Franklin Street Properties Corp. (FSP) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Franklin Street Properties Corporation 2013 Second Quarter Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Scott Carter, General Counsel. Please go ahead.

Good morning. And welcome to the Franklin Street Properties Second Quarter 2013 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 Factors section of our annual report on Form 10-K for the year ended December 31, 2012, which is on file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today, July 31, 2013. 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 will now turn the call over to John Demeritt. John?

Thank you, Scott, and welcome, everyone, to our second quarter earnings call. I'm going to start with our second quarter results and then a short overview of our balance sheet and liquidity position. Afterward, George Carter, our CEO will discuss the quarter and operational results in more detail. My brief remarks will refer to our earnings release, the supplemental package and our 10-Q that were filed yesterday. All of which can be found on our website. I'm pleased to report that we generated strong results in the second quarter of 2013 that reflect continuing momentum in our operating business and growth of our asset base. For the second quarter of 2013, our FFO was $0.24 per share, which is an increase of $0.01 over the prior year second quarter. This increase was driven by a higher property income due to acquisitions as well as increased occupancy with the new operating portfolio, which contributed to an increase in our same store NOI in the quarter. Additionally, please note that our share count has increased as a result of our equity offering that we completed recently. Turning to our balance sheet and current financial position, in May, as I mentioned, we successfully completed a follow-on equity raise and this was something we had not done since 2009. We issued 17,250,000 shares and received $230.7 million in net proceeds, including the full exercise of the underwriter's over allotment option. After the close of the offering on May 15, we repaid $45 million under the company's credit facility and used $183 million to complete the acquisition of one of our 2 new assets, this one in Denver, Colorado. On July 1, 2013, we drew $150 million from our credit facility and completed the acquisition of a property in Atlanta, Georgia, which had a price of $157.9 million before closing costs and adjustments. At June 30, 2013, we had cash on hand of about $25 million and about $319 million available on our credit facility, providing us with total liquidity of approximately $344 million. At quarter end, we also had a total of about $582 million in unsecured debt on our balance sheet and a total market capitalization of $1.9 billion. Our debt to total market cap ratio was 30.5%, and our debt service coverage ratio was 6.25:1 for the second quarter. As I said earlier, the earnings supplemental information package and the 10-Q filing are available on our website and provide more detail about our results. And as always, we are happy to take questions at the end of this call. George will now provide more specifics on the portfolio's results and our thoughts as we look ahead to the second half of 2013. George?

Thank you, John. Good morning, everyone, and thank you for taking the time to listen to our second quarter 2013 earnings call. Sorry for the froggy voice. I've got a little bit of a summer cold. Excuse me. As usual, my remarks today will generally follow my written commentary in yesterday's earnings press release. And after my comments, we will open the call for questions. For the second quarter of 2013, FSP's profits, as represented by FFO, totaled approximately $22.1 million or $0.24 per share compared to the first quarter of 2013 where FFO totaled approximately $20.6 million or $0.25 per share. So our FFO rose about $1.5 million from $20.6 million to $22.1 million, but our FFO per share dropped from $0.25 to $0.24. And that obviously is because our weighted average shares outstanding rose in the second quarter of 2013, as a result of our common stock offering of 17,250,000 shares completed on May 15. Proceeds from our stock offering were not fully deployed into additional planned property investments until July 1, the start of the third quarter. Consequently, there was some per share dilution of FFO for the second quarter; again, even though our FFO actually rose 7%, consecutive quarters from quarter one to quarter two. The impact of fully investing the net proceeds from our recent stock offering should be visible in our third quarter 2013 results. And we anticipate the third quarter profit run rate to show the accretive per share FFO effect from fully investing the proceeds of that stock offering. Our directly owned real estate portfolio of 38 properties totaled -- totaling about 8.5 million square feet was approximately 94.4% leased as of June 30, unchanged from the first quarter of 2013. We anticipate continued organic growth in rental revenue and FFO from our existing portfolio of properties in the second half of this year as we begin to realize the benefit of significant new leases signed in recent quarters and as continuing same-store rental increases positively affect profits. One of the big contributors here will be our Greenwood Plaza property in suburban Denver. The -- this $2 billion property, one of the buildings was totally leased to Kaiser Permanente. They have let us know that they would like to take space earlier than originally planned, so we have been vigorously building out ahead of schedule, that property for them and rent will -- more rent will commence in the second half of this year than originally anticipated. But obviously, spill over into the first half of '14 as also originally anticipated, so Greenwood Plaza's going to -- should contribute substantially to same-store rent growth in the second half of this year. Our property portfolio of office assets has relatively modest lease expirations over the next 1.5 years, which we continue to proactively reduce. As of the end of the second quarter, only 1.2% of our commercial square footage is scheduled to expire during the balance of 2013, and that's down from 2.2% at the end of the first quarter of '13. Next year, we have about 4.5% scheduled to expire, and we are actively looking on 2014 as well as '15 and '16. Growth in FSP's real estate assets and broader capital structure has been significant since the beginning of the second quarter of '13, and we plan to continue to actively pursue additional growth opportunities that we believe are available to us. Our pipeline for new property acquisitions is strong and we also have, within the portfolio, some very specific value-add opportunities that we may be taking or trying to take advantage of. On May 15, we completed a common stock offering, as John said, of 17,250,000 shares, providing the company with approximately $231 million. On May 22, about 7 days later, we acquired the first property that we had designated as a possible acquisition. That was a 680,000 square-foot office building for $183 million located in the central business district of Denver, Colorado, and that's one of FSP's primary markets. That property is known as 1999 Broadway. On July 1, the start of the third quarter, we acquired a 621,000 square-foot office property for about $158 million located in the mid-town submarket of Atlanta, Georgia. Again, this is another one of FSP's primary markets. This property is known as 999 Peachtree. These 2 properties, the Denver property 1999 Broadway and 999 Peachtree were the 2 properties that we had designated as probable acquisition candidates for effective use of proceeds of the stock offering. On July 15, we signed an agreement to purchase a 655,000 rentable square foot office property located in the central business district of Denver, Colorado for $217 million. This second Denver central business district property, whose address is 1001 17th Street, is scheduled to close on August 28. And obviously, that is still subject to successful due diligence, et cetera. The capital to facilitate this acquisition, as well as for other uses, is anticipated to be provided by certain members of our existing bank group in the form of an unsecured fixed-rate term loan. Right now, we are actively looking at a 7-year term loan from this group of banks. Continued growth, both organically in terms of same-store rents, along with additional property acquisition opportunities, makes us very, very optimistic about our profit performance potential for the second half of 2013 and beyond. So with those comments, let me open the call for questions.

[Operator Instructions] Our first question comes from Dave Rodgers of Robert W. Baird. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: George, question for you on the acquisition pipeline. I think there were a couple of things in there you said in terms of an active pipeline. I was wondering if you could give a little bit more color maybe in terms of the number of assets or the depth of the markets that you're looking at across the country. And in addition to that, you had mentioned something about value-add opportunities in the portfolio. I was wondering if you meant in the portfolio in the backlog or in your existing portfolio. I think you meant the backlog of acquisitions that I was going to ask about your pursuit of value adds. If you could give more color on that, that would be great as well.

Yes, I will. Let me turn this question over to Jeff Carter who does all of our acquisition work.

Good morning, David, this is Jeff. Our acquisition's pipeline is enhanced and quite strong this year. Our focus is going to continue to be on the 5 primary markets that FSP is focused on: the Atlanta, Denver, Dallas, Minneapolis and Houston, and we are seeing a steady flow of potential opportunities that range from value-add to sort of last-mile core-type properties as well, a lot like you've seen since July when we started with the Ravinia acquisition, which was 82% leased. So we're looking at deals that have a variety of profiles, including some value-add components as well as more stabilized properties. In all cases though, in these markets, we're seeing properties that we're viewing at discounts to replacement cost, with rents that are below market. And all these markets have drivers to them that we're very focused on and believe can contribute and grow meaningfully over time. The pipeline right now is -- continues to be strong. We have acquisition possibilities in a number of those markets that are probably roughly in the $200 million to $300 million range. None of them are made. None of them are on table so to speak, but it's a pipeline that we're viewing and will continue to do so in those markets. We're also going to continue to focus on looking in markets that we have been active participants in, in the past. Our primary markets will be our main focus, but we've been cyclical investors before in San Diego, Greater Boston, probably Durham in Greater Washington D.C., and I am continuing to look in those markets if an opportunity presents itself for potential acquisition as well. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: Great, and then maybe switching to leasing real quick. Leasing activity was a little slower in the second quarter. Clearly you're running above 94% on a leased basis. So I know it gets incrementally more difficult. But maybe give us a little bit more color on the current amount of leasing activity that you're looking at, deals out for signing. And then if you can comment on the updated 3Q, 4Q and early '14 commencements, as you mentioned some would be earlier than anticipated. If you could give us some color and remind us of the square footage or revenue commencements over the next couple of quarters, that would be great.

This is Janet Notopoulos, I'm the Head of the Property Management Group. I think you're right at 94%. We're seeing smaller leases as we fill out the smaller spaces and a lot of -- it's been summer, we've got some stuff in the queue, we don't have any big surprises coming that I'm aware of, of filling additional space, but we are working along with additional space. As you can see from our portfolio, we have the opportunity to do more leasing in markets that are starting to pick up. At the risk of boring everybody, we have a diverse portfolio. We see the different cities and locations come back online and strong at different times. You can see our Kaiser deal in Denver, we had a big pickup in Denver, as that market's gotten better. And right now, we're waiting for some of the smaller markets, the Baltimore market and some of the others. So as those pick up and we think that they are starting to, we'll see some further leasing there. When you were asking about the Kaiser lease, it's about 120,000 square feet in that one building, that's part of Greenwood Plaza. And that's coming on -- it was supposed to be in 2 pieces, it's coming on sooner. We expected more back ended into 2014 as there'll be more coming in earlier. So more impact in '13 than we had expected.

Our next question comes from Josh Patinkin of BMO.

Sticking with the leasing, '14 and '15, a greater percentage of the portfolio starts to roll over. And I'm wondering if we could get a sense for geography, where you guys think you are in terms of the market, market rents. And just get a sense for where you think the portfolio might roll on a leasing spread basis?

In 2014, where we don't have that much roll, if you look at it, it's pretty evenly split among our major markets. So since my crystal ball isn't that accurate, I think you could pretty much figure that, that we'll have to the extent that the leases are expiring in Houston, and Houston stays hot, we should see good activity there. Dallas is a little bit cooler and to the extent, that might not be. We have some in Denver, we have some in Atlanta. So clearly, the big number in '14 are pretty well spread across our portfolio. So I think you'll see that same kind of averaging that we see in the portfolio. 2015, we've got several large expirations coming up, and we're in talks with everyone, virtually everyone. I wish I had an announcement right now, but I'm hoping that by third quarter, we might have something, but there's -- it's just so hard to predict where we're going to end up on.

Okay.

But we are actively looking at '15, and I think we'll have some. Hopefully, it looks like we'll have some successes. And if not, we have -- if we lose some of the tenants, we don't get the renewals, we think some of the expirations are in markets that we'd be excited to have the space back.

Very Good. Jeff, on the more recent Denver acquisition, can you give us a few of the details, cap rate and anything else you're willing to disclose?

Absolutely. Good morning. Are you -- you're referencing the property we're under contract on, 1001 not 1999 Broadway, is that correct?

Correct, $217 million.

Got it. We are under contract on 1001 17th Street, $217 million was slated, closing date is August 28. I can only give some limited information on it, given that we're not closed and not the owner on it at this point. We're really excited about the asset. It's 655,000 square feet. It is in the downtown central business district in the mid-town micromarket. It is really at the gateway of lower downtown, or LoDo as it's called, in Denver. It is a property that occupies a full city block, fronting 17th Street, between Arapahoe and Curtis. And it is a property that will be -- looks similar in some ways to the 1999 Broadway and 999 Peachtree acquisitions in that it is continuing with this urban in-fill CBD move that we've been acquiring in, in one of our 5 primary markets. Denver is really going to continue to be a key focus for us. It's got a lot of drivers to it but -- domestic energy in particular and energy broadly is a key driver there. This property is really uniquely positioned in that it is a block from the 16th Street mall and right at the gateway to LoDo. It is a property that we would expect the closing to be approximately 89% leased. And which would give us just in excess approximately of 70,000 square feet of office space to potentially lease at the property. And at this point, I would not be able to give more information on it, except to say that you'll see the going in yield be consistent with what you've seen at other properties in the neighborhood of 6% to 6.5%.

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

Just wanted to thank you all for participating. And look forward to talking with you on our third quarter call. Thank you. Have a great day.

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