Franklin Street Properties Corp (FSP) 2015 Q1 法說會逐字稿

Good morning and welcome to the Franklin Street Properties Corp. First Quarter 2015 Financial Results Conference Call. 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 Scott Carter, General Counsel. Please go ahead, sir.

Good morning, and welcome to the Franklin Street Properties First Quarter 2015 earnings call. With me this morning are George Carter, our Chief Executive Officer; John Demeritt, our Chief Financial Officer; Jeff Carter, our Chief Investment Officer and Janet Notopoulos, President of FSP Property Management.

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 Factor 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, April 29, 2015. While the 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 First Quarter 2015 earnings call. On today's call, I'll give a brief overview of our first quarter results. And then afterwards, where we're going to do the call to hopefully benefit you would be, George Carter, our CEO will discuss our performance in more detail, provide us an update on operations and overall strategy.

Jeff Carter is then going to speak about our investment activities and he will be followed by Janet Notopoulos, President of our Property Management area to discuss leasing activities and then after that, we'll be happy to take your questions.

As a reminder, all of our comments today will refer to the earnings release, supplemental package and 10-Q that we filed last night with the SEC and as Scott mentioned, they can all be found on our website.

We reported a decrease in Funds From Operations, or FFO, of $3.1 million for the quarter to $25.7 million for the first quarter ended March 31, compared to the first quarter of 2014.

The decrease was primarily from lower property income as a result of previously announced property dispositions that we made and some single asset loan repayments that we had received in the last 12 months and from lower occupancy, which was partially offset by lower interest expense.

FFO per share was $0.26 as a result and that compares to the $0.29 per share that we had in the first quarter of 2014. Our results were in line with what our expectations were and as you may know subsequent to the end of the quarter, we did acquire Two Ravinia property in Atlanta for $78 million which is one of our core markets.

This transaction redeployed just about all of the proceeds from recent dispositions and loan repayments that we made.

Moving to the balance sheet and current financial position at March 31, 2015, we had about $860 million of unsecured debt outstanding and our total market cap was about $2.1 billion.

From a liquidity standpoint, we had about $15 million in cash and $260 million available on the line, so we have about $275 million in liquidity at the end of the quarter that's up from about $240 million of where we were at year-end.

This liquidity supports us and matches against our balance sheet strategy of having a line of credit available to do acquisitions and have not the line of credit to be able to pay down acquisitions, without breaking a swap or having a prepayment penalty, and we've talked about that in other calls.

So with the activity we had in the first quarter in April, we do remain very comfortable with our leverage. Our debt-to-total market cap ratio was 40.1% at the end of Q1, debt service to coverage ratio was about five times for the quarter and our debt-to-adjusted EBITDA ratio was about 6.9 times, and we feel good about those measurements.

We remain an unsecured borrower and a rated borrower. We have about 79% of our outstanding debt is effectively fixed or not affected by changing interest rates.

As we continue to execute our asset recycling program, we believe our balance sheet strategy enhances our ability to, as I said before, opportunistically sell non-core assets and reinvest proceeds as we grow.

Before I turn the call over to George, I'd like to provide an update on guidance as we put in the press release, we are maintaining full year 2015 guidance in $1.03 to $1.08 FFO per share range and the guidance takes into account the [loan]-payoff activity and the recent dispositions I talked about as well as the Atlanta acquisition that we did on April 8, and our current expectations of economic conditions as we look ahead in 2015.

It does not include the impact of future acquisitions, dispositions or capital market transactions which we would update guidance as we move ahead on those things.

With that, I'll turn the call over to our CEO, George Barrett. George?

Thank you, John and again, welcome to Franklin Street Properties First Quarter 2015 earnings call.

The start of 2015 for FSP has been punctuated by starting to achieve some real success in executing our strategy of property recycling, and that strategy is again to sell many of our non-core pure suburban office properties at what has become historically very strong prices.

Most of these properties are 100% occupied upon sale and are reaping certainly the benefits of compressed cap rates and lower competitive interest rates. And taking those disposition proceeds and using them to acquire urban infill, CBD, town-center office properties.

Usually those new acquisitions with a meaningful value-add opportunity associated with them and primarily looking at acquisitions within our five core markets. And we are very optimistic about our prospects for continued success in this effort for the balance of the year.

A good representation of the timing and size of our past property dispositions and then the recycling of those disposition proceeds into our new acquisition can be found in our supplement that we just filed yesterday. And I would refer all of you to that supplement, page 24 titled, transaction activity.

And on that page, it will show both our dispositions and recent acquisitions, and it will show at the bottom of that page, four dispositions that have occurred basically over the last 17 months. The proceeds from which had not been reinvested through the first quarter 2015 into any new property acquisitions. But of course, on April 8, we did reinvest those proceeds into the Two Ravinia project in Atlanta.

And just to run through those dispositions real quickly, that's East Renner about $12.5 million, Centennial about $15.5 million, Willow Bend at about $20.7 million and Eden Bluff at about $28 million, the most recent disposition.

Those disposition proceeds totaled up to about $76.7 million. And as John said, we also during 2014 had some of our single asset loans repaid and sort of the net remaining of that that wasn't redeployed into increasing loans on other properties or other things, was about $6 million.

So between that $76.7 million of property dispositions over the last 17 months and the net from the single asset (inaudible) loan repayments, we have about $82.7 million of proceeds to reinvest and that just about matches almost precisely the Two Ravinia purchase, which was $78 million in purchase price plus an estimated $4.8 million in capital improvements that we wanted to do at the property.

And we are very excited about the Two Ravinia purchase. We had great success, we believe, on adding value to One Ravinia, which is its next-door neighbor, the properties look very, very similar. And we think there's just a ton of synergism between the two properties. We've been eyeing Two Ravinia for some time and had the opportunity to do it and took advantage of it.

The number of tenants are different in the two properties, fairly dramatically, the size of the spaces and demise spaces in the two properties really work together well, a lot of efficiencies in operations.

Toby Daley, who is our Regional Director in Atlanta, and who many of you have done tours of our Atlanta properties with, is also here on the call today, so if you have any questions about Two Ravinia or the Ravinia project, what our ideas are there, feel free to ask him in the Q&A, and Toby would be happy to talk to you.

But the bottom line is we have been selling NOI for quite a while before replacing it. I mentioned in last quarter's call how disappointed we were that we could not do a meaningful acquisition in 2014.

It's not that we didn't try, but that the underwriting just didn't match up with what we need in our projects that we were very interested in, but Two Ravinia finally is (inaudible) and we are really on target, and very excited.

For a bigger view of our total investment activity, now I will turn it over to Jeff Carter, our CIO. Jeff?

Thanks, George. Good morning, everyone. This morning, I will review our investment activities, including the two recent dispositions just discussed by George, which were completed during the first quarter and our recent acquisition in Atlanta of Two Ravinia Drive, which we completed subsequent to quarter?s end.

I'll conclude with a discussion about the status of our potential development project in Downtown, Minneapolis at 801 Marquette Avenue.

First on the asset recycling front, as George indicated, FSP continues to be actively engaged in asset recycling efforts of non-core commodity suburban assets, when pricing is appropriate.

We had indicated the potential for dispositions of non-core assets of up to $150 million to $200 million. And we continue to think that this range is a meaningful estimate of our potential asset recycling efforts, which may also include the potential repayment of certain outstanding single asset REIT loans, and we will continue to update the market as greater clarity or progress is achieved.

During the first quarter of 2015, we announced the disposition of two assets which added to the one disposition in Colorado Springs at the end of 2014.

It is important to point out, as George mentioned that FSP has been selling nearly 100% leased non-core commodity suburban properties in order to reinvest into more and more value add and under lease infill office properties that are positioned within the best locations in our top five core markets.

More specifically, for this first quarter of 2015, we sold 100% leased Willow Bend Office Center in Plano, Texas on February 24 for $20.750 million and about a $1.462 million gain.

Dallas remains a committed core market to FSP, but Willow Bend was a two-story commodity suburban property that was acquired originally back in 2000.

Additionally, we sold the 100% leased Eden Bluff corporate center at Eden Prairie on March 31, 2015 [to Minnesota] for $28 million, at an approximate $9 million gain.

Minneapolis again remains a committed core market to FSP particularly Downtown, Minneapolis, but Eden Bluff was a single story commodity suburban flex product that was acquired originally in 2009.

And as previously discussed during last quarter's conference call, the nearly 100% leased Centennial Tech Center in Colorado Springs was sold December 23, 2014 for $15.5 million, about a $940,000 gain. And this was a single story flex product, our only asset in Colorado Springs, and so it was an exit from that market for us, and our property that was originally acquired 2000.

In sum, we have sold three nearly 100% leased properties since the fourth quarter of 2014 for $64.250 million at an average -- at average cap rates between 6.5% to 8% and recognized a total gain of about $11.4 million on those sales all in order to reinvest so far into one infill property in Atlanta, a core market to us. And that property was approximately 80.5% leased at closing at below market rents.

Looking ahead at potential future dispositions, FSP has its Park Seneca, Charlotte, North Carolina suburban office property that was originally acquired in 1997, currently under a purchase and sale agreement for $8.150 million.

This remains subject to customary closing conditions and so we will update the market further, but currently is slated to close on or about May 8.

This closing would bring our total dispositions since the fourth quarter '14 to $72.400 million if successfully closed. Additionally, we are currently marketing and are exploring the sale of several other non-core assets and/or single asset REITs with outstanding loans that would be repaid to FSP, which could represent gross proceeds of between approximately $100 million to $150 million additional dollars in 2015, assuming of course, we're able to achieve appropriate price levels and we'll continue to keep the market informed of any progress there.

Moving on to acquisitions. After a quiet 2014, FSP has ramped up our investment -- reinvestment acquisitions efforts in 2015 with the purchase of Two Ravinia Drive on April 8 and I will give a brief description of this acquisition at the end of this section.

As mentioned on our last conference call, FSP is targeting between $150 million to $300 million in acquisitions during 2015, which aside from Two Ravinia, are not in our current -- is not in our current FFO guidance.

FSP is actively working on several specific opportunities at this time that we believe would contribute meaningfully to our future growth and profitability. We'll continue to keep the market aware of any specifics when and if appropriate to do so.

We continue to see urban infill and CBD office assets in the strongest and most amenity rich locations in our five core markets. We're seeking below replacement cost assets and properties with irreplaceable locations that have a range of opportunities for value creation associated with them.

These include assets in some cases with significant vacancy in the plus or minus 50% to 75% leased rate range as well as more stabilized assets that are in the plus to minus 90% leased range that may have below market rents in place and/or the ability to create value in the near or intermediate term upon lease roll.

Our underwriting criteria is truly dependent upon the nature of the investment in question with variance between larger value add and more stabilized assets. But generally, we are seeing going in GAAP cap rates of between 5% and 6% on most of what we're currently underwriting.

Our pipeline continues to be strong. FSP continues to have healthy acquisition pipeline of about $575 million currently. And interestingly, almost all of these currently are uniquely off the market and unlisted deals at this moment.

The majority of our most promising prospects that we're underwriting are in Atlanta and Dallas. Again, we are seeing a wide range of profiles in that pipeline from as low as 30% leased to well over 90% leased.

Looking at the Two Ravinia Drive acquisition in more detail. As we reported on April 8, we announced the acquisition of Two Ravinia Drive for $78 million.

Two Ravinia is a 17-story approximately 442,000 square foot Class A multi-tenant office tower with attached parking garage. It was approximately 80.5% leased as of closing.

As George indicated, this property was highly attractive to FSP as we own the immediately adjacent One Ravinia Drive that we acquired in 2012, which was brought from just over 80% leased to currently over 90% leased.

FSP has now increased our total footprint in our core Atlanta market to about 1.8 million square feet with over 800,000 square feet now in the prime Central Perimeter Submarket.

The going in GAAP NOI cap rate for the Two Ravinia acquisition, falls within the range that I just described earlier, of between 5% to 6%, that I discussed during the earlier portion of the acquisition comments.

FSP believes that the current replacement cost of Two Ravinia is between $325 to $350 a foot, which compares favorably with the approximate $176 a foot purchase price.

We are planning capital investments of approximately $4.8 million over the next three to four years to among other things, modernized building elevators, modernize building HVAC systems, finish converting former health club space.

Again, the property was approximately 80.5% leased at closing at rates that we believe are about 25% below today's average asking market rents, which represents a meaningful opportunity for growth for Franklin Street.

Moving on to our development activities at 801 Marquette Avenue in Downtown, Minneapolis, positive activities continue to occur. As we discussed on the last call, we continue to contemplate two development scenarios discussed on that last call: One an office only development and two a much larger mixed use development that could contain hotel, office, retail and/or residential components or some combination thereof.

We continue to report strong interest in the site from perspective hotel groups, office customers and residential groups. I have no new announcement since our last call together, but I will continue to update the market with any material news and announcements.

We still anticipate that approximately 200,000 square feet of office space would best serve the demand that we see in the marketplace, and again as we discussed on the last call, depending on which scenario was selected, cost should approximate between roughly $325 to $400 a foot and total cost for the 200,000 square foot office portion to FSP, which equates to approximately $65 million to $80 million in very rough numbers. Again these are still preliminary and so please expect some variance.

At this time, I'll turn the call over to Janet Notopoulos, our President of Asset Property Management to discuss leasing and property operations.

Thanks, Jeff. I just want to add a few points about leasing. We had a quiet first quarter consistent with national leasing trends in seasonal pattern.

Despite selling two 100% occupied buildings and recognizing the impact of the RGA move out at the Timberlake in St. Louis, we ended the quarter at little over 90% leased. This is down from 94% at the beginning of last year and you can see this trend in our leasing statistics on page 10 of the earnings release, and you can see the impact on the NOI in the same-store NOI table on page 8 of the supplemental.

There you can see that we received termination fees at the beginning of 2014 and the resulting vacancies began at the end of that year and into the first quarter.

Because most of the vacancies came in the last part of 2014 or in January of this year, the spaces have not been on the market long and we've been busy taking control of those spaces and getting the market ready during this first quarter.

Our renewals continue to be strong and we've been able to increase rates in almost all cases. Aside from the new lease at Timberlake that I'll discuss later, we did mostly renewals or small leases.

As of March 31, only 3.8% of the square footage of the portfolio was scheduled to expire during the remainder of 2015, most of that is in the back half of the year and we are actively working on those leases.

Two Ravinia, the new Atlanta acquisition that was acquired in April, is around 80% leased. So we will pick up some new vacant space to lease, but the property will only add approximately 20,000 square feet to the 2015 expiration.

So even with the addition of Two Ravinia and the sales of the two 100% leased buildings in Q1, we should stay around 90% leased for the second quarter. With additional leasing, we could do even better barring any unforeseen events or new acquisitions or dispositions.

At Timberlake in St. Louis where RGA left on December 31, we executed a 43,754 square foot five year lease with Energizer Holdings at $24 per square foot with $0.50 bumps, which is approximately 3% higher than RGA's expiring gap rent. That lease is expected to commence next month.

Timberlake is still the only 100,000 square foot option in all of Highway 40 corridor. And we currently have several good prospects for various space needs, most of them with 2015 or early 2016 move in dates.

We expect the rents for new leases to be in the same range as the Energizer lease, probably higher depending on the size and location of the premises. And we believe that because of the shrinking availability in the market and our expectations in market intelligence that rents in general in the market are rising.

With that, I'll turn it back to George.

Thank you, Janet. And we'll open it now for Q&A.

(Operator Instructions) John Guinee, Stifel.

Great, thank you. Just one quick question and you may have said this and I just missed it. But on page 8, when you were going through some same-store NOI numbers, what's your average economic occupancy in 1Q 2014 versus your average economic occupancy in 1Q 2015?

So, economic occupancy, I am sorry, is it -- are you saying our physical occupancy as opposed to our leased occupancy?

Either one, whatever you have handy. What we are trying to do is figure out how much of this drop in NOI is attributed -- attributable to occupancy loss and how much is attributable to rent roll downs?

I would say most of it is attributable to occupancy loss. We are not seeing large rent roll down.

Okay. Great. Just after the call, just send us that number and then if [Aaron] has any questions, otherwise we'll cede the floor.

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

Hi, this is Stephen Dye filling in for Dave. Thanks for all the detail at the front end of the call.

I just want some clarity on some of the acquisitions. You mentioned, you were seeing opportunities in Atlanta and Dallas. But I was wondering more about Houston and if anything has come up there given everything that's going on in that market and if any opportunities have come to the forefront there?

Hi, Stephen, Jeff Carter here. Thanks for the question. Houston has continued to be as it was for us in the last quarter as well, a market that has seen very few marketed opportunities. Obviously, there was a big closing in Downtown, Houston. But in general, the investment activity for marketed deals has been very light, given I think some of the volatility in the energy markets.

And there is not much that we have seen that's available and that includes on an off-market basis. I haven't seen any indication of that changing in the near term, but we'll keep our eyes open for opportunities as they may present.

Great. Thanks. And then, I know we discussed some of the St. Louis leasing, but has the strategy changed at all from what we discussed on the fourth quarter call to today or is it still the same with regards to the three separate buildings there?

I think the strategy remains the same, which is that and if the Energizer lease is an example of that where we had the third building being multi-tenanted and that lease was approximately 43,000 square feet we put that -- that lease went into the existing multi-tenant building so that we still have 116,000 square feet for single tenant, or a larger user or two larger users in the market.

And we will keep on obviously responding to the type of tenants that are in the market, but that's -- there seems to be enough big ones mixed with some small ones to keep with that strategy.

Tom Lesnick, Capital One Securities.

Janet, I'm sorry If I missed this earlier. I know RGA obviously impacted same store performance in the mid West, but with regards to the West and South, what was driving the year-over-year change in that?

That was what I was referring to earlier, the terminations and expirations that happened at the end of the year. So we had -- so big early terminations and with late in the year move out in the West. In Denver, we had some known vacancies that again also came at the end of the year.

In Houston and in California and so that -- someone answered John Guinee's earlier question, that is really the driving force between the drop in the NOIs, those vacants that came up and compared to the quarter before which is the year before comparison, which not only has the rent but also had the amortization of the termination fee, so it was at doubly higher than the vacant space.

Great, thanks for the clarification. Toby just shifting to Houston. I'm curious, over the last few months, oil has stabilized a little bit. It's ticked up now to kind of upper $50s. Have you seen any shift in leasing trends or dynamics down there, whether it be concessions for just rent period or what are you seeing down there?

Right now, Tom we're seeing really solid leasing interest in the vacancies that we have. And in terms of the economics there has really been very little shift, but there has been a little bit. You might be giving an extra month or two of free rent to secure a lease today versus at the end of last year. You might be paying may be $5 more per square foot in TI on a 10-year deal, and less than that on a shorter term, but overall things remain very busy and we remain 94% leased in Houston.

Great, thanks. Shifting gears to Minneapolis. I know you don't have an update on the TCF site development, but as we think about tenant demand there, have you guys seen any shift in large user versus small user demand? Is there any uptick in the specific industry demand out there?

Hi, Tom. This is Will Friend. I'm the Asset Manager and Regional Director responsible for Minneapolis.

I think it's been consistent, we've seen over the past quarter an increase actually in slightly larger demand and developing a pipeline for upcoming vacancies that we?ll get at the beginning of next year.

But overall it's been a nice range of the low range in the 5 to 10 up to the 20s and 30s that are active in the market that we are seeing at the building.

Yes we are looking (Multiple speakers)

Exactly we are talking about TCF Tower.

Okay. Thank you.

And at this time, I'm showing no additional questions in the queue. We will conclude the question-and-answer session. I would like to turn the conference back over to George Carter for any closing remarks.

Thank you very much for tuning into our earnings call. We certainly appreciate it and we hope to see many of you REITWeek in New York in early June. Thanks again.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.