 2000 as one project even though they are separate, detached buildings.

They show in our statistics as the Timberlake project or just plain Timberlake. The first of these buildings is multi-tenanted with Amdocs as the largest tenant. The second building was 100% occupied by RGA Reinsurance and is now empty. The third building which we refer to as Timberlake East, or building 3, was purchased later and is multi tenanted.

RGA occupied approximately 81,000 square feet in that building which they vacated at year end. AB Mauri, or Fleischmann's, was the second-largest tenant in building 3, and they vacated approximately 18,000 square feet at the end of their lease in January. Our leasing strategy has been to market the third building to smaller prospects and to hold the second building for a single-tenant user or larger users. So here is a the good news.

We are in leasing negotiations with a tenant for approximately 43,000 square feet of the RGA space in building 3, or Timberlake East, that would commence in the second quarter of 2015 and would absorb over 50% of the space RGA vacated in that building. If the tenant exercises this right of first offer the lease could grow to 50,000 square feet. Timberlake 2, the middle building is the only class-A building in the Highway 40 market with over 100,000 square feet of contiguous space.

The West St. Louis market is strong today, and we think we are in a landlord's market. In addition to the 43,000 square feet tenants that we are in leases with, seven other prospects in need of 40,000 square feet or more of space have toured the building and three of them were full-building users. All of the known large users in the market with a current need have toured our buildings, and we expect be on the radar of any new ones that arise. Up until RGA moved out it was difficult to show the space.

But since they moved out in January, the leasing has picked up. We expect that once we announce the leasing of this new potential lease of over 40,000 square feet in one block of space that momentum will increase and will drive other prospects to move more quickly. The rates that are being discussed our above the expiring rents and are in the general range of $24 to $26 per square foot with a $0.50 bump depending upon the size and location of the space. We are looking at a mix of five- and ten-year leases.

While nothing is guaranteed, we hope to have a significant amount of the space in the multi-tenant building released by the second half of the year and to have the larger building well leased by the end of the year or the beginning of 2016 depending upon the size [of the users]. Turning to Houston, and our exposure to oil and gas, let me refer you to our tenants by industry pie chart in the supplemental where we show that oil and gas tenants occupied approximately 15% of our leased space as of December 31.

Of that 15% five of our largest tenants that we disclosed in our supplemental comprised 10% of the portfolio's square feet and 15% of our revenue. The rest of the tenants are spread among Houston, Dallas and Denver with the concentration not surprisingly in Houston.

I will now turn it over to Toby Daley to give you more information on our Houston properties. Toby not only has managed our assets for many years but also lived and worked in Houston in the 1980s, so he has seen energy cycles there before.

Thanks, Janet. Fortunately this cycle isn't quite like what we saw back in the 1980s. I will give you a brief overview and update on our Houston properties. And I just want to add that despite the recent decline in oil prices and delivery of new office product, leasing activity and demand for office space in well located class-A projects remains strong in the energy quarter and West Chase district where FSP's properties are located.

While employment growth during 2015 is not expected to be as strong as 2014, the forecasted growth, if it is realized, should generate positive absorption but simply not at the pace that we have seen in recent years. For as long as this period of depressed oil prices and increased availability of office space persists, I expect that we will see longer downtime for vacant space and flat or maybe even decreasing rental rates even in Houston's strongest submarkets.

FSP's Houston portfolio is approximately 1.2 million square feet and comprised of three, class-A office projects, The Towers at West Chase, The Offices at Park 10 and Eldridge Green. The Towers at West Chase is a 630,000 square foot, two tower office complex located at the intersection of Beltway 8 and Richmond Avenue in the heart of Houston's West Chase district. The Offices at Park 10 is a 310,000 square foot two building complex located directly on the Katy Freeway at Park 10 Boulevard in Houston's Energy Corridor.

Eldridge Green, also in Energy Corridor is a 250,000 square foot corporate headquarters facility. FSP has a total of 61 tenants in Houston averaging 18,000 square foot each. Of these 61 tenants, 15 are oil and gas related businesses. Only three leases in FSP's Houston portfolio our larger than 60,000 square feet. These three largest leases are oil and gas related businesses. They are currently 18% to 22% below current market rents, and they do not expire until 2017, 2019, and 2022.

At year end, FSP's Houston portfolio was 94% leased down from 98% at year-end 2013. During 2014 The Towers at West Chase and Eldridge Green remained steady at 98% and 100% occupancy respectively. The Offices at Park 10 dropped from 100% to 82% occupancy due to two full floors becoming available during the year.

When you approach 100% occupancy it's difficult to accommodate growth of existing tenants, which is why we did not retain one of the two tenants that vacated Park 10 during 2014. FSP started the year in Houston with a bit less than 2% vacancy. Roughly 11% or 128,000 square feet of the portfolio was scheduled to expire during 2014. We finished the year with vacancy of approximately 6%, a substantial proportion of which became vacant in November so the vacancy is relatively new to the market.

During 2015 approximately 9% or 110,000 square feet of FSP's Houston leases are scheduled to expire. Each of the 2015 lease expirations take place at The Towers at West Chase complex. There is very good activity in terms of renewing expiring tenants as well as interest from new and existing tenants should any spaces be vacated upon a lease expiration. Expirations for 2016 amount to less than 50,000 square feet or 4% of the tenant base in Houston.

Expiring rents during 2014 and 2015 range between 8% and 25% below current market rates. We believe that FSP's portfolio in Houston will continue to perform well and that conditions presented by the current drop in oil prices might present more attractive acquisition opportunities than we have seen during the recent period of explosive growth. And I will turn it back to George.

And we will open the call for any questions.

(Operator Instructions)

Dave Rodgers, Robert W. Baird.

Thanks, good morning. This is actually Stephen Dye here with Dave.

I was just hoping to go little more color on the acquisitions and particularly what gives you confidence that those in the pipeline will fit your criteria going forward and essentially the geographic dispersion of the properties.

Thanks.

This is Jeff. I appreciate the question. What gives us confidence, we are working on a number of deals both on and off market where we feel like we are in a good position, but you never know until you know, especially on the marketed deals. And so we are actively working on a couple deals right now that we feel like we have a reasonable chance of success on.

The deals that we are looking at most actively are in the Atlanta and Dallas markets. And we have a really good pipeline wide and large right now that would fit our criteria well, is within our parameters of underwriting, and we will keep the market apprised of any success over the coming weeks and months. And we do feel like we have a very reasonable chance of success on making some of these happens.

Great, thanks and moving over to the RGA insurance space, can you talk a little bit about the seven prospects that you have for the empty building and your hopes of either expanding that or what kind of tenants they represent?

They represent a broad spectrum of tenants, and the St. Louis market is, as I said is strong right now, but is a slow -- it's not a big -- it's not like Houston with 30 tenants that would be looking. These are all pretty real prospects. Most of it is organic growth where they may be looking to consolidate operations. They just have grown out of the space, not unlike what happened to RGA in our building.

But they have toured the space, they have been engaged in conversations with us over the past, not necessarily year, but they been waiting to see whether RGA would actually really move out. As Jeff was saying about acquisitions, they all look real to us right now, but you never know. They are now coming tours or coming back for second tours, so we think we've got some real prospects there. And I think the Maryville sale may help us little bit on that, as well.

Stephen, this is Jeff Carter again. Just as a follow-up on the acquisitions front I just wanted to mention to you another reason, although again as Janet mentioned no guarantee. Some of the deals we are working on we have prior an existing relationships with some of the players involved, and that gives us some reasonable comfort that we have a solid shot of success, but again until we know we don't know. And I wanted to add that component.

Thanks.

Essentially that question was trying to get at the difference between these opportunities versus any that were too elevated to conform to your underwriting criteria in 2014. But I appreciate the color and anything else you can give would be great.

Sure. I appreciate that.

To give you little bit more color, two of the deals that we are working on out of a number of deals that we are working on are in reasonable proximity to other properties we own. We understand the dynamics on the ground very well where these properties are located, in addition to knowing ownership involved and having done business with ownership in the past. We have a very good pulse on market dynamics on the ground that are helping our underwriting.

Great, that's really helpful. I appreciate it.

Sure thing.

Tom Lesnick, Capital One Securities.

Good morning. I appreciate the commentary on guidance. I just had a couple of clarification questions. One when you're talking about guidance as being a static run rate, and I know RGA expired right the end of the year, is that included in guidance, or is guidance really reflective of the full 4Q run rate?

That is included. Everything that has happened to date is included in that guidance.

Okay. Thank you.

Expanding on guidance for a little bit again, maybe I misheard it earlier, but George I think you said that 2015 would be a stronger disposition year than acquisition year. But when talking in ranges, Jeff, I think you mentioned dispositions of between 150 million to 200 million and acquisitions of 150 million to 300 million. I'm trying to make sense of the comments. Maybe I misheard it earlier but could you talk a little bit about your net acquisition expectations for 2015?

This is George. I may have misspoke or maybe you misheard. We don't think one side will be dramatically higher than the other side necessarily. So we have disposition activity that Jeff has given you numbers on and properties that are in the market that are above those numbers he's given.

Again unknown as to what will ultimately close, but if you took all of those numbers that we're working on dispositions you get to the $200 million mark. That does not include any potential loan repayments on single asset REITs that may get sold. That's one unknown at this point, but just on property dispositions, sort of a high water mark there of about $200 million and on property acquisition opportunity a target of between $150 million and $300 million.

So the delta if we hit the high side of our target acquisition efforts between dispos of properties, again not loan repayments, and acquisitions would be about $100 million.

Okay. Appreciate that color. Jen, I just wanted to talk about leasing a little bit. As you are leasing up the portfolio this year, obviously there is a capital expenditure required with that. What are your expectations in terms of TIs per square foot and maybe perhaps talking about it on a per year lease term basis, how do you expect that to really trend through 2015?

I wish it were -- that were a simple question to answer. We are in so many different markets that our costs are different around those markets.

I can tell you that we rarely, if ever, paid above market for TI commissions, but a lot of it if you look at our numbers that are shown in the supplemental and the variance from -- across the three years, I was looking at it, and you can see that it pretty much corresponds to some of the -- not only the markets that we are in but the type of lease. So obviously to the extent that we do a big space, a ten-year term, there is going to be higher leasing commissions and perhaps higher TI.

But the TIs do vary from market to market. Toby can help me out here a little bit in Houston, but in Texas I can say that the average -- we wouldn't want to go much above $25 a square foot TI on a five- to ten-year lease. But in other markets it may be more expensive. If you have a law firm it's more expensive.

So it's going to vary around that. But maybe, Toby, can give you some color in Houston. (multiple speakers)

Yes, Tom. Right now in Houston for class A space if it is second-generation, you are looking at roughly $20 TI per square foot on a five-year deal and maybe circa $35 a square foot on a ten-year deal. And of course, for new space, the TIs are much higher. That should give you a rough idea if you are modeling Houston.

I appreciate that color. Toby, I guess one follow-up on Houston, obviously there's a lot of concern with the oil sell off and whatnot, but are you seeing any specific interest in tenant expansion or demand from the legal services side in anticipation of a wave of M&A or something like that?

I can't say that I have. There has been very little activity at least in our portfolio from legal, so not a whole lot of law firms in our Energy Corridor buildings and the West Chase building.

This is Janet just to jump back in. If your question on TI leasing commissions is obviously going to be directed somewhat to the RGA vacancies, the market there is about $20 to $25 a square foot depending on the term and the space.

Okay, great. I appreciate the color. I'll hop back in the queue. Thanks.

Craig Kucera, Wunderlich Securities.

Hi, good morning.

Wanted to follow-up again on the guidance, not to beat a dead horse, but you've had a pretty significant drop in occupancy. You were at 94.5% in the first quarter of last year now per your comments and what happened with RGA, we're somewhere in the 90%. What is baked into your guidance as far as occupancy on the same-store portfolio?

I think its pretty much what I was saying before. That if we drop into 90%, in the first quarter we would hope to get back up where, obviously the optimistic end would be, we'll be back at 94% by year-end. But we would certainly be moving towards that -- to the 94% at the backend of the year.

So you are expecting some level of occupancy pick up this year in your guidance?

Yes, because as Toby and I were saying earlier, a lot of the space that we got back in this last quarter it's floor that we now have; it's some of our best space. We've got top floor. We expect to lease those.

Got it.

Whether that completely offsets what else comes at us, I can't tell you that, but we are pretty optimistic about doing some additional leasing.

Okay. And the asset that you sold in Colorado Springs I may have missed this, but did you put out what you -- what cap rate that sold at?

Hi, Craig, Jeff Carter here. Yes, I mentioned in my report that that cap rate was an approximate 7.6%.

Okay. And when you look, I think on the last call you mentioned your acquisition pipeline had a cap rate range I think of 5.5% to 6.5% first year going in. Is that still -- you've got a larger pipeline today, but are those metrics still relatively the same on the pipeline as it is today?

In general yes, but we're looking at a number of more value add properties in addition to more stabilized. We are still looking at that range of both value add that has real vacancy, 50%, 60% leased assets, as well as well as stabilized assets. I would say the floor on that range is lower. It's probably more like 5% to 6.5% now.

Thanks. I'll get back in queue. Appreciate it.

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

Thank you, everyone, for turning into the call. This was a little longer one that we normally do. And again a year end call, I think it makes a lot of sense. We're all excited about 2015 and look forward to talking to next quarter thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.