Feb 25, 2009
Executives
Scott H. Carter - Executive Vice President, General Counsel John G.
Demeritt - Executive Vice President, Chief Financial Officer George J. Carter - Chairman, President and Chief Executive Officer
Analysts
Justin Webb - Robert W. Baird Eric Anderson - Hartford Financial Management
Operator
Good day, ladies and gentlemen, and welcome to the Q4 2008 Franklin Street Properties Earnings Conference Call. My name is Trisha, I will be your operator for today.
(Operator Instructions). I will now like to turn the call over to Mr.
Scott Carter, General Counsel. Please proceed, sir.
Scott H. Carter
Thank you and good morning everyone, and thank you for joining us this morning. With me are George Carter, our Chief Executive Officer and John Demeritt, our Chief Financial Officer.
Before I turn the call over to John, 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, 2008 which is on file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today, February 25, 2009.
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 dates 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 the yesterday's press release which is available in the Investor Relations section of our website at www.franklinstreetproperties.com.
Now, I will turn the call over to John Demeritt. John?
John G. Demeritt
Thank you, Scott. Welcome to our earnings call.
We're going to be talking with you about our fourth quarter and year-end 2008 results. And we'll start with a short overview.
After that, George Carter our CEO will further discuss the quarter and FSP. I'm going to be brief and will be referring to the earnings release that went out last night and our 10-K that was filed on Monday night.
The turbulence in the markets that we talked about last quarter continues, and has affected the stock prices of most office REITs and the price volatility in this has been dramatic. However, the strength of our balance sheet as we go through this abyss should serve us very well and enable us to grow as we move ahead.
As of December 31, 2008 we had cash of about 29 million and 183 million in availability on our line of credit, to operate FSP and our future growth. We finished the year with a leverage ratio of about 14.4% with 142 million in debt outstanding and shareholders equity of 849 million.
Our shareholders equity is held by our common shares only as we do not have any preferred shares or other equity instruments in our balance sheet. The 142 million of debt that we have is unsecured and consist of our outstanding line of credit of about 67 million that was drawn and an unsecured term loan of 75 million.
A line of credit matures in August of 2011 that term loan can be extended to October of 2013. I think this balance sheet paints a solid picture of FSP at a time when there is general concern about the availability of debt from financial institutions, and debt levels have in companies.
We may see some issues with leasing and investment banking, as we move through the down part of the cycle. We have the strength of our balance sheet as balanced.
As we've said before, we measure our performance with three key drivers which are real estate operations, investment banking and gains on sale of real estate or GOS. The real estate operations driver is our ongoing net leasing or rent revenues from our portfolio of properties which is a recurring business.
By contrast, GOS and investment banking are transactional in nature and even in normal markets the quarter-to-quarter results from them can be very choppy. During 2008, we did not achieve any GOS as the market for selling real estate has changed.
Investment banking profits come from fees earned on the value of shares of securities that we sell as private placements. The sale of these private placements what we call gross syndication proceeds.
Income derived from the sale of private placements is essentially syndication and transaction fee revenues on our income statement plus the impact for direct expenses, which are commissions, some G&A expenses and related income taxes. Sales of private placements have been impacted by the financial markets and we did not have any sales in the fourth quarter of '08, compared to about 28.3 million in proceeds that we achieved in the fourth quarter of '07.
For the full year 2008, we achieved 57.4 million in gross syndications proceeds, compared to about 147.5 million in '07. George will be discussing this more shortly.
With respect to our performance in 2008, for the fourth quarter, we had GAAP net income of 6.6 million and EPS of about $0.09 per share. At the year, we had GAAP net income of 32 million and EPS of $0.45 per share.
We measure performance of real estate operations and investment banking by FFO which has got eluded too earlier. For the fourth quarter, FFO was 16.2 million or $0.23 per share, and for the year we achieved 69.2 million or $0.98 per share.
Comparing with fourth quarter of '08 to 2007, EPS was about $0.04 lower pretty much entirely as a result of lower contribution from our investment banking segment. For the full year, EPS decreased $0.41 per share which has three parts to it.
The first and most significant is we had no gain on sale of assets in 2008 compared to $0.34 per share in 2007. So that was $0.34 of the $0.41 decrease year-to-year.
Second, our investment banking segment returned decrease $0.10 per share from where we were in 2007. Those two decreases were partially offset by a $0.03 increase in contribution from our real estate recurring segment which was from property acquisitions and leasing activities which was completed in last two years.
Moving to FFO for the fourth quarter of 2008, our FFO per share decreased $0.03 to $0.23 compared to the fourth quarter of '07. On a dollar basis, this was a decrease of about 2.4 million, and the reason for the decrease in FFO was also lower contribution from our investment banking segment which was about 2.7 million or $0.04 of this and was partially offset by an increase from our real estate recurring FFO of about a penny with around in compare to the quarters.
For the full year of 2008, FFO decreased $0.08 to $0.98 compared to 2007. The decrease on our per share basis falls the same reasoning as the quarterly comparison or essentially $0.11 was attributed to the decrease from our investment banking segment and was partially offset by $0.03 of an increase from our real estate segment.
That covers our financial performance, the press release in 10-K filing went to further detail about our results. I also wanted to point out that the press release has our supplemental schedules including information about the 12 single asset REITs that we manage that include two that we currently have investments in.
There's also a current owned real estate portfolio thereafter interested and I also wanted to point out that we will be filing our supplemental package in the next week. That concludes financial highlights and at this point.
Our CEO, George Carter will tell you more about the results and where we are. Thanks for listening.
George?
George J. Carter
Thank you, John. Good morning, everyone, and thank you for taking the time to listen to our fourth quarter 2008 earnings call.
My comments on the call this morning as usual will follow and expand upon my written comments in our earnings press release. As John has said for the fourth quarter of 2008, FSPs profits has represented by funds from operations plus gain on sale, totaled approximately 16.2 million or $0.23 per share.
Dividend distributions for the fourth quarter of '08, totaled approximately 13.4 million or $0.19 a share. As John has also said, we had no GOS or gain on sale for the fourth quarter.
We had none for the full year, we really didn't have any properties listed for sale formally during the course of the year. You might ask why we've been include GOS or gain on sale, in terms of your calculations and I would tell you as I've said many times that we are a real estate investment firm, and gain on sale is an important part of our total return objective on each and every property we buy.
We are not a highly leveraged firm and consequently do not leverage our FFO with increasing debt but rather gain increase in FFO from sale proceeds in this very cyclical asset class that we are a part of that is real estate and specifically office buildings. There are clearly good times of a cycle to sell properties '04, '05, '06 and first half '07 would have been excellent times in retrospect, we did sell quite a few properties during that period of time, we used mostly 1031 exchanges, tax free exchanges to help us reinvest those proceeds and to upgraded assets, and I think those upgraded assets are serving us well right now.
It's hard to tell when strong market for sales will come back, property sales that is. When you look out there right now, what we see is not just that prices of real estate have generally gone down and cap rates have generally gone up.
But that it is a very inefficient market. There are not of lot of bidders, there is a lot of waste of time and money that goes on trying to sell properties in this market because the markets are moving so fast.
Now there will be opportunities to sell properties in whatever part of the cycle we're in. It's just that this period right now which really, fully await and as we head into '09, really is marked by a very inefficient marketplace, and this certainly has to do primarily with the uncertainty and inability to access the capital debt markets and more traditional mortgage markets.
During the fourth quarter of 2008, our investment banking group raised no equity as John has said and that compares to 4.8 million in the third quarter of '08, 49.9 million in the second quarter and 2.7 million in the first quarter of '08. Again that is about a third of what we raised last year, and fairly those markets have been impacted by the current economic situation.
Concern and uncertainty continues to surround the potential impact on commercial real estate emanating from the U.S. recession and financial credit crisis, and our established investor clients continue to sit on the sidelines until a clearer sense of stability returns to the broader capital markets before considering significant investment purchases.
The lack of equity raising activity resulted in our investment banking business segment, operating at a loss for the fourth quarter that loss totaling about $620,000 or about a penny or share. For the full year again as John said, our banking business did generate about $0.03 in profit.
We anticipate this business to remain very, very volatile quarter-to-quarter as long as the broader investment market activity and financial events continue to meaningfully sway investor confidence and settlement. We are committed to maintaining our investment bank.
We have wonderful infrastructure there, real great professionals that are part of that bank. And most importantly, a very loyal a long-term client tell that's been with the firm, investment client tell it's been with the firm for a long time.
It is a tremendous business in the up part of the investment cycle and I think the thing to watch for in '09 and as we go forward is, you know when the naives stop falling. It's the issue now is no one wants to catch the falling naive, like a lot of our investors have traditionally been more than willing to invest in a good property for the future, it's just the prices are moving so fast and the downward push particularly in the fourth quarter of '08 has been so strong that everybody is just backed down.
While profits continue to suffer in the fourth quarter of '08 from our two transactional businesses at sale of real estate and investment banking. Our real estate portfolio of 29 properties maintained its overall 93% occupancy and provided a steady rental income.
FFO for the fourth quarter of '08 was $0.23 per share, all of which came from real estate operations and that is net of the cost of maintaining our investment banking capability. I am very proud of our portfolio and how properties and how well it did regarding rental and leasing during '08.
We handled this small amount of roll, we had a lease roll we had in '08, I think very, very well. We do have substantially more lease roll occurring in the second half of 2009 and going into '010.
We're working on that now and I think making some very good progress. But obviously, we and every other office owner in the country is going to be subject to marketplace and the business cycle employment and business capital spending et cetera.
In late December of 2008 just a couple weeks before the end of the quarter, FSP invested approximately $40 million to purchase two additional properties for its portfolio. Full quarter operations from these two additional investments will be reflected in the first quarter results of 2009.
As the capital markets and U.S. economy work through the current recession and financial credit crisis, we will continue to pursue additional commercial property investment opportunities.
Our plan is to continue to use our balance sheet strength and very low leverage which has John mentioned that the year-end was about 14.4% to acquire properties. Again I think it is important to understand that every bit of ownership of FSP is in the common stock.
There are no prefers or preferred dividends to pay, no convertibles and there is no properties secured debt. We have been in '08 very, very patient with the acquisition process and I think it is paid off.
We purchased three new properties in 2008. In May we purchased a property in Houston that we had actually developed in one of our single asset REITs 157,000 square foot office building for about 35 million.
And again these last two properties in late December that we purchased approximately 20 million in the St. Louis area, 127,000 square foot office building and about 19 million in the Washington, DC, Northern Virginia market about 135,000 square feet.
These three acquisitions totaled about 75 million in total. In all three of these acquisitions are in existing markets, markets that have we have been in and a part of for years.
We know these markets, we have contacts in these markets and inside view of -- in our opinion what is real value and what is not. And we would anticipate continuing to acquire in '09 properties that we believe are good near-term and long-term values in markets that we are already in.
We continue to be very optimistic about FSP's position in the current commercial real estate investment market, and the opportunities that are presenting themselves to acquire commercial properties at better pricing and value metrics that we have seen in the last few years. We think that this part of the cycle really allows FSP's strengths to come to the forefront in terms of positioning the company for the next part of the cycle which hopefully will be a strong move to the upside once we get pass this, economic and credit canyon that we're all facing.
With that, I would be happy to open up for questions.
Operator
(Operator Instructions). Your first question comes from the line of Justin Webb with Robert Baird.
Please proceed.
Justin Webb - Robert W. Baird
Hi, guys.
George Carter
Hi, Justin.
Justin Webb - Robert W. Baird
George, a quick question on, I know you touched on it, and remarks is there any more sort of information given how critical is going to be '09 results for the transaction business being relatively muted. Any more information in terms of maybe what's been renewed, what you expect to lose.
I know lot of its back half weighted, maybe what kind of rank growth you're expecting there?
George Carter
We do have in the press release as you know, what portion of our leases are expiring in each year. In 2009 and 2010 you can see those numbers 11 and 14% respectively.
And again 2009 is pretty much back half weighted. If you were going to say to me it's just -- what we do think will happen, the honest answer is I don't know.
The economy is certainly moving very fast. And a lot of companies out there that are trying to make decisions on space really seem to be somewhat frozen in terms of their ability to make a decision either to renew, expand, contract et cetera.
So it's a very uncertain market. I'm sort of reminded of, I think it was Gemmy Den at JP Morgan was talking the other day about his business, and he said it's war out there and I don't mean to be dramatic, but the reality of owning a diverse portfolio of office properties around the country with 100s of tenants, because that it is war.
And the war is renewals at what rate, at what rental rate, at what terms, how much TI improvements, leasing commissions you have to pay for that. You throw in on top of that bankruptcies that many times are just totally unforeseen.
And it really becomes -- it really does become a war. At the end of the day, the war will be won by those companies that number one have good properties in good locations, we certainly would believe we are one of those companies.
And companies that have the staying power to deal with whatever comes at them relative to vacancy and relative to rental rate. For us Justin, I can't give you a good feel at this point and I will try in the coming quarters to do that as we closer to expirations and deals that we're working on now, sort of where we are.
But we will have some push and pull or offset from new acquisitions, most of the new acquisitions that we are looking at and trying to acquire very much like three that we acquire during '08 are properties that are tend to be more fully leased, tend to have credit tenants that in this economy you can count on, and longer-term leases. So occupancy and rental rates and obviously the cap rates you can buy the new properties at are going to sort of counterweight our balance what's going on in the existing portfolio.
That's pretty long winded and not real specific but it's sure the best I can do.
Justin Webb - Robert W. Baird
No, it's helpful. You mentioned cap rates there in terms of cap rates that you're seeing out there, and I know obviously there is market specific but maybe on a more general basis, like we all know they're sort of going up but is there any sort of range maybe you're seeing sort of like an 8% to 10% range anything along that line?
George Carter
Yeah, again our real estate is local and cap rates vary a lot in different markets. So the broad based statements are not too important when you're talking about a specific property in a specific market.
But generally, for suburban or in field office buildings around the country, generally we have seen during '08, cap rates rise by anywhere between 1 to 1.5 points. So if they were at 7 to 7.5% cap rates, they're now at 8.5 to 9 cap rates, and we're seeing that fairly consistently.
The problem both as I mentioned earlier in the prepared remarks as a potential seller, and as a potential buyer is that that market is moving so fast that if you are a seller, you're sort of chasing the price of real estate down and if you are buyer, you are chasing that same price. And there still is lot of cases a disconnect between sellers and buyers, and the longer the process takes, the more -- the wider that gap tends to get and both sides are having to back and fill to try to make deals and then of course when you deal with the mortgage market at the same time, it becomes real tough sturdy.
Justin Webb - Robert W. Baird
No, that's definitely very helpful George And then one more quick question, more of a technical question but if you need run rate its maybe 4Q something more likely to be expected in the first sort of for '09 and it came down a little bit and just sort of wondering there what you're thoughts are?
Scott Carter
I think, it probably -- they're obviously using the full year on average.
Justin Webb - Robert W. Baird
Okay. Sounds good.
Yes, thank you.
George Carter
Thanks.
Scott Carter
Okay, Justin.
Operator
Your next question comes from the line of Eric Anderson with Hartford Financial. Please proceed.
Eric Anderson - Hartford Financial Management
Yes, good morning George. I was wondering if you could just elaborate a little bit further on -- you mentioned that your lease roll that's coming up '09 and 2010 probably was a little bit more than I guess around 25% of the total.
In terms of is there a geographic concentration all in some of the properties that are or the leases that are up for renewal, and are you starting to see any affect from the lower oil prices in the Houston, Dallas markets from last summers' decline?
George Carter
Yes. I think our roll Eric, is pretty much in concert with our concentration.
So I think we're fairly, evenly spread relative to where our properties were concentrated. They're not -- the roll is not doesn't tend to be concentrated in one particular area.
And again you know rolling, if you think of suburban office which was our primary product type and you think of an average lease of five to seven years in length. Having an average roll of anywhere between 10% to 15% per year is pretty much the norm.
In other words, we don't have in '09 or '010 much more than a normal roll. What's abnormal is what are rolling into, which is just a tougher market.
The Houston properties that we have and I would say in any of the energy belt in general have done extremely well in terms of occupancy and rental rate over the last couple of years. With clearly growth and leasing activity in those markets, the energy markets and that really include Houston and the Texas markets, Dallas for that matter and Denver.
Clearly energy is a component of leasing activity there, what we're not seeing in those markets, we're not seeing dramatic breaks in property prices, we're not seeing dramatic increase in vacancy or dramatic drop in rental rates. So occupancies, rental rates, prices of properties are holding pretty well.
But what we are seeing is a real slowdown in new leasing activity, definitely the energy markets have affected that aspect of the energy belt.
Eric Anderson - Hartford Financial Management
With some of the deals that you're working on now, assuming they were signed five to seven years ago, are the per square foot rates that are being talked about higher or lower than initial terms.
George Carter
It really varies. I'm not trying to be evasive.
It really varies property to property and lease to lease. I will tell you though in general and again, this is the same for no matter if anybody tells you, this is same for everybody that owns office.
It has turned into during '08 a tenants' market and tenants particularly tenants that have any credit behind them. Our column the shorts, they have plenty of choices.
Their tenant reps and so on are back in the driver seat and it's much tougher to be a landlord and sign a new tenant at a good lease rate today than it was a year ago. Having said that, what we are finding in general out there is that a lot of tenants, not all but a lot, a majority are willing to sacrifice lease rate for a bigger TI package, tenant improvement package and lease terms.
So, that when you look at it in the individual office property and you try to think two or three years or four years down the road on the other part of the cycle, you say am I going to comprise the ultimate value GOS gain on sale of that property on the backend when we go to sell it. If you have capital which FSP does, if you have cash which FSP does to pay TIs, leasing commissions as upfront cost to get those tenants in the space, you can hold rate or increase rate which makes the backend value of the property obviously much more enhanced.
And as we look out there right now against all of our competition which is all of the other office buildings and all of the other owners, one of our strengths and we're seeing that day-to-day is that we are able to approach a tenant existing or new and offer a very, very attractive package in terms of TI's and leasing commissions because of our liquidity in our balance sheet and that is making the difference both in terms of occupancy and in terms of rate.
Eric Anderson - Hartford Financial Management
So it's a corollary then you would be more inclined to let a tenant go if they were demanding a huge concession in rents as opposed to trying to keep the building for at all cost.
George Carter
I think generally and it's a very general statement that's correct, Eric and I think it flows not only from our view of how important sale proceeds are on properties, gain on sale and how a lower rent stream can be to that. But it hits to something more near-term and something that's really important and that is if you view on an office building where you I would say 60% leverage with the mortgage and you're facing that mortgage payment.
In other words, if you don't pay that mortgage, you don't get to see that property, two or three or four years from now. You are likely to take any rent to service that mortgage, because if you can't stay, you can't play.
We are not in that position. Now only time tells whether the positions that we're taking with tenants, occupancy versus rate as you would say will pay-off but our 35 years of experience would tell us that that is the case and that cycles are cycles and while this one maybe deeper and lighter than most.
Back into the cycle we will be very, very opportunistic for those that keep the discipline and can afford to keep the discipline during this downturn.
Eric Anderson - Hartford Financial Management
Okay, thanks George. I appreciate it.
George Carter
Welcome.
Operator
Your next question comes from the line of Mike Bird (ph) with Mutual Fund Management Systems. Please proceed.
Unidentified Analyst
Hi, good morning George. How are you doing?
George Carter
Hi, Mike. Good morning.
Unidentified Analyst
I just had one quick question on leasing and things like that. The LandAmerica financial lease since they're in bankruptcy, do you have a contingency plan for that.
I believe it's coming up at the end of the year or something?
George Carter
All right. We have a property just -- so everybody is on the same page.
We have a property in Richmond, Virginia. Our property is actually leased currently to Capital One Financial.
And that's leased into the fourth quarter of 2009 where upon the lease with Cap One ends and a direct lease with LandAmerica was scheduled to begin. In effect, Cap One has been subletting space in that building to LandAmerica over the last year and a half.
LandAmerica declared bankruptcy, the acceptance or rejection of that lease is what the bankruptcy courts are right now. So we will not know until the bankruptcy court decides on whether or not to accept or reject that lease.
So, contingency is obviously to release the property if the property were to go vacant. However, LandAmerica -- this is their corporate headquarters.
LandAmerica has is trying to reorganize under chapter 11 not 7. All of their computers and files and so on.
They have several businesses some of their business has been sold to another title company or fidelity, fidelity is onsite there. There are three buildings that are associated with this particular property.
What if any of those buildings and square footage LandAmerica may want maybe accepted in the bankruptcy that's going on. What if any of those buildings and square footage fidelity may what which is again a purchaser of LandAmerica's assets.
Is a real question mark. In addition, there are some other subtenants or at least one other subtenant that is there along with LandAmerica and where that subtenant goes and what space they require is still a question mark.
So it is one of these moving targets that its been almost two months now in bankruptcy court. So we don't have a final answer on the lease, we probably will get one within the next month or two is my guess.
And as soon as we do, we will inform everyone about that particular property. But it's a little bit of a moving target, Mike like by the way like most chapter 11 bankruptcies are.
Unidentified Analyst
But currently, I would imagine Capital One is still paying?
George Carter
Yes. It's a 100% leased in Capital One has being and full rep.
Unidentified Analyst
But we have pretty strong economy down here in Virginia. It probably get leased up pretty quick, I would imagine.
Thank you very much.
George Carter
You're welcome. It's a wonderful property and probably the best submarket of the Richmond area.
We're really optimistic about it but have to deal with it in. And again these are the things again you talk about war, I mean it is war and these are the things that you deal within war.
Unidentified Analyst
Okay. Thank you very much.
George Carter
You're welcome.
Operator
We have a follow-up question from the line of Justin Webb with Robert W. Baird.
Please proceed.
Justin Webb - Robert W. Baird
George, just following up on LandAmerica. Do you have any updates on the IBM lease that I guess comes due in July or how the stall back which I guess is now being renamed officially Jones Lang LaSalle that comes due in April?
George Carter
No update on IBM, that's the property inventory and again I don't have to tell anyone it's only our property in the Detroit area, South of Michigan. But there is a question that surrounds IBM's future needs that is still not yet totally solved.
So I don't have any update on IBM probably go by next quarter. Stall back in our Jones Lang is in our Addison Circle property which is Dallas on the toll way.
And they've been a great tenant of ours for many, many years and we're very excited to see them go there moving down the road a bit. But we have very good leasing activity at that property so we feel confident there.
Justin Webb - Robert W. Baird
Sounds good.
George Carter
Thank you.
Operator
We have no further questions in queue. I would now like to turn the call over to George Carter for closing remarks.
George Carter
Thank you everybody for attending the call, and I will look forward to speaking with you on next quarter's earnings call. Thank you.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Good day.