Franklin Street Properties Corp. (FSP) Q3 2008 Earnings Report, Transcript and Summary

Welcome to the third quarter 2008 Franklin Street Properties earnings conference call. My name is Ericka and I’ll be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Mr. Scott Carter, General Counsel.

Thank you for participating in this call. With me this morning 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 sections of our annual report on Form 10K for the year ended December 31, 2007 and our quarterly report on Form 10Q for the quarter ended September 30, 2008 both of which are on file with the SEC. In addition, these forward-looking statements represent the company’s expectations only as of today, November 5, 2008. 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 yesterday’s press release which is available on the investor relations section of our website at www.FranklinStreetProperties.com. Now, I’ll turn the call over to John Demeritt.

Welcome to our earnings call. We’re going to be talking to you about our third quarter 2008 results and we’ll start with a short overview. Afterwards, 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 and 10Q that went out last night. Before I start I wanted to talk about our balance sheet. We’ve all seen the turbulence in the stock and credit markets these past couple of months. The strength of our balance sheet going in to this abyss should serve us well and enable growth as we move ahead. As of September 30th we had cash of $35 million and taking in to account the $75 million unsecured term loan that we just completed we have about $220 million in availability in our line of credit to fuel growth in the fourth quarter and beyond. As of the end of the quarter we had total assets of $997 million and $105 million in debt making our leverage ratio then and now about 10.5% of our total assets. The unsecured debt on our balance sheet matures in three to five years. Our balance sheet is very solid at a time when there is general concern in the market about debt levels and many are making an effort to delever. We may see some issues from economic conditions that could affect leasing and investment banking as we move through this down part of the cycle. We have the strength of our balance sheet as ballast. As we’ve said before, we measure our performance with three key drivers which are real estate operations, investment banking and gain on sale of assets or what we call GOS. Investment banking and GOS are transactional in nature and even in normal markets the quarter results from them can be very choppy. We believe our overall performance is better evaluated over the long term. For the third quarter of 2008 we had net income of $7.4 million and earnings per share of about $0.11. We measure performance of real estate operations and investment banking through FFO which for the third quarter was $17.1 million or $0.24 per share. We did not sell any properties during the third quarter and as a result there were no gains on sale in our results for the third quarter. Comparing the third quarter of 2008 to 2007 EPS was about $0.03 lower in 2008 pretty much entirely as a result of GOS of that amount that we had in 2007. If you strip that out, EPS was $0.11 per share for both Q3 2008 and 2007. FFO was also flat at $0.24 in both Q3 of 08 and 2007. On a dollar basis there was an increase of about $162,000. The reason for the increase in FFO was primarily from performance of our real estate assets which were about $600,000 ahead of the third quarter of 2007. The most significant reason for this increase was the benefit of leasing that we’ve accomplished in the last 12 months that positively impacted this third quarter of 2008 compared to 2007. The increase in real estate FFO was partially offset by an FFO decrease from the investment banking segment of about $400,000. This was because we had lower banking fees compared to our third quarter last year. FFO from investment banking is from fees based on the value of the shares that we see in private placements. For the third quarter we sold shares of these private placements of about $4.8 million which was $5.1 million lower than the value of shares we sold in the third quarter of 2007. FFO derived from the investment bank is essentially syndication and transaction fee revenues on our income statement less the impact of direct expenses which are commissions and related income taxes and also some G&A expenses. George will be talking more about the investment banking GOS as we believe turbulence in the markets and other external factors in the market have affected these drivers. That covers our financial performance. The press release and 10Q filing go in to further detail about our results. I also wanted to point out that our press release has our usual supplemental schedules including information about the 12 single asset REITs that we managed and include two that we currently have investments in. There’s also a current owned real estate portfolio information there if you’re interested. I also wanted to point out that we will be filing our first supplemental schedule at the end of this week or perhaps early next week with some additional operating and financial data. That concludes our financial highlights and at this point our CEO George Carter will tell you more about the quarter and where we are. Thanks for listening.

Thank you for taking the time to listen to our third quarter 2008 earnings call. My comments this morning, as usual, will follow my written comments in our earnings press release. As John has said, total profits for the third quarter of 2008 were approximately $17.1 million or $0.24 per share. Franklin Street represents its profits as a combination of FFO, funds from operations and GOS, gain on sale of properties. For the third quarter of ’08, as in the first two quarters of ’08 there were no property sales, consequently there were no gains on property sales. Very generally speaking, we believe the current market environment does not offer the best opportunity to achieve efficient aggressive pricing on the sale of commercial properties. If you don’t have to sell property now, and we don’t, a better market is likely to develop when more liquidity returns to the commercial mortgage product that is used to help finance the more traditional acquisition process. So, 100% of our profits for the third quarter was FFO and our FFO as John has said is comprised of two components, one is the ongoing recurring real estate operations and the other is the transactional component of real estate investment banking. Since our real estate investment banking business operated at a small loss for the quarter, 100% of our FFO profit was generated from real estate operations. With regard to our investment banking business, continued turmoil in the investment markets during the third quarter of 2008 virtually shut down investor appetite for our real estate private placements. During the quarter we raised only $4.8 million of equity capital compared with $49.9 million in the second quarter of 2008 and $2.7 million in the first quarter of 2008. Historically we breakeven in our investment banking business on a quarterly basis at about $12.5 million of equity capital raised and on an annual basis at about $50 million. Consequently, for the third quarter of ’08 this business segment cost us about $216,000. The bad news about this business segment is obvious and that is its transactional nature can really suffer in times like this. The good news is that in stable investment markets the business can generate significant profits as well as certain sponsored properties that Franklin Street can consider for potential future acquisitions. The other piece of good news surrounding our investment banking business is that even in the toughest of environments like we and other investment banks find ourselves in now, the size, scope and overhead of maintaining and operating this business for us is relatively small compared to our real estate operations. With equity raised through the first three quarters of 2008 totaling approximately $57 million our investment banking business should produce a small profit for the company this year. We anticipate this business to remain very volatile quarter-to-quarter as long as broader investment marketing activity and financial events continue to meaningfully sway investor confidence and sentiment. While profits continued to suffer in the third quarter of 2008 from our transactional businesses being negatively impacted by the turmoil in the broader capital markets, our ongoing recurring source of profits, our real estate portfolio consisting of 27 properties maintained its overall 93% occupancy and provided steady rental income. FFO for the third quarter of 2008 was $0.24 per share all of which came from real estate operations. On October 15, 2008 the company used its balance sheet strength to obtain a $75 million unsecured term loan. The loan was provided by banks that provide FSPs existing $250 million revolving line of credit facility. The purpose for the loan is to increase capital to take advantage of property acquisition opportunities that are beginning to present themselves at attractive prices as a result of the current distress surrounding some aspects of the broader commercial real estate markets. As the capital markets and US economy work through the current financial credit crisis we will continue to pursue additional commercial property and investment opportunities. It will be FSP’s objective to continue to grow its property portfolio and rental income business during this period of liquidity constrained capital markets by using its balance sheet strength to help finance and fund new acquisitions. We will also look for the first time in our company’s history to the broader capital markets via traditional Wall Street investment banking firms and their capabilities to help us access additional new capital for property acquisitions and in the process hopefully gain some dedicated longer term institutional ownership and ongoing analyst coverage. 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 than we have seen in the last several years. With that we’d be happy to open up for questions.

(Operator Instructions) Our first question comes from Eric Anderson – Hartford Financial Management. Eric Anderson – Hartford Financial Management: I wonder if you could just offer a little bit of clarification. I believe it was either yesterday or the day before you had filed an 8K that talked about the purchase and sale of a building in Chicago. It was unclear to me whether or not that concerns the existing buildings you have in Chicago or if that represents a new purchase by either the company or its investment banking subsidiary of a building?

That would be a potential purchase of a new property directly in to Franklin Street Properties and would not be consider to be investment banking or syndication. Eric Anderson – Hartford Financial Management: So that’s just sort of something that you entered in to a purchase and sale agreement assuming it passes due diligence?

That’s correct. Because of the size of that potential acquisition we are required to file an 8K as it is a material agreement that we’ve entered in to. But, it would be, if successful through the whole due diligence process, it would be a direct acquisition in to Franklin Street Properties and would be our second large investment in the Chicago central business district, our first being a significant participation in 303 East Wacker which in fact was a syndication. This, as I mentioned, would not be. Eric Anderson – Hartford Financial Management: In reading through that 8K it looks like you would be assuming some of their debt as part of the transaction? In other words part of the purchase price would already be financed, is that the correct way to read that?

That’s the correct way, yes.

I’d now like to turn the call over to George Carter for closing remarks.

Thank you for turning in to the call everyone. We look forward to next quarter’s call and we hope to see some of you at the upcoming [inaudible] annual meeting in San Diego. Thank you.

Thank you for your participation in today’s conference. This concludes the presentation. Everyone have a great day.