Franklin Street Properties' (FSP) CEO George Carter on Q3 2015 Results - Earnings Call Transcript

| About: Franklin Street (FSP)

Franklin Street Properties Corp (NYSEMKT:FSP)

Q4 2015 Earnings Conference Call

February 17, 2015 10:00 AM ET

Executives

Scott Carter - EVP, General Counsel and Secretary

John Demeritt - EVP, CFO and Treasurer

George Carter - Chairman, President and CEO

Janet Notopoulos - EVP

Jeff Carter - EVP and Chief Investment Officer

Toby Daley - VP and Regional Director, Houston

Will Friend - VP and Regional Director, Denver

Analysts

Dave Rodgers - Robert W. Baird

Tom Lesnick - Capital One

John Kim - BMO Capital Markets

Craig Kucera - Wunderlich Securities

Operator

Good morning and welcome to the Franklin Street Properties Corporation Fourth Quarter 2015 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Scott Carter, General Counsel. Please go ahead.

Scott Carter

Good morning and welcome to the Franklin Street Properties fourth quarter 2015 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. Also with me this morning are Toby Daley, Vice President and Regional Director of Houston; and Will Friend, Vice President and Regional Director of Denver.

Before I turn the call over to John Demeritt, I must note the following; 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, 2015, which is now on file with the SEC.

In addition, these forward-looking statements represent the company’s expectations only as of today, February 17, 2016. 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 web site at www.franklinstreetproperties.com.

I’ll now turn the call over to John Demeritt. John?

John Demeritt

Thank you, Scott, and good morning everyone. Welcome to our earnings call. On today's call, I will begin with a brief overview of our fourth quarter and year-end results, and afterward, our CEO, George Carter will discuss our performance in more detail and provide an update on where we are and to give some guidance. Janet Notopoulos, the President of our Asset Management Team, will then discuss some of our leasing activities, and then Jeff Carter, our CIO will discuss our investment and dispositioning activities. After that, we will be happy to take your questions.

As a reminder, our comments today will refer to our earnings release, and our supplemental package, and the 10-K, all of which were filed yesterday, and as Scott mentioned, can be found on our web site.

We reported a decrease in funds from operations or FFO of about $450,000 to $27.1 million for the fourth quarter of 2015 compared to the fourth quarter of 2014. For the year, we reported a decrease in FFO of $5.6 million compared to the full year of 2014. These decreases were primarily from lower property income, as a result of the asset sales of May of this year, and also some loan repayments we received in the past year, and also lower occupancy during 2015.

These decreases were partially offset by our acquisition of 2 Ravinia in Atlanta, this past April. You can see the effect of all this in our same store comparisons. As a result of the asset sales, we had gains on four properties that we sold in 2015 of $23.7 million.

Our FFO per share was $0.27 for the fourth quarter of 2015 and 2014, so it was flat quarter-over-quarter, on a per share basis, and our FFO for the full year 2015 was $0.05 lower than 2014, and it was $1.07. These results were very much in line with our expectations.

Turning to our balance sheet and current financial position, at December 31, 2015, we had about $910 million of unsecured debt outstanding, and our total market cap was $1.9 billion. Our debt-to-total market cap ratio was 26.7% at year end, and our debt service coverage ratio was about five times for the fourth quarter -- annual [ph], last fourth quarter. Debt-to-adjusted EBITDA ratio was 7.1 times.

From a liquidity standpoint, we had cash balance of about $18.2 million at year end and $210 million available on our $500 million unsecured line of credit. So as a result, we had approximately $228 million of liquidity at year end. In January, we received $37.5 million of proceeds from the full repayment of the secured loan we had with a property at Colorado.

We remain comfortable with our leverage and are an unsecured rated borrower. We believe our balance sheet position enhances our ability to opportunistically sell nine core assets from time-to-time, and reinvest proceeds or use our availability to acquire assets in our core markets, as we find the right opportunities.

With that, I will turn the call over to George. George?

George Carter

Thank you, John, and welcome to Franklin Street Properties fourth quarter and year end 2015 earnings call. For the fourth quarter of 2015, FSP's funds from operations or FFO totaled approximately $27.1 million or $0.27 per share. For the full year 2015, our FFO totaled $106.9 million, or $1.07 per share. These results are within our initial full year 2015 FFO guidance range, of $1.03 to $1.08 per diluted share. That original guidance of $1.03 to $1.08 FFO per share, was given at this time last year, and excluded the impact of any acquisitions dispositions, debt financings or repayments or other capital market transactions. In fact, many of these transactional events did occur in 2015, but their net impact, combined with FSP's regular ongoing operations, settle out at $1.07 per share.

FSP's full year 2015 adjusted funds from operations, or AFFO, totaled approximately $79.8 million or $0.80 per share. Dividend distributions paid and declared for full year 2015, totaled $76.1 million or $0.76 per share. And while the FSP Board of Directors determines the dividend level every quarter, and can maintain, raise or lower the dividend at any time.

Based upon our forecast for 2016 and beyond, we feel very comfortable with the current level of dividend payout for full year 2016, barring any significant unperceived events.

We also recorded gains on the sale of four properties during 2015 of $23.7 million or $0.24 per share, and our initial FFOP guidance for full year 2016 is estimated to be in the range of $1.01 to $1.07 per diluted share.

Relative to this initial 2016 FFO guidance, we believe that 2016 will mark the bottom of the effects that our ongoing property portfolio transition is having on FFO, which contracted n 2015 for the first time in four years. But the four years prior to 2015, FFO grew at an average of better than 8% per year. 2015 full year FFO per share of $1.07 was down approximately 5% from 2014s FFO per share of $1.12.

Our current forecast is for resumed FFO growth in 2017, propelled primarily from our projected realization of increased leasing in our more recently acquired urban office properties. Particularly, the value added space component, which is heavily weighted to initially acquired vacant square footage. This value add square footage, we believe will be leased at significantly higher net rents per square foot than a suburban office product lease, that were disposed off to recycle into those urban acquisitions.

As just a final note on guidance, relative to first quarter 2016, it is anticipated that the first quarter of 2016 will be below the average carve-up of our full year guidance, and we are estimating first quarter 2016, at that [ph] bulk of share at this point, between $0.24 and $0.26 a share. This is primarily because of the late fourth quarter 2015 sale of Montague Business Center and the early January sale of 285 Interlocken. Both those property sales gave us that significant capital, which have yet to be reinvested in a new property.

In addition to those dispositions, we have at the beginning of January, the TCF vacancy in Minneapolis. And again, that reflects on two properties, the bulk of the TCF rents that we -- that goes missing as of January, is in the tower, and the tower is -- the property that we have, worked on for several years, and is ready to lease. We have a lot of leasing activity in the tower, and are very optimistic about leasing the TCF space efficiently during 2016 in the tower. Jeff will talk a little bit later about the redevelopment of the -- what we call [indiscernible].

With that, I will turn over the call to Janet Notopoulos to talk about leasing. Janet?

Janet Notopoulos

Thank you, George, and good morning. Our leased occupancy at December 31, is 91.6%, which is up from the 90.5% where we ended the third quarter. Included in that increase, is a notable expansion of Centene at Timberlake East, in St. Louis, which brought the occupancy there up to 96.2%.

Let me just take a moment to remind you, that at this time last year, RGA had just vacated approximately 197,000 square feet of the three building complex at Timberlake and Timberlake East, and by the end of 2015, we had re-leased all of that space. The Timberlake buildings were 95% leased at year end 2015, and Timberlake East was 96% leased. So that was 2015 in St. Louis.

Now, to go to 2016 in Minneapolis, we think we will be able to lease the TCF bank space to Minneapolis, which was given back as of January 1 this year in a similar fashion. TCF leased approximately 98,000 square feet in the high rise tower, vacating [ph] approximately 306,000 square feet or about a third of that building.

In anticipation of this TCF vacancy, we did a significant common area of improvement, and now that the space is empty and available, there is a lot of leasing activity and interest in that tower.

TCF Bank also leased the older low rise building located at 801 Marquette, containing approximately 165,000 square feet, where they paid only $4.75 per square foot net, and where we have been working on a proposed high rise mixed use redevelopment tower to replace the older building.

You will notice in this quarter's financial statements that we have broken out 801 Marquette as a separate project from a high rise tower at 121 South 8th Street, in anticipation of the redevelopment of that low rise building. Jeff Carter will talk more about that redevelopment project later on the call.

One other point, regarding our occupancy statistics; our occupancy numbers not only reflect our leasing effort, but also our strategic transition of the portfolio from suburban buildings to urban buildings to urban infill and CBD buildings. As in some cases, by trading lower rents but high occupancies suburban buildings for higher rent, urban infill and CBD value add buildings.

We maintained our lease occupancy through 2015 at around 90%, despite the fact that three of the four buildings we sold in 2015, contained approximately 380,000 square feet that were 100% occupied, and we bought a single value add building, containing about approximately 442,000 square feet that was under 80% leased.

While the TCF vacancy may be a drag on occupancy for the first part of the year, depending upon what we buy and what we sell, we aim to maintain a run-rate of at least 90% with the expectation that that rate will be higher by the end of the year.

In general, our cash rents are increasing on new leases and renewals. On a GAAP basis, new rents compared to the average GAAP rents in those buildings for the prior year, increased 10.4% for the year.

Our lease expirations for 2016 are moderate, 9.4% of the square feet in the portfolio, including the TCF square feet, and 7.8% of annualized rent. We share with others, the concern about the impact that oil prices may have on tenants engaged in the oil and gas industry, but none of our tenants in that broad classification are in default on their rent payments, as of today.

Approximately 12.6% of all of our rentable square feet are located in Houston, but only approximately 59,000 square feet of leases for all of our tenants in Houston, in any industry, expiring 2016. Or stated in other way, less than 1% of our rents per square feet are located in Houston and expiring in 2016, and not all of those are in the oil and gas industry.

FSP is active and active in renewal negotiations with most of these tenants that do renew or expire, and is encouraged by the potential lease activity from new prospective tenants over the vacant spaces. Toby Daley our asset manager for Houston is here with us, if you have additional questions on Houston.

I will now turn the call over to Jeff Carter.

Jeff Carter

Thanks Janet. Good morning everyone. I will review our investment activities for the fourth quarter of 2015 and for the full year. On the disposition and asset recycling front, during the fourth quarter, FSP sold Montague Business Center in North San Jose, California, for $30,250,000 and recognized a gain of approximately $4.9 million. Montague Business Center consisted of approximately 146,000 square feet, between two single story buildings that were originally acquired back in 2002.

For 2015 in total, FSP recycled out of four properties for $87,250,000. Those included Eden Bluff in Minnesota, Willow Bend in Dallas; Park Seneca in Charlotte; and Montague Business Center in North San Jose; and those resulted in gains of approximately $23.7 million in total.

Additionally, and as we mentioned during our last conference call, that some transactions could spill over in 2016, this did even occur, specifically in January, FSP received the full repayment of our approximately $37.5 million first mortgage loan via property sale of 385 Interlocken. Including the Interlocken loan repayment, we completed roughly $125 million in total recycling, over approximately the past 12 months.

FSP remains committed to recycling out of our non-core assets within the portfolio, when appropriate pricing is achieved. Accordingly, FSP expects the continued dispositions during 2016, and they are likely to be in excess of 2015. We are not providing specific disposition guidance, as there are a number of moving pieces that make such guidance potentially less meaningful. Moving pieces include, number one, that we are not sellers at any price. Two, that some properties are being prepared now by the respective selected brokers for actual price discovery. We do not yet know, if they will meet, exceed or miss pricing expectations. Three, one asset is actually currently under agreement now, and is in its due diligence period, but until we know the outcome of that process, we don't want to assume anything. And four, there are several properties that we believe would represent strong potential disposition candidates, that we believe still have possible rent role value creating enhancement opportunities, that we would like to try to make happen, prior to their marketing, and this would gauge the potential timing of the expected sales. We will update our disposition efforts quarterly.

On the acquisitions front, FSP continues to seek new investments, and is underwriting both on and off market opportunities, primarily in our core markets. We continue to focus on self-funding these new investments, by working to utilize disposition and loan repayment proceeds, and we are looking at a number of opportunities and are seeking to be a net acquirer in 2016. We do recognize that this objective would be opportunity driven though, and be connected to our recycling and disposition efforts.

On the development front, we continue to work in earnest with our intended partners and our potential downtown development in Minneapolis at 801 Marquette. Our work is now focused on finalizing the actual cost and feasibility with our development partners. This consists of addressing the specific needs or programs of each piece of the development, office, hotel and apartments. We do anticipate that this work will be largely complete in approximately the next month, and from the work we have seen so far on the office version, which is still subject to change, the office piece of the tower is coming on, in line with our preliminary estimated costs, between approximately $80 million to $90 million, including the land.

In the meantime, and as Janet mentioned, we are fully engaged on pre-leasing efforts, in the new potential tower development.

Now at this time, I'd like to turn the call back over to George Carter to close. George?

George Carter

Yeah. So we will just open up the call for questions at this point.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Dave Rodgers of Robert W. Baird. Please go ahead.

Dave Rodgers

Yeah, good morning. I guess, I heard Janet, your comments regarding no tenants behind on their rent payments in the energy space. But I guess, I wanted to dive a little further, so for Janet, George or Toby, we will throw you all into the bucket. 17% of your tenancy obviously is energy, exploration firms. Five of your top 20 tenants appear to be energy and exploration firms. So can you kind of dive a little bit deeper for us on each of those tenants, in terms of how they are using their space, what they are used for, and how you feel about the consistency of their ability to pay, not only now, but in the future?

Toby Daley

Dave, this is Toby. I will take that, and I am assuming you are focusing on tenants in Houston?

Dave Rodgers

Yes. And I guess any bleed over in Denver as well?

Toby Daley

I will let Will address anything in Denver. But specifically, in Houston, we are finding that all of our space, occupied by oil and gas firms, is fully utilized, fully engaged, with the exception of one space, and that's the Park Ten Phase II building, where the entire building or most of the building is leased to Murphy Exploration and Production Company, and sublet to ConocoPhillips. ConocoPhillips is there, but is most likely going to vacate that building around Memorial Day, at which point, this space will become 100% vacant, and we are already marketing that space for lease, which comes back to us in April of 2017.

Aside from that, all of our oil and gas tenants are making full use of their space. We have no collection issues, and no cause to be alarmed at this point in time.

Dave Rodgers

That's helpful. And Will, anything in Denver that we are watching from an energy perspective?

Will Friend

I can say, our tenants in Denver are -- we have several that have space in the market for sublet -- for sublease, and have had success with subleasing their space, based on some -- there are some spaces left to sublease. But with all of our tenants that are either currently on rent, and it is for the [indiscernible], we have no reason to believe that they won't continue to be -- to the extent, that an opportunity arises where, a tenant [indiscernible] once through, because on their term, we would consider discussing a direct lease or some sort of buyout with the prime lessee to make a direct deal with the subtenant.

Dave Rodgers

Okay, that's helpful. And maybe Janet, the renewal activity was really strong in the fourth quarter. Were there any particularly large leases in there, are you getting ahead of any expirations that really impacted I think, what looked to be a pretty good renewal activity in the fourth quarter?

Janet Notopoulos

We are always working ahead on the renewals, which goes to -- if you look at our list of major tenants, where we are trying to be proactive on that. There was one large renewal that did work through, and you can see that in the change in expiration dates as Quintiles, where we have seen that turn out, and that was a large one -- a large portion of this quarter's activity.

Dave Rodgers

Okay. And two more for me, Janet, I guess an update on Fannie Mae and what's happening with that space?

Janet Notopoulos

Well again, going back to our major tenant; in I think page 19 of the supplemental, you will see that we extended Fannie Mae two years essentially. We would have -- Dallas, let me just back up, Dallas is still a very strong market for us. And we would have been happy to take that space back and re-lease it. Fannie Mae exercised their option to extend for two more years. So that has been pushed out for two years, and that was built in their lease.

Dave Rodgers

Okay. And last question for Jeff on the TCF, redevelopment or ground-up development you are looking at; is that something that, as you look forward, you would wait for a tenant, or because of the other components of apartment and hotel, will you kind of be forced to go through with that construction with your partners more quickly?

Jeff Carter

We have set this up to be a -- in our minds and our development partners minds, as a pre-leasing scenario. But we are seeing good activity, and we will evaluate that as it goes along. But right now, the intent has always been -- with some sort of pre-leasing requirement.

Dave Rodgers

Okay. That's helpful. Thank guys.

Operator

The next question comes from Tom Lesnick of Capital One Securities. Please go ahead.

Tom Lesnick

Hey, good morning everyone. First, just on guidance, I know you kind of talked a little bit about bridging the $0.25 midpoint for 1Q to the full year guide of $1.01 to $1.07. But I was just hoping, if you could talk, maybe a little bit more specifically about the timing of when we should expect some of those leases to commence on the back half?

George Carter

Tom, its George. I don't really have specific leases or specific timing for specific leases for you. It is a lot of activity at a lot of our value add space in virtually all of our markets; and not the least of which, is again, the Atlas Tower that TCF has vacated. It includes Atlanta, it includes Denver, and [indiscernible] for that matter.

So by changing these specifics on it, but the amount of activity, just so share the number of leases; some of these are medium sized, some are small, just tells us that we are going to do really-really well. And the key there is that, the net rents are so much higher on that space than [indiscernible]. So most of this underwriting, probably, disposed off suburban. Even though, you dispose it at an initially higher cap and buying a lower cap.

The underwriting, to add the value, really moves you significantly over the cap, you're selling the suburban app, if you do this value add activity. Upfront, we are spending the money to get the space ready to lease. That space is ready to lease and there is activity at that space, and that's why we believe that we will move the needle for the rest of the year.

Tom Lesnick

Got it. Appreciate that color. With regards to same store NOI, obviously the Midwest has been impacted by RGA for the last few quarters. I was just wondering now that, you know the full year impact is rolling out, how should we expect Midwest same store NOI to trend through 2016?

Janet Notopoulos

Well, I think we have the TCF building is in the Midwest as well. So I think, that on an annualized basis, increasing impact -- the big impact of the first quarter was going to be a bit of a drag on that. But I think that the rent loss from TCF was actually less than that of RGA. On just pure whole dollars though.

Tom Lesnick

Got it. And on leasing, it looks like your average lease term has gotten a little bit shorter here over the last couple of years. I was just wondering, if that's really a function of the leasing environment, or the function of the buildings you own? Just wondering if you could talk about that a little bit?

Janet Notopoulos

I think it's primarily just the -- whether or not how many renewals we are doing, since I believe that's a blended number. So those renewals are disproportionately larger than the new leases, we are going to shorten that up, and so -- while Quintiles might have been a long renewal; we had Fannie Mae, that Dave Rodgers had just asked about, is a purely large renewal, and that brings the average then.

Tom Lesnick

Got it. And I guess, finally, congratulations Janet, we will miss you. But I was just wondering, what if any, succession plan is in place, or what does that process look like for you guys?

George Carter

It's George, Tom, we will miss Janet too. We have a deep bench here, at Franklin Street, and the Board and others here are busy at work, and we will have an announcement, just as soon as we have the replacement.

Tom Lesnick

All right. Great. Thanks everyone.

Operator

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

John Kim

Thank you. Your tenant improvement costs decreased, [indiscernible] in the fourth quarter. It's just purely reflective of the higher renewals, or are there specific markets where you are pushing back on TI?

Janet Notopoulos

I would think that in general, it is probably more reflective of the proportion of renewals versus new leases. We haven't seen an increase in tenant improvement across our markets. But we haven't seen a significant decrease over there, and we are still in multiple markets. So that's a hard one that [indiscernible].

John Kim

Okay. And then on page 23 of your CapEx, there is a bit of a pickup on the deferred leasing costs, can you just remind us what that's in relation to?

Janet Notopoulos

Are you saying there is an increase in the deferred leasing costs? The deferred leasing costs are essentially the brokers' commission. And so, since those -- and one of my favorite discussion points internally is that, since the GAAP reported numbers are really more like a cash-basis. We often pay the brokers' commission in front of -- as soon as we do the leasing, or at least half of it -- as the signing half, when it commences in the TI [indiscernible] later. So there is a little bit of a disconnect. That's because we did do leasing.

John Kim

And remind us again please, the difference between page 23 and page 20? Page 20 is more of a cash outlay, and page 20 is leases that you are signing during the period? So there might be a bit of a timing mismatch?

Janet Notopoulos

Yes. And so, on page 20, its more of on an accrual basis, and we do it, as soon as we lease the space in the quarter, we estimate what the leasing -- the cost for leasing and brokerage commissions will be, and amortize that over the term of the lease. So that condenses it all into the same timeframe. So that's going to be different than what we report. As you know, some tenants never come and collect their TIs.

John Kim

Okay. Question for George or Jeff, are there markets that you're seeing softness in demand, or softness in cap rates potentially? Either your non-core assets or some of your targeted markets?

Jeff Carter

Yes, this is Jeff here. In terms of the softness that I am seeing, is really heavily in Houston, as you might imagine, given the oil condition of the marketplace. I am not seeing considerable softness in our other core markets. Denver still has quite a bit of demand. Atlanta has a tremendous amount of demand, and Dallas has a tremendous amount of demand. And so, Houston has been the one notable exception there.

John Kim

And final question for me, your net debt-to-EBITDA, it looks like it’s a little bit below seven times at the end of the year. Where is it today, post the sale of 385 Interlocken?

Jeff Carter

385 Interlocken was a mortgage loan that was repaid. So I don't have that. But you could probably calculate it by the interest rate, that's in the supplemental, John.

John Kim

Okay. Any thoughts on maintaining, potentially, a more conservative balance sheet during the year, or holding back on cash proceeds from asset sales of -- potentially see some more opportunities in your markets?

John Demeritt

Sure, it's John. I think it's just opportunity driven. Again, when you do debt as a percentage of total market cap, one number you do get as a percentage of what we believe, well closer than [indiscernible] number. When you do debt service coverage ratios, it's another number. We feel very comfortable with our debt right now, and want to be opportunity driven. But we have to live within an organic growth scenario, and we will look there and I think be conservative but opportunistic on our balance sheet.

John Kim

Okay, great. Thank you.

Operator

[Operator Instructions]. The next question comes from Craig Kucera of Wunderlich Securities. Please go ahead.

Craig Kucera

Yes, thanks. Wanted to follow-up on the sale of the Interlocken. How should we think about the use of proceeds in the near term? It sounds like you guys are thinking about being a net acquirer for the year, but should we think that you will invest back soon, or more like, maybe something else with the excess capital?

George Carter

Craig, its George. So both Montague and 385 Interlocken, we have put those proceeds together, coming up with close to $60 million. And again, what we found, and I talked about it in the last call, what we are finding in this transition to urban from our non-core suburban, particularly, is, the urban properties are much larger. And so, many a times, there is this delay, between selling your suburban properties, and acquiring urban. Right now, we will be opportunistic. We are looking at things now, that are lined up. We would buy forward a urban property ahead of other dispositions along, as we thought that further dispositions were a strong likelihood.

So that capital does need to be redeployed, and we plan to do it. There are prospects for it, but that is one of the things that certainly [indiscernible] a bit on the FFO number.

Craig Kucera

Got it. So it sounds like probably in the near term, maybe some debt repayment and the short term debt. What is the thought about any sort of share repurchases given, where the stock is trading?

George Carter

This is George again. The board considers that, along with all other opportunities, and if it were decided to go that direction, we would have left the market immediately.

Craig Kucera

Okay. Can you give us some color on the mortgage loan investment made this quarter?

John Demeritt

Sure. This is John Demeritt, we made a loan to a property in Indianapolis, we call it Monument Circle. It's currently [indiscernible], and they are in the process of merger with Cigna, I believe. And they have announced, that Indianapolis is going to be their headquarters. The mortgage loan, that was on the property, it expired on December 7th, and we financed it and are working -- or hope to work with them on a lease extension, after which, there may be an opportunity to have that loan be repaid.

Craig Kucera

All right. I see that loan is yielding, I think, 4.9%. How does that size up with how you view your cost of capital, relative to making acquisitions or doing other things with capital?

John Demeritt

Well if you look at some of the asset acquisitions that we have looked at, cap rates have been in the 5, 5.5 range for the assets that we are interested in buying. When you acquire an asset, but that kind of a cap rate, generally it comes with some capital expenditure that you need to make, and asset management expenses you need to incur. And when you compare that to a yield on a loan, with no CapEx, its [indiscernible] we will have to gain a little bit, without having the CapEx to spend on it. So we view it as a good investment, solid investment. And I think that addressees the cost of capital question.

George Carter

And Craig, this is George. At least we view this particularly alone as potentially quite short term, very low loan value, and it’s a real good cash flow. And again as John said, when you look at any other acquisition and you go from the NOI line to the cash flow line. A short term, loan to value like this is really competitive from a cash flow point of view.

John Demeritt

And another point, Craig, on that, the 385 loan was repaid in January, so our balance sheet, if you'd pro forma it today, we have got about $90 million outstanding on these loans, in the aggregate today.

Craig Kucera

Okay. Can you give us some color also on the cap rates that you guys were able to sell on the property in San Jose and Interlocken?

Jeff Carter

Sure. This is Jeff Carter. The Montague property was sold at an approximate 5.5 GAAP rate.

Craig Kucera

And what about the property in December?

Jeff Carter

That was sold for roughly 5.75 GAAP rate.

Craig Kucera

Got it. Okay. And couple more questions, and I will hop off. I thought the quarter was very good, from a leasing perspective and a nice pickup. Can you give us some, and I think this question came up earlier, but I don't know that I heard the answer. Particularly, as it relates to the Timberlake properties, when are those -- when does that tenant or tenants expected to take occupancy?

Janet Notopoulos

We basically leased three large leases; one to Energizer Edgewell, that commenced. We did a big chunk to Centene that commenced, I believe, December 1st, and the next tranche will be in April 16, that's the [indiscernible] under a major tenant.

Craig Kucera

So I guess the question is, so are we going to be at about 90% to 95% occupancy then in the second quarter for those properties, given where the leasing is?

Janet Notopoulos

I am sorry, physical occupancy?

Craig Kucera

Yeah.

Janet Notopoulos

That's probably about right. It should close out to be the same statistics that I read out, as far as lease occupancy.

Craig Kucera

Okay. And the last one I had is the, Denbury Onshore lease that I think is expiring in, looks like July; where is that located? Is that the Houston asset that is tied to the oil industry?

Janet Notopoulos

No. It's definitely tied to the oil industry. It's located in Dallas and the legacy Plano submarkets, which is more at -- really attractive markets right now. We are in negotiations with subtenants, and we expect the significant leasing done at that building, before or by the time that lease expires in July.

Craig Kucera

Okay. Thanks.

Operator

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

George Carter

Thank you everyone for attending the call. We appreciate it. We look forward to talking to you next quarter.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!