Franklin Street Properties Corp. Q3 2009 Earnings Call Transcript

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 |  About: Franklin Street Properties Corp (FSP)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2009 Franklin Street Properties Earnings Conference Call. My name is Latrice; I will be your coordinator for today’s call. At this time, all participants will be in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

At this time, I would like to turn the call over to your host for today’s conference Mr. Scott Carter, General Counsel. Please proceed.

Scott Carter

Thank you and good morning, everyone, and thanks 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 factor 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, November 4, 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 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 as contained in 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 Demeritt

Thank you Scott. Welcome to our earnings call. We’re going to be talking with you about our third quarter and nine-month results and we’ll start with a short overview. Afterwards George Carter, our CEO, will further discuss the quarter on FSP.

I’m going to be brief and we will be referring to our earnings release, the supplemental package and the 10-Q that were filed last night. I’d like to start with the balance sheet, which continues to serve us well and will enable us as we move ahead.

As of September 30, we had cash of $26.4 million and $159 million in availability on our line. This totals about $185 million in liquidity to help operate FSP and fuel future growth. Our property portfolio is well diversified geographically and has no secured debt.

Properties with secured debt can have property-specific issues that could cause a sale when the market is not right for it, sort of like where we are right now. Since our debt is unsecured, it’s viewed more like one property and connects to mitigate the risk of the potential sale.

Geographic diversification within our portfolio spreads outlook economic risk across the portfolio which we think benefit shareholders over the long haul as well. At the same time, our low leverage ratio provides a terrific loan-to-value for our bank group on our unsecured loans. Our interest rate coverage ratio is also very high compared to our peers at about 11 times through nine months.

Our debt maturities on these loans are about two years away but we’re laying the groundwork for expansion with them in the future. The sense we have right now is the credit markets are still difficult, particularly given the level of bank closures recently but we are a desirable credit.

Over the past month we have made some contact and had meetings with some members of our bank group and they are very supportive of FSP and our growth strategy. During September, we completed an equity offering and as a result finished the quarter with our leverage ratio at about 15% which is down from 19.2% at the end of June. We have a $166 million in unsecured debt outstanding and shareholders equity of $944 million.

Our shareholders equity is held by our common shares only as we don’t have any preferred shares or other types of equity investments on our balance sheet. A $166 million in debt, as I said earlier, is unsecured and consist of our unsecured line which was drawn at about $91 million and an unsecured term loan of $75 million. The line matures in 2011 and has a total capacity of $250 million, and our term loan can be extended to 2013.

This balance sheet paints a solid picture of FSP at a time when there continues to be general concerns about the availability of debt from financial institutions and short term debt maturities at a lot of companies. We may see some issues with leasing and investment banking as we move through the down part of the cycle, but we have the strength of our balance sheet to see us through.

On the income statement, we measure our performance with three key drivers, which are real estate operations, investment banking, and gains on sale of assets or GOS we refer to it. The real estate operations driver is our ongoing rental revenues from our portfolio of properties, which is recurring business. By contrast, the latter two, GOS and investment banking, are really transactional in nature and even in normal markets the quarter results from them can be choppy.

First with GOS, during the third quarter and first nine months of ‘09, we didn’t achieve any GOS sales of property; in this market generally it doesn’t make sense unless you have to. Second, our investment bank profits continue to be impacted by the financial markets. Investment banking profits come from fees we earn and the value of shares of securities we sell as private placements. The sale of these private placements are what we call gross syndication proceeds and the earned fees based on a percentage of them.

The income derived from this is essentially syndication in transaction fee revenues on our income statement, less the impact of direct expenses which are commissions, some G&A expenses and related income taxes. There were no gross syndication proceeds during the third quarter of 2009 compared to about $4.8 million that we had in the third quarter of 2008. Third quarter of 2008, we actually had proceeds from two syndication transactions we had going on at the same time.

In the last four quarters though our investment bank has been very slow as we’ve talked about in all the calls, we measure performance of real estate operations and investment banking by FFO, which for the third quarter was $17.5 million or $0.25 per share, which is a penny up from the third quarter of 2008 and fairly flat compared to Q2 ‘09.

Comparing the third quarter of ‘09 to ‘08 our FFO was up as I said about a penny. The increase was primarily from performance of our real estate portfolio which was up about $828,000 mostly from the benefit of new acquisitions and also from other sources within the portfolio. The investment banking for the quarter was about $376,000 lower in Q3 than in Q3 208 which accounts for this penny increase net.

On a nine-month basis, we are down a penny at $0.74 compared to $0.75 where we were through nine months of 2008 which is interesting because our investment bank has had a real tough year. On a nine-month year-to-date comparison our investment bank FFO is $0.06 lower on a per share basis in ‘09, yet we are only behind a penny. The difference is contribution from our real estate portfolio and looking at the nine-month periods, our real estate FFO was up $3.7 million or a nickel a share this year compared to last year.

The real estate performance was greater primarily from six properties we acquired despite of our growth plan in 2008 and 2009. We acquired one property in May 2008 in Houston, two properties in December of 2008, one was in Virginia and another was near St. Louis, Missouri.

This past second quarter, late June, we acquired two more properties, one in Virginia and one in Minnesota and we acquired another property in Virginia at the end of September, right on September 30 actually that will contribute to Q4 and beyond but wasn’t really significant for Q3. That covers our financial performance. The earnings release supplemental filing in 10-Q go into further detail about our results if you are interested.

We continue to provide more property level detail in our supplemental filing as we noted in Q2, and we added FAD to the supplemental filing as well, which for the third quarter was $0.24 per share, it’s about a penny below our FFO. The definition in quarterly calculation of FAD is in the filing if you are interested. That concludes financial highlights.

At this point our CEO George Carter will tell you more about FSP results and where we are. Thanks for listening. George.

George Carter

Thank you John, and thank all of you for taking the time to listen to our third-quarter 2009 earnings call. As John has said, our FFO for the third quarter of $0.25 per share was sequentially flat compared to our second quarter. More specifically, there were no property sales in the quarter, we don’t have any properties listed for sale and we don’t anticipate listing any at this time.

As I’ve said in past calls it isn’t just about the absolute price and cap rate that properties are trading at, but it is as much about liquidity and competitive bid pricing which is still substantially lower than our normal active commercial real estate market.

I will say this though, and you may have heard this on other calls. For the quarter, we have seen some improvement in the amount of transactions done, the amount of properties offered, the amount of properties bid on, the number of bidders, just more activity, and I hope I know everybody does, this portents some liquidity coming back into the sales market, there definitely has been some improvement going forward.

Rental revenue rose to over $31.7 million for the third quarter from about $29.3 million last quarter, but our occupancy dropped to about 90% for the third quarter from 92% in the second quarter as our lease roll into a weak leasing market had its consequence.

I will say that on the ground when you look across the country, and we have a diversified portfolio primarily of suburban office, depending on what statistics you read from what source, vacancies are somewhere between 15% to 20% and it’s still very tough out there.

The one thing I would say though that is quite different from really the start of the year is that we are seeing more leasing activity that is the decision-makers for the companies or businesses that occupy these properties were pretty much frozen for a lot of ‘08 and early ‘09. That unfreezing which may be a part of this sort of Armageddon scenario being taken off the table is definitely happening.

That is very good for us, because we have terrific properties or good balance sheet we can be competitive on TIs and leasing commissions etcetera, and so just that there is activity and more people making decisions, I think is a positive and hopefully, again, portent generally a better market in the future.

But, having said all that, make no mistake that net absorption of square footage out in the marketplace is still negative. Vacancies are still rising, rent levels are still tough and until we see genuine employment growth in the broader economy I don’t think those fundamental trends are going to reverse themselves.

Our investment banking group completed no equity closings in the third quarter and consequently, again as John said, operated at a loss for the quarter which totaled about $600,000 or about a penny a share. However, and very important, our bank began its first new private placement real estate offering of 2009 during the last two weeks of the quarter.

We are starting to see more opportunistic property acquisition prospects for this business segment, and in addition, a growing interest from our established investor clients to move some portion of their capital from the sidelines to specific property investment situations.

Investor interest in the real estate asset class normally precedes the actual recovery of that asset class, and it is possible that we are witnessing the beginnings of that anticipatory capital positioning. If so, the potential for meaningful profit contribution in 2010 and beyond from our investment banking group looks promising, but remains subject to broader capital market economic and investment activity.

On September 30, FSP acquired its third property by direct acquisition this year, a 253,000 square foot office property located in Falls Church, Virginia for a price of $73,000,000. Along with three additional properties acquired in 2008, really the first full year of the commercial real estate downturn, FSP has increased its total property portfolio from 26 to 32 assets and added over 900,000 square feet, and that does not include our preferred stock interests in our Phoenix Tower, Houston syndication 303 East Wacker, Chicago, most recently our investment in Grand Boulevard Kansas City.

When you take the interest in those three offerings and plug them in, it’s really like we have 35 assets that we’re invested in rather than 32, and property acquisition efforts continue to be very active and we would expect to acquire additional property in 2009 and 2010. It continues to be FSP’s objective to grow our property portfolio and rental income business during this period of liquidity constrained capital markets.

In addition to using our balance sheet strength to help finance and fund new acquisitions, primarily through our line of credit in term loan, raising equity by issuing additional shares of our common stock for sale to the broader public market is also a consideration as part of our capital funding, property acquisition and growth strategy.

The timing and execution of such capital events will be subject to, among other things, the size and amount of our specific property acquisition opportunities and the acceptance of our shares by the public capital markets. An initial execution of this component of our growth funding plan was completed on September 23, ‘09, with our first ever public common stock offering of 9.2 million shares at a price of $13 per share.

The offering resulted in net proceeds to the company of about $114.7 million, a portion of those proceeds were used to complete the Falls Church Virginia property acquisition on September 30. Again, additional property acquisition efforts are active and we would expect to acquire additional property in 2009 and 2010.

Looking ahead to the fourth quarter of ‘09 and full year 2010, our quarter-to-quarter profit FFO picture is really likely to be affected by the following positives and negatives. On the negative side of the ledger we have significant lease roll, about 8% as of the end of the third quarter of ‘09 for the balance of ‘09 and about 13% for 2010, obviously that lease roll is occurring in a weak market and the consequences of that will be what that will be.

The positive side of the ledger on that issue is that the four main properties that have the upcoming lease roll for the balance of ‘09 and 2010 are really four of our best properties. We are active on those properties and we have activity on those properties. The new leasing activity we’re seeing the market I think bodes well for us getting those properties leased in good order at the best prices the markets will bear.

Obviously, we have other vacancy that exists even before these lease roll and we’re working on that as well. So, clearly the negative and the positive of lease roll and lease up are two issues. On the negative side, again, to the extend that we do equity offerings there is a timing effect of that equity coming in initially no shares of effectively investing that equity into new property.

Our property acquisitions are accretive whether they occur effectively with our term loan, effectively on our line of credit or effectively with equity, but as equity comes in there is a timeframe whether it’s a partial quarter or full quarter or more where all of that equity effectively is not invested in a property, and so there is effectively profit dilution for some part of the quarter or quarter for that money that is not invested.

The positive side of that short term potential negative is the accretive side of acquisitions. As John said, our rental revenue has been rising because primarily of our accretive property acquisitions and the equity offering we did and future equity offerings we might consider would only be based upon our ability to acquire properties with those funds that are accretive and it is quite accretive in this environment, a very, very good time to acquire.

Sort of sliding between the positive and negative side of the ledger is our investment banking business, and our investment banking business has clearly been negative all of 2008, it has cost us money.

We’re quite optimistic that there are changes occurring in this business right now, I think you can look at the general investment markets, stock market et cetera, and extrapolate from that that real estate may not be too far behind and we are definitely seeing opportunities on the acquisition side as I said earlier and definitely in equity investor interest.

So, investment banking has been a negative over 2008 and for 2009. Looking forward for the balance of ‘09 and 2010, we’re optimistic that investment banking will turn around and definitely be a positive in terms of additional profits.

Looking ahead, at the bigger picture, potential growth opportunities for Franklin Street in this commercial real estate downturn is very exciting to us. We have a business model that is designed to take advantage over the real estate cycle. The company maintained a strong balance sheet to the up part of the cycle and is now extremely well positioned financially to grow its property portfolio in the current really opportunity laden down part of the cycle.

We believe we have been executing well our cyclical growth and investment strategy in 2008 and 2009, directly acquiring into the portfolio six additional high quality lower risk assets at prices and values that are more attractive than we have seen in many years. All the while, keeping debt-to-total capitalization under 20% and debt service coverage ratios at over 10 times.

FSP believes that a significant difference in the total return on IRR of real estate investing is made at the point in time of the buy. Price paid and value gotten at the point of purchase may be the most decisive factors in return on investment. We will continue to play disciplined offence for the balance of 2009 and 2010 with further property acquisitions.

That concludes my prepared remarks. I would be happy to open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Dave Aubuchon - Robert W. Baird.

Dave Aubuchon - Robert W. Baird

George, you’ve mentioned the acquisitions that you’re looking at, and I believe you said it looks like it’s going to close on more before this year, and can you provide a little bit more detail on what the pipeline looks like and perhaps bracket where you’re seeing those opportunities and assuming in your core markets, but maybe little bit more specific by region, and then the cap rates? And yields that you’re seeing right now whether or not the increased activity you’re seeing is moving the cap rates at all?

George Carter

Good morning Dave. Sure. The pipeline it’s been interesting because we are definitely seeing a stabilization in cap rates and sort of, I would almost call it a stabilization in transactional business in the property type that we believe is best to acquire at this part of the cycle, and that property type has been primarily existing fully leased properties, credit tenants, long-term leases, cap rates, when I say long-term leases I‘m talking about anywhere between 7 and 15 years.

Net leases, so you don’t have the operating expense risk going along with them. These are mostly newer properties so even though the leases maybe long coming off the back end you still have a very viable product type, this is particularly important in suburban, and definitely looking in regions that are areas that we already are in where we know people, where we know properties that are on the market etcetera.

Cap rates, as I mentioned probably in the last call, we are looking at the cap rates for these kinds of properties of anywhere between 8.5 and 9.5 caps and those held pretty steady for the quarter.

From our perspective there is a time in the cycle to buy these kinds of properties. The time to buy these kinds of properties is when you are unsure of how deep this canyon will be and how wide it will be. I think a lot of us in the real estate business right now think we are getting close to a bottom.

We are still not sure how long it will take to turn up, how long employment lags that the GDP cycle, etcetera, and I think that for the balance of ‘09 and 2010, I think our pipeline, because we are connected to a few very good sources and a lot of these sources are primarily developer type sources who have construction loans that are maturing.

We really anticipated selling or owning or financing properties that they developed at much different metrics a year or two ago when they started the development. I think our pipeline looks good and is of significant size in this product type.

Dave Aubuchon - Robert W. Baird

Do you think that pipeline would match, the acquisitions would match what you have already acquired this year, if you look at the balance of next three or four quarters?

George Carter

It certainly has the potential to and then so.

Dave Aubuchon - Robert W. Baird

You mentioned that you do have quite a few in your square footage, and your portfolio is expiring over the next four to five quarters. Can you detail a little bit more distinctly what the potential downside is from those leases that are rolling whether or not you keep some of the bigger leases, I think we all know about the capital one leased this quarter, but if you look out into 2010 you do have a lease to side base and I understand that most of that space is subleased, but also the Tektronics deal in Texas in Q2 and Q3 of next year.

Can you provide a little bit more detail where do you think you see your occupancy moving over the next four to five quarters?

George Carter

Yes, I mean occupancy is going to go down. We are going to have increased vacancy over the next few quarters. There is really not much doubt about that. Again, I don’t know net how the profit FFO picture will be affected because that is being offset by the things.

The biggest stain on the upcoming lease roll, there are four significant properties that have the role associating with them. One is in the Richmond Virginia area Innsbrook, this is the Latin America property, cap one property that we talked about so extensively. There was a bankruptcy there which virtually vacates that whole property.

That property is about 298,000 square feet, we’ve actually leased about 21% of that property already with really no downtime from the exploration of the cap one lease, and we have real and significant interest looking at the balance of the space in that property.

There are three different tenants that have leased 21% already and we have several other tenants looking at that space. Again, the good news is it’s a wonderful property and in one of the best locations in that market, and so we should be competitive in leasing that up.

One of the things that we’re trying to do and I think most landlords are trying to do, is if we can sign tenants on shorter term leases with no or lower TIs, you try to do it rather than signing some big long lease at a much lower rent with a large TI and sort of encumbering the value of that property over the long haul.

I mean if you believe in a recovery, you definitely want to try to stay short at this point. One of the things that gives me some encouragement is that we are getting tenants and the reps becoming more aggressive about wanting to sign longer term leases and wanting to obviously get a big TI package with that. Again, there are some properties with the right credit tenant and so on that might make a lot of sense, but we’ve been trying to stay shorter with less cash outlay and we’ve been somewhat successful, and that has been the case of Innsbrook so far.

The other big property in ‘09 is Meadow Point, call that the CACI property or CACI-property Chantilly Northern Virginia. We have done some leasing there that is in place at the turn, that lease expires November 30. We’ve leased about 47% of that property on actually a longer-term lease and we have interest in the balance of that space.

Greenwood Plaza, Dave, is in Denver the lease with Sybase or new era networks expires May 1 of next year, and Sybase had sub leased most of the property and we are very, very actively working with sub leased tenants in that property to extend and renew their leases, again trying to stay short, trying to keep the cash outlays down to a minimum.

We are making very, very good progress there. I hope to have some real good news on that property first quarter next year, and are very optimistic that we lease that property up, again that’s one of the best properties and one of the best markets in that segment of Denver.

Columns Crossing which is the Tektronics deal, which is located in Richardson Texas which is the North Dallas area is absolutely the best property in that market and its tenant will be leaving, its big tenant will be leaving and that expires June 30 of next year. We are very active in trying to release that property right now, and we have a lot of interest in that one as well.

It is the best property in sub market in Dallas and it is on the public rail line in Dallas, and there is a lot of interest in it. So, on every one of these, I got to tell you I am very optimistic, our asset managers are very optimistic, but it’s a tough market and even when you sign leases if it’s a credit tenant and you’re signing for any length, there is free rent involved, there is a TI package involved.

I mean rent rule downs if you look on average and again, it varies dramatically from property to property, lease to lease, but on average if you looked around our portfolio you’ll see lease roll downs of 10% to 15%.

Again that how we enter probably our biggest lease roll in the balance of ‘09 and 2010, but we enter with great properties. None of these properties having secured debt on them, we are not pressured to do something just to do a lease, just to do our occupancy, just to do debt service and I’m optimistic that profits are going to hold up here, not only because of our leasing but because of our new acquisitions, our banking et cetera.

Dave Aubuchon - Robert W. Baird

On the banking side, you did mention that it looks like you are starting to feel a lot more optimistic about the outlook there. Do you feel like that’s a breakeven business in 2010 or you don’t reach that point yet. Obviously it’s pretty early in the turn?

George Carter

I’d just qualify it, but I don’t know. I mean that is one market that can dramatically change from moment to moment with stock market or events in the world, but the way we are looking at it now is that business should be profitable in 2010 and far more than breakeven.

Dave Aubuchon - Robert W. Baird

Again, the breakeven point in terms of capital raise and that is typically around the $15 million mark, is that correct George?

George Carter

That’s a good number. Again, deals can vary a little bit in terms of how we structure them and lowed and profitability et cetera, but generally speaking sort of all in, yes that’s a good number.

Dave Aubuchon - Robert W. Baird

My last question is related to the balance sheet. John, I assume that you have given your comments about mortgages that you want to stay away from the security side. Should we expect, obviously depending on the level of acquisition activity within the portfolio, should we expect that maybe a term out some of the line of credit debt into another unsecured term loan?

John Demeritt

Yes, that’s a good thought. I’m just not sure of the timing of it. Right now the spreads are a little higher than we’d like. We’re enjoying a pretty good rate; we only have two years left. So, we would certainly be looking at that when that term loan comes to maturity either absorbing it into a line of credit or doing exactly that to stretch not a longer term loan.

Operator

Your next question comes from John Guinee - Stifel Nicolaus.

John Guinee - Stifel Nicolaus

George, great job on summarizing your major roles in the next few months, can you add to that what you see happening on Technip, which I think is the end of next year as well as Ober Kaler, which is early 2011?

George Carter

Technip really is a little bit of a moving target. It’s involved in a couple of properties of ours. In the Park Ten property Technip is effectively already gone, and we’re working on leasing that space. They are involved in a whole strip right along I-10 of Houston and in several buildings there they’ve had a new building built for them which is right next to another property that we have as a syndication where they are the major tenant and until this new building was built for them they back filled some space in our Park Ten property.

So they are moving around and according around, they are a little hard to predict, but on the Park Ten property where we have the Technip vacancy, we are leasing that actively as we speak to other tenants, again a number of them energy tenants in that energy quarter or market of Houston.

Ober Kaler, which is a 2011 expiration in Baltimore, a law firm, I don’t know in the final analysis where that goes and I don’t want to speak for Ober Kaler, I don’t know if any announcements have been made or anything else and so I don’t know the answer there, but we would assume at this point that the law firm would be leaving us.

John Guinee - Stifel Nicolaus

Going back to Technip, is 86,000 square feet in Park Ten and then additional space in the syndication building?

George Carter

Right.

John Guinee - Stifel Nicolaus

Park Ten we ought to underwrite that as in lease up now, and then which asset is the syndication asset.

John Demeritt

The name of that asset is Energy Tower.

John Guinee - Stifel Nicolaus

How much space do they have there? Just roughly, I mean is it 10,000 or?

George Carter

Yes, I can find it for you.

John Demeritt

They have 326,000 square feet.

George Carter

326,000 in Energy Tower.

John Demeritt

Yes.

John Guinee - Stifel Nicolaus

Do you have a position; is that a syndication where you have any position or do you sold that all off?

George Carter

No, no. We don’t have any position there, that’s all on the outside investors.

John Guinee - Stifel Nicolaus

Then I think you increased your loans outstanding, you probably you made a loan to one of your syndications, which one is that?

John Demeritt

Well, probably the most significant one is 385 interlocking, which is a construction loan for a property spec developing in Colorado.

John Guinee - Stifel Nicolaus

Any lease termination fees in the third quarter?

George Carter

Yes, we had one lease termination fee for our property in Missouri that occurred, and that space has already been re-let to an existing tenant in the building.

John Guinee - Stifel Nicolaus

How much was that?

George Carter

The fee?

John Guinee - Stifel Nicolaus

Yes, the lease term fee.

George Carter

Lease term fee was 445.

John Guinee - Stifel Nicolaus

Then the last question is, it looks like from your supplemental that you are running amortization of favorable leases, anywhere between $800,000 a year and $1.1 million a quarter, I’m assuming that that’s a amortization of above market leases, so it’s a deduct from a GAAP NOI to get to get to a cash NOI, is that the right way to look at that?

George Carter

Yes, we had to back for purposes of calculating FFO, but I guess if you’re going with GAAP, yes, it sounds right.

John Guinee - Stifel Nicolaus

Then just one last question, I’m sorry, can you talk a little bit about your new syndication that you’ve started, is that something that FSP has any loan on now or what exactly is your involvement besides the investment banking effort to syndicate the equity?

George Carter

Typically we will acquire an asset when we do syndication; essentially we will lend money to entity that will hold that asset while we syndicate it that’s the technically correct term. On this one, we haven’t done that yet, we really aren’t able to according to reg D-rules and regs talk about syndications that are in process right now, otherwise we could fly in the phase of some of the rules that are established with that. So there is really not much else we can say about that one John.

John Guinee - Stifel Nicolaus

Basically your teams working on it, it hasn’t been closed yet and therefore a loan has not yet and made on to it?

George Carter

That’s correct.

Operator

Your final question comes from [Bob Sarason - Glen Oaks].

Bob Sarason - Glen Oaks

Can you give me a little update on Colorado property, because I’m just trying to understand the economics behind it, $42 million total loan commitments there and $50 million of it’s been funded. So is it fair to assume that you have $27 million of additional funding to do on that. So, what’s the timing of that and what’s the goal trying to get that money back on permanent financing?

George Carter

Yes, this is George. That was a syndication effectively a spec development, which is right next to two light type properties developed by the same on the ground developer that are owned by FSP and those properties are virtually fully occupied.

So, we raised the equity through outside investors for that property and provide the construction loan, we do have the balance of that construction loan committed to and it’s drawn down as needed on a month-to-month basis. When the property is completed at least that property will either be permanently financed which will allow our capital to come back or sold and allow our capital to come back.

Bob Sarason - Glen Oaks

So $27 million, you basically have to come up with $27 million of cash, I’m assuming that thing will be done in the year within the next year to fund their construction, is that correct?

George Carter

Right.

Bob Sarason - Glen Oaks

And then what debt is of lease on that building?

George Carter

It’s just topped off. There are no leases in the building at all now.

Bob Sarason - Glen Oaks

So it’s completely a 100% on spec and you have no committed leases?

George Carter

Correct.

Bob Sarason - Glen Oaks

Then going back to some of the vacancies that you have, have you looked at your exposure to impairments on these properties. I kind of look at these things and I see some that’s 80% vacant or properties. For example, if I look at the federal weight property that’s been basically 80% vacant for three years now. I don’t understand if lease properties keep generating negative NOI, how they support their carrying without you?

John Demeritt

Well, this is John. There is a distinguishment between impairment, and I think you are talking about potential market value right now, and it has to do with your hold period. If you have secured debt on our property that’s coming due in two years you are more than likely going to have impairment because two years from now you need to do something to finance that property.

We are not in that position, and so, when you look at FAS 144 which is what the rule is, the use for when you are evaluating impairments you evaluate whole period on undiscounted cash flows over a long period of time and use a variety of factors. As a result we tend not to have an impairment charge that would pop on these, that’s just the way the GAAP is written for this particular exercise, and market value is something very different.

Bob Sarason - Glen Oaks

But in that analysis, you are using it at some point; you are using a residual value in that discounted cash flow analysis. So, you are making assumptions that residual cash flow or that residual value is a number that’s at least equal to its current market value?

John Demeritt

No, it’s equal to our greater than our carrying value over the long term hold. That’s the way GAAP is written on this. We are not in fair value accounting right now.

Bob Sarason - Glen Oaks

Right, I understand this.

John Demeritt

Just to put a little color on it, from my perspective if people have an impairment usually people have to sell assets, we are not in that position right now. So it’s kind of in some ways when you look at cap rates and movements in them and sort of try to push those on to a balance sheet adjustment, it doesn’t make sense for a company like ours. You are talking about mark-to-market and that’s very different than impairments.

Bob Sarason - Glen Oaks

Then going back to the Land America Building, can you give me some idea of the rental rates you are getting on that? I know you said that on an average you are seeing lease roll down or lease reductions of 10% to 15%, is that about what you saw on the leases that you executed on Land America 10% to 15% below what you were receiving?

George Carter

That’s correct, on the leases we’ve executed there, that would be accurate.

Bob Sarason - Glen Oaks

Then lastly on the equity offering, you made a comment that you would look at additional equity offering depending on how your shares were received, and I know as a shareholder I’d look at it and say well we are down 15%, almost 20% since the equity offering six week ago. Is there a threshold where you would see below $11, below a certain level that you just wouldn’t issue additional equity?

George Carter

Well, of course there is a level at which you wouldn’t issue equity whether it would be received or not in the market place at some sort of pricing. I mean we’re issuing equity not to survive or to pay down debt per se, we are issuing equity to acquire property which we believe both on a current profit basis FFO accretion et cetera, and on a long term ROI basis, we will be accretive to our equity shareholders.

There is a price in the market place that properties are selling at and there is a price in the market place that our stock would be selling at. Those would have to lineup to be accretive and positive to equity shareholders or we wouldn’t issue equity, but I think the answer to your question is that there are two metrics that would have to lineup the acquisition metric and obviously the price of your stock metric.

Bob Sarason - Glen Oaks

Right, I mean how the market has currently received your equity offering?

George Carter

I don’t know exactly what you are asking?

John Demeritt

This is John, I would just throw a comment that. If you follow the REIT index, which I’m sure you do, a lot of the REITs in the last few weeks or last month have seen their share prices declined significantly.

Bob Sarason - Glen Oaks

I follow the REIT, and I’m very focused, that anywhere near like FSP, I mean you are down from 14.50 to 10.50, 10.75 in eight weeks since the equity offering. So that’s a 30% drop I think the REIT index is best it’s off 5%. So it’s just a big concern when you talk about addition looking to do more equity offerings when you see that literally the stock is down 30% in eight week, that’s way beyond any other office REIT that I’ve seen or follow?

George Carter

Bob your point is the right point. That is to say you are only doing equity offering when you can be accretive on the acquisition front. So you would only do it if we could be accretive on the acquisition front. If the stock has fallen and is not accretive, you wouldn’t do an equity offering.

Operator

There are no further questions in queue at this time. I would like to turn the call back over to Mr. George Carter, CEO for closing remarks.

George Carter

I just thank everyone for turning into the call and we look forward to seeing some of you at the 2009 [Mayreed] Annual Convention in Phoenix-Scottsdale. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and everyone have a wonderful day.

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