Franklin Street Properties Corp (FSP) 2016 Q4 法說會逐字稿

Good morning, and welcome to the Franklin Street Properties Corporation fourth-quarter 2016 results conference call.

(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.

Good morning, and welcome to the Franklin Street Properties' fourth-quarter 2016 earnings call. With me this morning are George Carter, our Chief Executive Officer; John Demeritt, our Chief Financial Officer; Jeff Carter, our President and Chief Investment Officer; and John Donahue, President of FSP Property Management. Also with me this morning are Toby Daley, Senior Vice President and Regional Director of Atlanta and Houston; Will Friend, Senior Vice President and Regional Director of Denver and Minneapolis; and Patty McMullen, Senior Vice President and Regional Director of Dallas.

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, 2016, which is on file with the SEC. In addition, these forward-looking statements represent the Company's expectations, only as of today, February 15, 2017. 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.fspreit.com.

Now, I'll turn the call over to John. John?

Thank you, Scott. Good morning, everyone.

On today's call, I'll begin with a brief overview of our fourth-quarter results. Afterward, our CEO, George Carter, will discuss our performance in more detail and provide some of his remarks. John Donahue, our President of the asset management team will then discuss recent leasing activities; and then Jeff, our President and CIO will discuss our investment and disposition activities. After that, we will be happy to take your questions. As a reminder, our comments today will refer to our earnings release supplemental package and 10-K, which has been filed with the SEC; and as Scott mentioned, can be found on our website.

We reported FFO of $26.9 million or $0.25 per share for the fourth quarter of 2016 and $106.3 million or $1.03 per share for the full year. Compared to 2015, our full-year 2016 FFO is about $600,000 lower. The FFO decrease was primarily from the impact of asset sales and loan repayments that we received during 2016 and was partially offset by four acquisitions that we've made including one in April of 2015, and three more in 2016: one in June and one in August and the last one in December. As we look ahead to 2017, this should be meaningful contribution from our 2016 acquisitions. FFO on a per-share basis in 2016 decreased $0.04 per share compared to 2015, primarily as a result of higher weighted average shares in 2016 from an equity offering that we completed in August. Our FFO per share of $0.25 for the quarter and $1.03 for the year was in line with our excitations and also followed our guidance.

Turning to our balance sheet and current financial position, at December 31, 2016, we had about $1.05 billion of unsecured debt outstanding. Total market gap was about $2.4 billion; the debt total includes a $150 million bridge loan that was used to acquire property in Denver on December 1. Our debt to total market capitalization ratio was 43% at the year's end. Our debt service recovery ratio was about 4.7 times. Adjusted EBITDA ratio was about 7.6 times in December 31. From a liquidity standpoint, we had a cash balance of $9.3 million at year end and also had $220 million available on our $500 million unsecured line of credit. As a result we have liquidity of about $229.3 million at December 31.

We remain comfortable with our leverage and have managed our unsecured debt as part of our strategy. We can opportunistically sell [to] non-core assets and repay short-term employee rate debt, or depending on the magnitude, sales can reinvest proceeds into properties, as we've demonstrated. We continue to focus on acquisition of assets in our core markets as we find the right opportunities.

With that, I'll turn the call over to George.

Thank you, John.

And welcome to Franklin Street Properties' fourth-quarter and full-year 2016 earnings call. As John said, for the fourth quarter of 2016, FSP's functional operations were: our FFO, total approximately $26.9 million or $0.25 per share, and for the full-year 2016 FSP's FFO totaled approximately $106.3 million or $1.03 per share. These results are within our most recent guidance range as given to the markets of December 14, 2016. Our dividend was $0.19 per share for the fourth quarter and the FSP Board of Directors continues to feel comfortable with this level of dividend as we begin 2017.

At this time, we are reaffirming our initial full year 2017 FFO guidance of $1.04 to $1.09 per share, also given to the markets on December 14 of last year. For the first quarter of 2017, we estimate FFO to be in the range of $0.25 to $0.26 per share. More importantly, we continue to believe that 2016 will mark the bottom of the reductive effects that our property portfolio transition has had on our FFO over the past two years. And just to look back quickly, before going forward, we've had declines in FFO during 2015 and last year, 2016, from a high of $1.12 per share in 2014 to $1.03 per share for full-year 2016. That's about a $0.09 per share reduction over that 2-year period, or about an 8% decrease over that 2-year period. It was fully anticipated by us, as we transformed this portfolio and faced the hurdles of both differential cap rates from suburban to urban and, of course, the timeliness of sales and acquisitions.

Currently, prospective leasing activity is meaningful in all of our core markets, including Houston, and we are reiterating our forecast and are very positive about resuming our FFO growth in 2017 and beyond, propelled primarily from our projected realization of increased rental income from select recent property investments, select new development or redevelopment efforts such as 801 Marquette in Minneapolis, and additional leasing in our broader portfolio of urban office properties, many of which contain meaningful value-added square footage. We anticipate updating future FFO guidance quarterly in earnings releases. I'll now turn the call over to John Donahue, President of our property management company. John?

Thank you, George. Good morning, everyone.

The total amount of leases completed in the fourth quarter was slightly greater than the third quarter. Leases completed in the full calendar year of 2016 totaled approximately 1.19 million square feet, which represents 12% of the portfolio. Approximately 75% of the total was attributable to renewals. Lease occupancy ended the year at 89.3%. The five-year average for leases signed has been 1.04 million square feet. The 1.19 million square feet for 2016 was approximately 14% greater than the five-year average.

During calendar 2016, the total amount of scheduled lease expirations by square foot exceeded 900,000 square feet. As a comparison, in calendar 2017, we have approximately 700,000 square feet of scheduled expirations. If leasing volume in 2017 is similar or greater than 2016 and 2015 levels, we believe there will be meaningful net absorption in our portfolio. During Q1 2017, we expect approximately 60,000 to 90,000 square feet of new leases to be completed, which represents net absorption, and barring any surprises, we anticipate that lease occupancy will improve.

Total activity has been ramping up over the first month of so in the year after a brief slow down during the holidays. Minneapolis has been one of our strongest core markets, with solid activity, and we expect positive net absorption in Q1 and Q2. Dallas and Denver are also expected to perform well over the next two quarters, with net absorption in both core markets. Atlanta, as we have mentioned, continues to be one of the are stronger markets, with solid activity; but will incur approximately 240,000 square feet of lease expirations in calendar 2017. FSP remains optimistic that the increasing level of demand will translate to (inaudible) deals during 2017, and we remain confident that we can improve occupancy during calendar year.

With that, I'll hand it off to Jeff Carter. Jeff?

Thank you, John. Good morning.

I'll be discussing our current investment [vector] and strategy. The strategic investment focus that FSP continues to be clear, with primary emphasis on generating sustainable FFO growth and value creation within our portfolio and in particular within our five core markets. We believe that there are three drivers to achieve our desired results: the first driver is through leasing efforts; the second is through select (inaudible)investments; and the third is through select new development and redevelopment efforts, like at 801 Marquette.

On the disposition and asset recycling front, FSP has made considerable progress in completing our portfolio transition, with approximately 75% of our square feet now located within our five core markets. Since 2014, FSP has sold properties or had mortgages repaid to us of approximately $192 million through the repositioning program. This compares to approximate $359 million in acquisitions within our five core markets during the same timeframe.

At this time, we expect further acquisitions -- sorry, at this time we expect further dispositions this year if satisfactory pricing and values are achieved, and we will continue to keep the market posted as sales activities unfold. Specifically, during the fourth quarter, we exited from and sold our Federal Way Washington State property for approximately $7.5 million on December 15. And as a subsequent event of the fourth quarter, on January 6, 2017, FSP exited from [sold Garfield deal asset] in [Salsitas] California, for $6.34 million, again, on January 6 of this year. In total then, FSP disposed of approximately $65.6 million during 2016 plus another $6.34 million in January [at the start of] 2017.

On the acquisition front, during 2016, FSP had an active year of acquisitions, with approximately $281.7 million in new properties representing about 1.1 million square feet. As a reminder, on June 6, we added to our position in downtown Minneapolis with the 326,000 square-foot acquisition of the [Plaza 7] office tower for $82 million; on August 10, we added to our position in Midtown Atlanta, with the 160,000 square-foot acquisition of [Bergen] Park Plaza for $45.5 million; and on December 1 we added to our position in downtown Denver with the 614,000 square-foot acquisition of Dominion Towers for about $154.2 million.

On the development front, at 801 Marquette, FSP is continuing with our efforts to transform the property into a modern and [premier] asset. Since our last quarterly report, FSP has completed all interior demolition work and finalized our (inaudible) requirements, and construction work is now fully underway. We anticipate construction to be finalized during or by the end of the second quarter. The total square footage at 801 Marquette has grown from 120,000 square feet to about 128,000 square feet, and we estimate total costs, including leasing expenses, to be approximately $20 million. Expected rents are anticipated to be between $17 and $19 on a net basis versus expiring rents that were [$4.75] on a net basis.

Thank you for listening to our earnings conference call today. And now at this time I would like to open up the call for any questions. Operator?

Will now begin the question-and-answer session.

(Operator Instructions)

First question comes from John Guinee with Stifel. Please go ahead

Great, thank you. So basically, over the course of the year, looks like you were at-- raised about $83 million of common, increased your debt outstanding by about $135 million, which is about equal to the net acquisitions of $210 million. And then you spent another $10 million or $20 million on 801 Marquette. 801 Marquette looks like it's about $156 a foot of spend. Can you break that down to how much would be base building and how much would be TIs and leasing commissions?

Yes. John, this is Will Friend. Base building is going to be in the range of $14 million to $15 million and the balance will remain above TIs leasing commissions.

Is the $20 million number that you cited include all TIs and leasing commissions to get to stabilization?

It does, though the variable is certainly on lease term and the terms of those leases, so the longer the lease, the more TIs and commission. So depending upon what those terms are, that's why it's possibly $20 million, that's your variable.

Okay, then George, you have a sort of a long history of keeping your G&A low and keeping your interest expense low via short-term debt, which allows you to pay out a relatively high dividend. Do you anticipate any changes to that strategy? For particularly terming out the debt versus keeping it short?

I think, John, when we look at our debt ladder, we believe that we can deal with our debt ladder as maturities come up and they are starting to come up. And our anticipation is that we will start to term out more of our debt as those maturities come up. Exactly what percentages, will depend, obviously, on factors at that time. I think if you wanted to take a five year view of Franklin Street you would see more of our debt termed out, and maybe as a total percentage of total market capitalization, actually less debt.

And do you have a -- I'm assuming you have no mortgages -- no asset-specific debt, just term loans with J.P. Morgan, BAML and BMO?

That is correct. We have no property secured debt.

Got you. Thank you very much. Nice job.

Our next question comes from Dave Rodgers with Baird. Please go ahead.

I wanted to start with John. Good morning, guys. With a quick question, I think you said 60,000 to 90,000 square feet of absorption or activity in your comments. I guess I missed whether that was related specifically to the Minneapolis redevelopment or if that was just the overall portfolio? And then I have some other questions to follow up.

Good morning, Dave. Yes, the 60,000 to 90,000 square feet comment was in regards to the entire portfolio. However, Minneapolis will be a solid contributor to that expected amount.

So, I guess, one other question, I go back to the 88,000 of new leases that you signed in the fourth quarter, did those all commence? Will those commence in the coming year? How does that play out?

It's spread out through 2017. The trend that we've been seeing has been that the demand is coming from smaller tenants and, as you know, the positive of that is that the leases tend to start sooner. The larger prospects and the larger leases tend to be way out in front of their requirements and so those commencement dates are further out but we expect the FFO impact to start in Q1 and to riamp up as 2017 progresses.

If I look at the 88,000 from the fourth quarter and kind of tie it back to the 60 to 90, it kind of implies that you're kind of done for the year. I know there are some other move outs as well. Maybe, walk us through the pieces and parts that gets us to a number in 2017 that makes, I guess, more sense relative that you've already completed the goal for the year.

Well, I'm not sure that I look at it exactly the same way, but I understand your question. We are expecting the leasing success in the first two quarters to contribute, in some way, to FFO in the second half of the year. We do not have any large blocks of vacancy in the portfolio. When I say large blocks, I mean above 70,000 square feet. We do have expirations later in the year that will -- Murphy, being one of them, that will be larger and then if you include the 801 Marquette building. Other than that, most of our vacancy is in single floor or less than single floor, and so we are optimistic that there will be some meaningful contribution to FFO in the second half of the year.

Okay. Great, on that. Thank you. Maybe a couple more for me. In terms of leasing activity at 801 and the overall backfill of the TCF space, can you dive into a little more detail on that and the remaining timing and how you're feeling about the activity there?

I'll turn it over to Will Friend in a moment. In general, Minneapolis has been one of our strongest performers with activity and we have -- well, I'll let Will talk about the activity but we're encouraged by, not only the 121 South Eighth Street progress but also see a wide variety of size prospects for Minneapolis. Will, do you have any more color there?

Yes, I think it's important to point out that we signed 38,000 square feet of new leases in the tower since the end of the year. As John might correct me some of the year end numbers are not but-- and that's about 12.5% of the 121 South Eighth Street Tower. We continue to have really good response and activity at the building in the form of tours and actual proposals we're working on. And at 801 Marquette, the response to the building since we completed demolition and have been able to get the brokerage community and prospective tenants of the building, has been is nothing short of terrific.

We've got several proposals we're working on to date for 801. About 250,000 square feet of proposals we're working on and we have additional, toward scheduled -- excuse me, inquiries of properties. So both, from a tower perspective and the redevelopment of 801 we expect great activity. The type of activity want to see as part of our proposals [in our future].

Last question for me and I'll requeue, what do you see as the near term up side at Dominion Towers, obviously, Denver has been a little bit of a tougher slug here going of late, with regard to occupancy, to Broadway in particular, I know that turnaround was little bit more challenging in the face of kind of the energy problem. Can you talk about what you see at Dominion Towers and the opportunity there.

Absolutely. Dave, this is Jeff, good morning. The acquisition of Dominion Towers really solidifies our belief and commitment into downtown Denver. We really see the fundamentals in Denver as strong from an employment and a residential standpoint. And yes, Denver has certainly had its headwinds from energy and related industries. But we think those will turn back into tailwinds and buying Dominion Tower at the basis that we were able, in the current yield that are provided was strong, but we do see upside in that building from in place rents that are at or below market.

We've got roll in that building that is -- roughly 25% of the building rolls over the next three years at rents that average, weighted average, probably about [1843] on a net basis versus achieving rents there that are closer to an average of 20 for that space, so we see upside in marking to market on expiring leases and we see upside coming over time from appreciation in the performance of Denver.

Okay, great. Thank you, guys.

Yep.

Our next question comes from Tom Lesnick, Capital One, please go ahead

Good morning, guys. I guess, first on 801 Marquette, and I appreciate the leasing color there. I was just looking at the transcript from last quarter and it seemed like you guys were pretty confident in that the project would be completed by the end of 1Q, and now you are saying 2Q, so just wondering what the delay was for.

Go ahead.

Yes, Tom, this is Will. It was really permitting. We got hung up a little bit in the permit process. It's a small building, small project, relatively speaking. It's a complex project because it's adjoined to the existing tower. And it's a -- 1920's vintage building, so there were a lot of things we needed to work for the permitting process. That's entirely (technical difficulty)

Got it. Will, for leasing 801 Marquette, what are you guys offering right now in terms of month of free rent and when should we expect to see cash NOI really begin to come on line from that project?

Every deal offer is different depending upon [rents] requirements in the market. On average, like say, a month of gross free rent per year of term. But it varies based on the other components of the term's TIs, et cetera. So I think it's fair to say that we'll start to see something, I'm optimistic depending upon how it leases up in the fourth quarter this year, if it ends up being a larger lease, you know, for a larger component of the building, that can be pushed out a little further or we end up doing smaller leases on the lower floors first, (technical difficulty).

Got it. I appreciate that. And then John, a quick accounting question on the 801 Marquette CapEx. Where is that being reflected in financial statements? I just saw that TIs, in terms of the dollar amount had picked up a little bit here in the last couple of quarters. Just wondering if any of 801 Marquette was being wrapped into that or if it was just being allocated completely separately?

Well, we haven't got a lot of capital expended yet on 801 Marquette. I think we'll see more of that in the 2017, but that would be what we call investment capital so we would treat it accordingly.

Got it. Thank you. And then, shifting to leasing, appreciate your comments earlier about the optimism of activity generally across all of your markets, but just looking at sequentially, it looked like there was a downtick in occupancy at 380 Interlocken and One Overton, I was just wondering if you can comment on what's going on there.

Sure. It's John Donahue. The big picture is that the same store NOI, did dip across the portfolio in several of the regions. Atlanta, as a whole, same store NOI in Atlanta was up approximately $1.5 million in 2016 versus 2015. Overton didn't have any significant lease expirations, anything material, but we did have one departure and we had one extend a downsizing. So there's been a little bit of a downturn in Overton. However, again Atlanta as a whole, has been one of our best markets.

As far as Interlochen goes, the two Interlocken buildings combined perform exceptionally well in 2016. FFO increased approximately $800,000 or 16% compared to 15%. So we had some significant gains at the one Interlocken building and a slight downturn in the other building. But collectively, they performed well.

Okay, I appreciate that. Just following up on Atlanta there, you mentioned it being one of your strongest markets. We're hearing similar commentary from some of your peers in Atlanta. And if we reflect back and look at the Two Ravinia acquisition in May of 2015, I believe that was acquired at about 81% leased, today it's 79% leased. What do you see in terms of leasing activity for that asset specifically, in terms of getting lease up and realizing the value add component of that value proposition?

I'll let Toby Daley into that.

Yes, Tom, most of our-- or many of our lease expirations in Atlanta have been in the Two Ravinia building. It's comprised mostly of small tenants. And we knew when we acquired the building that there were quite a few lease expirations coming up, and also I think a number of those tenants that were -- that leased space in that building prior to our acquisition had come from lesser quality buildings and as rents have risen, they've retreated back to class B and class C properties. We've been replacing the tenancy with stronger credit tenants. The result has been, we've been relatively flat during our ownership period. But we expect 2017 to show some steady improvement as the year progresses.

Okay. Appreciate that. Last question on leasing is, where do you guys stand in terms of progress on backfilling Murphy Oil which is coming up here in 2Q?

I'll take that Tom. Murphy and Conoco Phillips will vacate phase two of Park Ten project as you well know. And as oil prices started to rise, subsequent to February of last year, we've noticed a corresponding increase in lease activity, which makes sense. And right now, we're dealing with, in Houston total, a little over one million square feet of new lease activity, that includes inquiries, proposals, tours, and a complete portion of that is focused on the 'Park Ten phase 2 building. Were encouraged by the activity and hope to have some good news as the year progresses.

Okay. Thanks for that. Shifting to investment sales, just a couple of quick questions. You said in the release that you feel substantially complete with the noncore asset sales but the assets outside of your five core markets still represent roughly 25% of the portfolio. You know, as you think for 2017 and even further forward, how do you think about your approach to the cadence of noncore asset sales as opposed to what you've achieved over the last three or four years? Do you see picking up at all?

Tom, this is Jeff. Good morning. Our focus -- we definitely right now have a focus on dispositions at FSP for a couple of reasons. One, as you point out is to finish the transition of our portfolios to our five core markets. More completely, as you mentioned, we've got about 25 % remaining to go. The other reason, as we indicated at the time of our Dominion Tower acquisition relates to our -- our want and need to pay down that bridge financing by the time that bridge financing comes due.

So I think you will see dispositions. We are, this year, I suspect we will. And I think you'll see them in the next year as well. The pace and scope for those and timing of those will vary, we've got multiple paths that were looking at and we remain committed to not selling just to sell, we are looking to find the right prices and right values on the assets. We've got number of things that were working on and anticipate that you will see more sales this year. And I anticipate you'll see more into next year as well. And we'll keep you posted as we come up -- we would rather not indicate which properties and what our thoughts are for just competitive market reasons.

Sure, Sure, I appreciate that. Can you talk at all about what you're seeing generally in the investment sales market for -- for the assets that you're looking to dispose of? Is the buyer pool expanding, thinning? What do you see in terms of cap rates or per square foot metrics?

It's definitely been variable, depending on the asset in question. By most historical measures, as I look back over a number of years, we're still seeing really strong pricing and results overall. I've differently seen over the past six-plus months that the pools of buyers have probably thinned slightly. There are probably less institutional names that we're seeing involved on some of the transactions but there is still capital and there is still strong pricing that we've been seeing on the assets that we put out there.

All right. I appreciate that. Last question. Are you able to provide the cap rates on each, Federal Way and Hillview?

The cap rate on Federal Way was approximately 7.5 and the cap rate on the Hillview Milpitas asset was approximately 6.7.

And just to clarify, that 7.5 on Federal Way, was that on in place NOI because it's about 61% leased? Or is that pro forma stabilization?

No, that was -- those were both in place numbers.

Okay. Thanks guys. I appreciate it.

You're welcome.

Our next question comes from John Kim, with BMO Capital Markets. Please go ahead

Thanks, good morning. I was interested in George's comments on this year really being a bottom as far as earnings dilution from asset sales. Look into 2018 you do have a lot of floating rate debt, $430 million that is expiring towards the end of the year. I know you're not giving 2018 guidance now but I just wanted to make sure that you're implying that you have enough growth in your core operations to offset that potential dilution.

We are implying that, John. Again, I think the big picture here is we've now got a real spread out, diverse portfolio mostly into our core markets. A really diverse, spread out suburban portfolio mostly into urban and CBD properties within our core markets. And that sort of tipping point between the reductive effects of doing that, which is tough to do over the last couple of years, we believe we've hit it. 2017 we believe will be the first year that we start to see that trend move up in our FFO, our profits from FFO. And, actually, as we look forward into 2018 and 2019, we see that trend accelerating potentially and accelerating meaningfully.

So in that context, with debt maturities coming up during those time frames, and as an earlier-- as John asked earlier, planning to deal with them at that time at the appropriate time, and doing some pay down of debt as we go along through some dispositions here, as well as some terming out of debt as we deal with their maturities. That increase in rental income, in occupancies, in this urban portfolio, in these five core markets that we've transitioned to, is the weighted offset to that, that we believe will move the numbers meaningfully.

As far as terming the debt out, is the plan to extend it for a couple of years? Or do you plan to utilize some longer-term debt? And does it, is it reliant on the leasing activity that you have between now and the fourth quarter next year?

John, I think it all intersects and so including the markets at the time, obviously. And there's still some difference of opinions on what the markets look like going out, and so we will analyze those at the time. I think, overall, you will see us laddering, so you'll see different maturities from shorter term fixed to some longer-term. If you, if you are asking me today what we would look like, again five years from now, I would say you would see a laddered portfolio of debt.

Okay. And then also you mentioned the FFO growth sort of accelerating but I was wondering if you still feel the same way about AFFO, given the amount of lease expirations over the next couple of years?

Well, I -- we definitely have a TIs and leasing commissions that will be meaningful this year and next. But if we're moving the FFO number we believe -- we believe that our AFFO will be in line and will definitely be in line with our dividend.

It might make some sense, since we're at the start of the year just to talk about the way we think about our dividend and our levels of AFFO. We've worked hard on our AFFO number to come up with a good number that we think represents, really sort of a longer-term ongoing recurring cost of running our kind of office portfolio. And we have a very long-term view of the AFFO and dividend relationship. Our AFFO, like everybody's, can be quite variable quarter-to-quarter and even year-to-year.

As an example, over the last three years, 2014, 2015 and 2016, our three-year AFFO per share was $2.39 and over that three-year period the dividend stayed constant at $0.76 per share. So the dividend totaled $2.28 per share over that same three-year period. So we were paying out a fairly high percentage, about 95% of our AFFO number over those three years as we transition this portfolio. So we think we're over -- we think we're at the tipping point and we think the FFO line moves up. Which, we believe longer-term, will give us a better AFFO number and more dividend coverage and obviously hopefully the opportunity to raise dividends in the future.

Interesting, too, when you look at how variable this can be, in the fourth quarter of 2016, one of our big tenants, Centene, which is at the Timberlake properties in Chesterfield, greater St. Louis, completed a lot of their tenant improvements on their space and under the lease that was written in June of 2015 they had a right to call for about $5 million in TI reimbursement and did so, actually right at the end of December.

So here's a call, fairly extraordinary call for TI late in the fourth quarter of 2016, that was actually baked into the lease that was signed in 2015. So these changes in TIs and leasing commissions particularly -- leasing commission is usually paid upfront, but the TI portion particularly, can be quite variable and unpredictable.

So we take a very, very long-term view of the AFFO dividend relationship. We certainly are going to have our dividend covered over the long-term. We believe it will be over the long-term, but we do take that long-term point of view towards it. And as I mentioned earlier, the board feels comfortable with our dividend level as we start 2017.

Do you have a target as far as payout ratio before you consider raising the dividend?

No, not really. I think -- you know, the board looks at this every quarter and takes it very, very seriously. I think it is our projections of the future as to what level of payout we're talking about. We do believe in dividends at FSP. We believe it's a major component of the rate of return on a REIT like ours, but obviously it has to be and will be in line long-term with our performance.

Okay. Moving onto occupancy. The forecast for this increasing this year, can you just break that out by some of your major markets? Sounds like you're very bullish on Minneapolis for instance, but Atlanta you have a lot of expirations. I imagine Houston is also very challenging. But if we could get a further breakdown that would be great.

Sure, John. Good morning. This is John Donahue. We believe that lease occupancy will be increasing quarter by quarter by approximately 1% in totality if everything goes according to plan.

Minneapolis will be the highest increase in percentage of occupancy, but we believe that will have occupancy gains in Denver and Dallas and we believe that Atlanta will keep pace with its high rate of exposure in 2017. And that if we have any occupancy gains in Houston that will be a bonus.

As far as our noncore markets, we believe that we'll make slight progress in Chicago. We also hope to make some progress in Baltimore and the east markets in general. So hopefully that answers your question.

Yes, that's great, thanks. I may have missed this, but what were the cash releasing spreads this quarter? For this past year?

Cash releasing spreads? Well, we look at those numbers in terms of what the costs are per square foot per year. And I believe that's on page 20 of the supplemental. We have -- let me see here. The leasing for calendar 2016, our costs were approximately $4.36 per year. And our GAAP rents achieved are approaching $30. The net rents are in the $18.50 range. So we think that the net cash range is in the $14.50 range. Does that answer your question?

Yes, I mean I see that the GAAP rent increase is 10% over the last couple of years, but I was wondering on a cash basis what that is?

It's about 8% to 9% on the net cash basis as far as percentage increase.

Okay. Great. Thank you.

You're welcome.

(Operator Instructions)

Our next question comes from Craig Kucera with Wunderlich. Please go ahead

Thanks. Good morning. I wanted to circle back on 801 Marquette. Can you give us an update on what's left to spend this year? And I think we're now at the high end of the range but you bumped up your expectation of net rent from maybe the $15 to $18 to $17 and $19 range. How does that impact what you expect to earn on this capital from an underwriting perspective?

Craig, this is Jeff Carter. The range that we've been giving for total cost on 801 Marquette has been in the $15 million to $20 million range. The size of the project increased by about 8000 square feet and so we have just narrowed that range down to be approximately $20 million because we think we will be at the higher end of that range now. As far as timing of the expensing of those expenses costs, John, I don't know if you want to comment on that, but I would expect a number of those expenses to come due throughout the current course of the year.

I guess I'm asking how much is there left to spend on the project and kind of what do you expect to -- the rent that you're expecting are higher, but what you're spending is a little bit higher. Has that impacted your underwriting?

We'll have to look into how much has been expended. I don't have that number right in front of me.

Actually, we disclosed it. We do disclose in the supplemental, I believe our cost in that now is about $8.9 million, so we've got some room to run in 2017 for more capital to spend. But I think the key point there, Craig, is that we've increased the square footage in the building and I think we're still within the $15 million to $20 million range. So I think the rent growth -- I think it's a better picture than where it was.

Okay. And I appreciate that you guys made some good headway on selling some noncore office properties, but can we talk about your loan portfolio? I think it's yielding about 5.65% and it would seem that you could recycle that capital into something that's maybe more accretive with some growth. Is that on target for anytime in the near future or do you anticipate holding onto those loans for a while?

Craig, this is Jeff again. We are-- in terms of the mortgages that FSP holds on some of our single assets, we are anticipating the potential for some dispositions that would falter those repayments this year. And we will keep you posted as we proceed through the year, but there are a couple on deck that are possibilities for this year.

Got it. And one more for me, just an accounting follow-up. I think your straight-line rent was positive this quarter. Was that a true up or should we expect any sort of trend from that going forward?

This is John Demeritt. It's primarily a function of new leasing is when straight-line rent goes positive and some of the leasing that we did in the third and fourth quarter is what picked that up. And also from the acquisition that we made in December for Dominion Tower. That was part of it as well.

Okay, thanks guys.

No problem.

Our next question follow-up from John Guinee with Stifel. Please go ahead.

Actually, I hadn't planned on asking this, but based on the last question, I'm not an accountant, but does straight-line rents going positive because of Dominion Tower mean that they were below market or above market rents? Being adjusted via FAS 141 accounting?

There's been a combination of both of those, John, but what we're doing is looking at the remaining lease term of all the leases we have when we acquire the building and setting straight-line rents. So in most cases the leases have increasing rents each year, so we're sort of starting off with positive straight-line rent until we meet the midpoint of the leases that we acquire. So, you know, I think it's more a function of that then above and below market leases. I don't have a number for you on those. We do evaluate each one of those individually.

Okay. And then what was the 2017 expected cash and GAAP yields on Dominion Tower?

Good morning, John. This is Jeff Carter. The GAAP yield for the first full year is expected at about 6.9%, and the first full year cash yield is expected at about 6.2%.

Great. Thank you.

You're welcome.

Our next question is a follow-up from Dave Rodgers with Baird. Please go ahead

Hey, Jeff, do you expect to be a net acquirer or net seller this year? And are the two mutually exclusive or are you running two separate processes there? Just in terms of the assets that you're seeing?

Dave, this is Jeff. Our expectations is to be a net seller in 2017.

I know you don't want to identify the assets and I understand that; what would be the magnitude of the dispositions over the acquisitions?

Well right now were not expecting acquisitions, so I'd rather not give a disposition range because there's a variety of scenarios that we've looked at.

I guess maybe just going back to the acquisitions side of the equation, is that a function of capital or is that more a function of what you're seeing opportunistically in the market after you closed on Dominion Towers?

We will continue to monitor all five of our markets for opportunities, but our expectation is, broadly speaking, to be a net seller and to work on our objective of replacing the bridge financing for Dominion Towers. What I'm seeing out there is there are opportunities out there and we'll keep our eyes open. But that's not our expectation.

Okay, great, thank you.

Yep. You're welcome.

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

Just to say thank you everyone for tuning in to the call and we look forward to talking to you next quarter. Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.