eps3168.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10 - Q

(Mark One)
x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008.

OR

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.

Commission File Number:  001-32470

Franklin Street Properties Corp.
(Exact name of registrant as specified in its charter)


Maryland
04-3578653
(State or other jurisdiction of incorporation
(IRS Employer Identification Number)
or organization)
 

401 Edgewater Place, Suite 200
Wakefield, MA 01880-6210
(Address of principal executive offices)(Zip Code)

(781) 557-1300
(Registrant’s telephone number, including area code)

N/A
 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 
YES     x
NO     o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer x
 
Accelerated filer o
       
 
Non-accelerated filer    o (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 
YES     o
NO     x

The number of shares of common stock outstanding as of October 31, 2008 was 70,480,705.


Franklin Street Properties Corp.

Form 10-Q

Quarterly Report
September 30, 2008

Table of Contents


Part I.
Financial Information (Unaudited)
   
       
Page
 
Item 1.
Financial Statements
   
         
   
Condensed Consolidated Balance Sheets as of September 30, 2008 and
December 31, 2007
 
3
         
   
Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2008 and 2007
 
4
         
   
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2008 and 2007
 
5-6
         
   
Notes to Condensed Consolidated Financial Statements
 
7-18
         
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
19-27
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
28
         
 
Item 4.
Controls and Procedures
 
29
         
Part II.
Other Information
   
         
 
Item 1.
Legal Proceedings
 
30
         
 
Item 1A.
Risk Factors
 
30
         
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
31
         
 
Item 3.
Defaults Upon Senior Securities
 
32
         
 
Item 4.
Submission of Matters to a Vote of Security Holders
 
32
         
 
Item 5.
Other Information
 
32
         
 
Item 6.
Exhibits
 
32
         
Signatures
   
33




PART I – FINANCIAL INFORMATION
Item 1.          Financial Statements

Franklin Street Properties Corp.
Condensed Consolidated Balance Sheets
(Unaudited)

   
September 30,
   
December 31,
 
(in thousands, except share and par value amounts)
 
2008
   
2007
 
Assets:
           
Real estate assets:
           
Land
  $ 100,440     $ 99,140  
Buildings and improvements
    780,276       743,027  
Fixtures and equipment
    301       212  
      881,017       842,379  
Less accumulated depreciation
    68,579       52,060  
Real estate assets, net
    812,438       790,319  
Acquired real estate leases, less accumulated amortization
               
   of $26,831 and $23,401, respectively
    28,024       33,695  
Investment in non-consolidated REITs
    83,896       85,663  
Assets held for syndication, net
    13,335       26,310  
Cash and cash equivalents
    34,527       46,988  
Restricted cash
    336       336  
Tenant rent receivables, less allowance for doubtful accounts
               
   of $509 and $430, respectively
    1,174       1,472  
Straight-line rent receivable, less allowance for doubtful accounts
               
   of $261 and $261, respectively
    8,255       7,387  
Prepaid expenses
    2,922       1,395  
Other assets
    1,475       406  
Office computers and furniture, net of accumulated depreciation
               
   of $1,075 and $968, respectively
    313       309  
Deferred leasing commissions, net of accumulated amortization
               
   of $2,988, and $1,975, respectively
    10,365       9,186  
Total assets
  $ 997,060     $ 1,003,466  
                 
Liabilities and Stockholders’ Equity:
               
Liabilities:
               
Bank note payable
  $ 105,118     $ 84,750  
Accounts payable and accrued expenses
    24,945       20,255  
Accrued compensation
    1,652       1,564  
Tenant security deposits
    1,823       1,874  
Acquired unfavorable real estate leases, less accumulated amortization
               
        of $1,587, and $1,226, respectively
    4,654       4,405  
Total liabilities
    138,192       112,848  
                 
Commitments and contingencies
               
                 
Stockholders’ Equity:
               
Preferred stock, $.0001 par value, 20,000,000 shares
    authorized, none issued or outstanding
    -       -  
Common stock, $.0001 par value, 180,000,000 shares authorized,
    70,480,705 and 70,480,705 shares issued and outstanding, respectively
    7       7  
Additional paid-in capital
    889,019       889,019  
Earnings (distributions) in excess of accumulated earnings/distributions
    (30,158 )     1,592  
    Total stockholders’ equity
    858,868       890,618  
    Total liabilities and stockholders’ equity
  $ 997,060     $ 1,003,466  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 


3


Franklin Street Properties Corp.
Condensed Consolidated Statements of Income
(Unaudited)

   
For the
Three Months Ended
September 30,
   
For the
Nine Months Ended
September 30,
 
(in thousands, except per share amounts)
 
2008
   
2007
   
2008
   
2007
 
                         
Revenue:
                       
     Rental
  $ 27,927     $ 27,109     $ 82,283     $ 75,110  
Related party revenue:
                               
     Syndication fees
    304       687       3,766       7,090  
     Transaction fees
    300       604       3,606       7,446  
     Management fees and interest income from loans
    380       1,497       1,364       5,176  
Other
    13       37       52       84  
        Total revenue
    28,924       29,934       91,071       94,906  
                                 
Expenses:
                               
     Real estate operating expenses
    7,159       7,151       20,973       19,026  
     Real estate taxes and insurance
    4,590       4,398       13,375       12,490  
     Depreciation and amortization
    7,666       7,756       22,616       21,710  
     Selling, general and administrative
    1,927       1,787       6,557       5,675  
     Commissions
    208       406       2,020       3,720  
     Interest
    1,108       1,823       3,351       6,121  
                                 
       Total expenses
    22,658       23,321       68,892       68,742  
                                 
Income before interest income, equity in earnings (losses) of
                               
   non-consolidated REITs and taxes
    6,266       6,613       22,179       26,164  
Interest income
    177       650       657       1,864  
Equity in earnings (losses) of non-consolidated REITs
    679       147       2,167       (611 )
                                 
Income before taxes
    7,122       7,410       25,003       27,417  
Income tax expense (benefit)
    (297 )     (206 )     (337 )     514  
                                 
Income from continuing operations
    7,419       7,616       25,340       26,903  
Discontinued operations:
                               
   Income (loss) from discontinued operations
    -       (72 )     -       1,259  
   Gain on sale of assets, less applicable income tax
    -       1,942       -       23,532  
      Total discontinued operations
    -       1,870       -       24,791  
                                 
Net income
  $ 7,419     $ 9,486     $ 25,340     $ 51,694  
                                 
Weighted average number of shares outstanding,
                               
     basic and diluted
    70,481       70,596       70,481       70,709  
                                 
Earnings per share, basic and diluted, attributable to:
                               
Continuing operations
  $ 0.11     $ 0.11     $ 0.36     $ 0.38  
Discontinued operations
    -       0.02       -       0.35  
Net income per share, basic and diluted
  $ 0.11     $ 0.13     $ 0.36     $ 0.73  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

4


Franklin Street Properties Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

   
For the
Nine Months Ended
September 30,
 
(in thousands)
 
2008
   
2007
 
Cash flows from operating activities:
           
   Net income
  $ 25,340     $ 51,694  
   Adjustments to reconcile net income to net cash
        provided by  operating activities:
               
      Gains on assets sold
    -       (23,532 )
      Depreciation and amortization expense
    22,649       22,818  
      Amortization of above market lease
    3,376       3,706  
      Equity in earnings (losses) from non-consolidated REITs
    (2,167 )     619  
      Distributions from non-consolidated REITs
    3,838       1,199  
      Increase in bad debt reserve
    79       -  
  Changes in operating assets and liabilities:
               
      Restricted cash
    -       425  
      Tenant rent receivables, net
    219       1,053  
      Straight-line rents, net
    (854 )     (2,924 )
      Prepaid expenses and other assets, net
    (1,474 )     (717 )
      Accounts payable and accrued expenses
    3,863       572  
      Accrued compensation
    88       (1,273 )
      Tenant security deposits
    (51 )     179  
      Payment of deferred leasing commissions
    (2,434 )     (2,905 )
                 
        Net cash provided by operating activities
    52,472       50,914  
                 
Cash flows from investing activities:
               
      Purchase of real estate assets, office computers and
          furniture, capitalized merger costs
    (37,215 )     (75,887 )
      Purchase of acquired favorable and unfavorable leases
    (2,067 )     (3,726 )
      Investment in non-consolidated REITs
    (10 )     (18 )
      Investment in loan receivable
    (1,125 )     -  
      Redemption of certificate of deposit
    -       5,143  
      Investment in assets held for syndication, net
    12,235       (112,618 )
      Proceeds received on sales of real estate assets
    -       85,673  
                 
      Net cash used in investing activities
    (28,182 )     (101,433 )
                 
Cash flows from financing activities:
               
      Distributions to stockholders
    (57,089 )     (65,813 )
      Purchase of treasury shares
     -       (4,767 )
      Repayments under bank note payable, net
    20,368       104,550  
      Deferred financing costs
    (30 )     (7 )
                 
      Net cash (used in) provided by financing activities
    (36,751 )     33,963  
                 
Net increase (decrease) in cash and cash equivalents
    (12,461 )     (16,556 )
                 
Cash and cash equivalents, beginning of period
    46,988       69,973  
                 
Cash and cash equivalents, end of period
  $ 34,527     $ 53,417  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 


5


Franklin Street Properties Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

   
For the
Nine Months Ended
September 30,
 
(in thousands)
 
2008
   
2007
 
             
Non-cash investing and financing activities:
           
Accrued costs for purchase of real estate assets
  $ 2,027     $ 1,716  
Deposits on investments in assets held for syndication
  $ -     $ 5,010  
Investment in non-consolidated REITs converted to real estate assets
               
   and acquired real estate leases in conjunction with merger
  $ 1,162     $ -  
                 
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 


6

Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.      Organization, Properties, Basis of Presentation and Recent Accounting Pronouncements

Organization

Franklin Street Properties Corp. (“FSP Corp.” or the “Company”) holds, directly and indirectly, 100% of the interest in FSP Investments LLC, FSP Property Management LLC, FSP Holdings LLC and FSP Protective TRS Corp.  The Company also has a non-controlling common stock interest in twelve corporations organized to operate as real estate investment trusts ("REITs") and a non-controlling preferred stock interest in two of those REITs.

The Company operates in two business segments: real estate operations and investment banking/investment services. FSP Investments LLC provides real estate investment and broker/dealer services. FSP Investments LLC's services include: (i) the organization of REIT entities (the "Sponsored REITs"), which are syndicated through private placements; (ii) sourcing of the acquisition of real estate on behalf of the Sponsored REITs; and (iii) the sale of preferred stock in the Sponsored REITs.  FSP Investments LLC is a registered broker/dealer with the Securities and Exchange Commission and is a member of the Financial Industry Regulatory Authority, or FINRA.  FSP Property Management LLC provides asset management and property management services for the Sponsored REITs.

The Company owns and operates a portfolio of real estate, which consisted of 27 properties as of September 30, 2008.  From time-to-time the Company may acquire real estate or invest in real estate by purchasing shares of preferred stock offered in syndications of Sponsored REITs.  The Company may also pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, or for geographic or property specific reasons.

On May 15, 2008, the Company acquired one of its Sponsored REITs, FSP Park Ten Development Corp. (“Park Ten Development”) by merging a wholly-owned subsidiary of the Company with and into Park Ten Development for a total purchase price of approximately $35.4 million.  The holders of preferred stock in Park Ten Development received cash consideration of approximately $127,290 per share.  The merger was accounted for as a purchase and the acquired assets and liabilities were recorded at their fair value.

Properties

The following table summarizes the Company’s investment in real estate assets, excluding assets held for syndication and assets held for sale:

   
As of
 
   
September 30,
 
   
2008
   
2007
 
Commercial real estate:
           
Number of properties
    27       27  
Square feet
    5,153,396       5,066,813  

Basis of Presentation

The unaudited condensed consolidated financial statements of the Company include all the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission.

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included.  Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any other period.
7


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.      Organization, Properties, Basis of Presentation and Recent Accounting Pronouncements (continued)

Reclassifications

Certain amounts from the 2007 income statement have been reclassified to conform to the 2008 presentation.  The reclassification primarily reflected a state tax on gross receipts as an income tax, which is further described in the income tax footnote.  The reclassification changed the amount of real estate taxes and insurance and income taxes presented on the Company’s 2007 income statement.   There was no change to net income as a result of this reclassification.

Recent Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The adoption of this standard did not have a material impact on the Company’s financial position, operations or cash flow.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of this standard did not have a material impact the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”, which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption of SFAS No. 141(R) will have on our financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (SFAS No. 160).  SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141R.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company is currently evaluating the impact of SFAS No. 160 on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows.  SFAS No. 161 is effective on January 1, 2009.  The Company is currently evaluating the impact of SFAS No. 161 on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162).  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The Company is currently evaluating the impact of SFAS No. 162 on the Company’s consolidated financial statements.


8


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

2.      Investment Banking/Investment Services Activity

During the nine months ended September 30, 2008, the Company has sold on a best efforts basis, through private placements, preferred stock in the following Sponsored REITs:

Sponsored REIT
Property Location
 
Gross Proceeds (1)
 
     
(in thousands)
 
FSP Grand Boulevard Corp.
Kansas City, MO
  $ 24,075  
FSP 385 Interlocken Development Corp.
Broomfield, CO
    33,275  
 
Total
  $ 57,350  

(1). The syndications of FSP Grand Boulevard Corp. (“Grand Boulevard”), which commenced in September 2007, and FSP 385 Interlocken Development Corp. (“385 Interlocken”), which commenced in June 2008, were not complete at September 30, 2008.

3.      Related Party Transactions and Investments in Non-Consolidated Entities

Investment in Sponsored REITs:

At September 30, 2008, the Company held an interest in twelve Sponsored REITs.  Ten were fully syndicated and the Company no longer derives economic benefits or risks from the common stock interest that is retained in them.  The Company holds a non-controlling preferred stock investment in two of these Sponsored REITs, FSP Phoenix Tower Corp. (“Phoenix Tower”) and FSP 303 East Wacker Drive Corp. (“East Wacker”), from which it continues to derive economic benefits and risks.  The remaining entities that were not fully syndicated at September 30, 2008 are Grand Boulevard and 385 Interlocken.  Grand Boulevard has a carrying value of approximately $13.3 million and $26.3 million on the accompanying condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007, respectively and is classified as an asset held for syndication.

The table below shows the Company’s share of revenues and expenses from Sponsored REITs prior to consolidation.  Management fees of $30,000 and interest expense on acquisition loans made by the Company to Sponsored REITs for the nine months ended September 30, 2007 are eliminated in consolidation.

 
  Nine Months Ended
   
September 30,
 
(in thousands)
 
2007
 
       
Operating Data:
     
Rental revenues
  $ 3,449  
Operating and maintenance
       
    expenses
    (1,834 )
Depreciation and amortization
    (856 )
Interest expense: permanent mortgage loan
    (179 )
Interest expense: acquisition loan
    (1,448 )
Interest income
    51  
    $ (817 )



9


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

3.      Related Party Transactions and Investments in Non-consolidated Entities (continued)

Equity in earnings (losses) of investment in non-consolidated Sponsored REITs:

The following table includes equity in earnings (losses) of investments in non-consolidated Sponsored REITs:

   
Nine Months Ended
 
   
September 30,
 
(in thousands)
 
2008
   
2007
 
             
Equity in earnings (losses) of Sponsored REITs
  $ 133     $ (776 )
Equity in earnings of Park Ten Development
    10       8  
Equity in earnings of Phoenix Tower
    18       157  
Equity in earnings of East Wacker
    2,006       -  
    $ 2,167     $ (611 )

Equity in earnings (losses) of investments in Sponsored REITs is derived from the Company’s share of income or losses following the commencement of syndication of Sponsored REITs.  Following the commencement of syndication, the Company exercises influence over, but does not control these entities, and investments are accounted for using the equity method.

Equity in earnings of Park Ten Development was derived from the Company’s preferred stock investment in the entity.  In September 2005, the Company acquired 8.5 preferred shares or 3.05% of the authorized preferred shares of Park Ten Development via a non-monetary exchange of land valued at $850,000.  The Company acquired Park Ten Development by merger on May 15, 2008, which merger was accounted for as a purchase, and the acquired assets and liabilities were recorded at their fair value.

Equity in earnings of Phoenix Tower is derived from the Company’s preferred stock investment in the entity.  In September 2006, the Company purchased 48 preferred shares or 4.6% of the outstanding preferred shares of Phoenix Tower for $4,116,000 (which represented $4,800,000 at the offering price net of commissions of $384,000 and fees of $300,000 that were excluded).

Equity in earnings of East Wacker is derived from the Company’s preferred stock investment in the entity.  In December 2007, the Company purchased 965.75 preferred shares or 43.7% of the outstanding preferred shares of East Wacker for $82,813,000 (which represented $96,575,000 at the offering price net of commissions of $7,726,000, loan fees of $5,553,000 and acquisition fees of $483,000 that were excluded).

The Company recorded distributions declared of $3,838,000 and $1,199,000 from Sponsored REITs during the nine months ended September 30, 2008 and 2007, respectively.

Non-consolidated Sponsored REITs:

The Company has in the past acquired by merger entities similar to the Sponsored REITs.  On March 19, 2008, the Company entered into an agreement and plan of merger to acquire Park Ten Development by merger for a total purchase price of approximately $35.4 million. Upon completion of the acquisition on May 15, 2008, the holders of preferred stock in Park Ten Development received cash consideration of approximately $127,290 per share. The acquisition was effected by merging a wholly-owned subsidiary of the Company with and into Park Ten Development.  Consummation of the acquisition required the approval of Park Ten Development's stockholders.  The Company’s business model for growth includes the potential acquisition by merger in the future of Sponsored REITs.  The Company has no legal or any other enforceable obligation to acquire or to offer to acquire any Sponsored REIT.  In addition, any offer (and the related terms and conditions) that might be made in the future to acquire any Sponsored REIT would require the approval of the boards of directors of the Company and the Sponsored REIT and the approval of the shareholders of the Sponsored REIT.

The operating data below for 2008 includes operations of the twelve Sponsored REITs the Company held an interest in as of September 30, 2008, and Park Ten Development from January through May 14, 2008.  The Company acquired Park Ten Development by merger on May 15, 2008.  The operating data for 2007 includes operations of the twelve Sponsored REITs the Company held an interest in as of September 30, 2007.

10


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

3.      Related Party Transactions and Investments in Non-consolidated Entities (continued)

At September 30, 2008, December 31, 2007 and September 30, 2007, the Company had ownership interests in twelve Sponsored REITs.  Summarized financial information for these Sponsored REITs is as follows:

   
September 30,
   
December 31,
 
(in thousands)
 
2008
   
2007
 
             
Balance Sheet Data (unaudited):
           
Real estate, net
  $ 678,645     $ 684,441  
Other assets
    123,229       96,180  
Total liabilities
    (189,784 )     (202,757 )
Shareholders' equity
  $ 612,090     $ 577,864  
                 

   
For the Nine Months Ended
September 30,
 
(in thousands)
 
2008
   
2007
 
             
Operating Data (unaudited):
           
Rental revenues
  $ 76,023     $ 69,654  
Other revenues
    1,638       2,348  
Operating and maintenance  expenses
    (40,303 )     (33,605 )
Depreciation and amortization
    (17,805 )     (16,280 )
Interest expense
    (7,970 )     (17,838 )
Net income
  $ 11,583     $ 4,279  

Syndication fees and Transaction fees:
The Company provides syndication and real estate acquisition advisory services for Sponsored REITs.  Syndication and transaction fees from non-consolidated entities amounted to approximately $7,372,000 and $14,536,000 for the nine months ended September 30, 2008 and 2007, respectively.
Management fees and interest income from loans:
Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancelable with 30 days notice.  Asset management fee income from non-consolidated entities amounted to approximately $706,000 and $637,000 for the nine months ended September 30, 2008 and 2007, respectively.  The Company typically makes interim mortgage loans to Sponsored REITs that enable Sponsored REITs to acquire their respective properties prior to the consummation of the offering of their equity interests.  The interim mortgage loans are subsequently repaid out of offering proceeds.

In December 2007, the Company entered into a secured promissory note for a revolving line of credit (the “Highland Revolver”) for up to $5.5 million with a Sponsored REIT, FSP Highland Place I Corp., that owns an office building in Englewood, Colorado, of which $1,125,000 has been drawn and is outstanding as of September 30, 2008.  The balance of this loan is classified in other assets.  Advances under the Highland Revolver bear interest at a rate equal to the 30 day LIBOR rate plus 200 basis points.  The Highland Revolver was made for the purpose of funding capital expenditures and other costs of leasing.  The Company anticipates that any advances made under the Highland Revolver will be repaid at its maturity on December 31, 2010 or earlier from long-term financing of the property, cash flows from the property or a capital event.

The Company recognized interest income from interim mortgage loans and advances on the Highland Revolver of approximately $658,000 and $4,540,000 for the nine months ended September 30, 2008 and 2007, respectively.


11


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

4.      Bank Note Payable

The Company has a revolving line of credit agreement (the "Revolver") with a group of banks providing for borrowings at the Company’s election of up to $250,000,000, which matures on August 11, 2011.  Borrowings under the Revolver bear interest at either the bank's prime rate (5.00% at September 30, 2008) or a rate equal to LIBOR plus 100 basis points (3.70% at September 30, 2008). There were borrowings of $105,118,000 and $84,750,000 at the LIBOR plus 100 basis point rate at a weighted average rate of 3.49% and 6.20% outstanding under the Revolver at September 30, 2008 and December 31, 2007, respectively.  The weighted average interest rate on amounts outstanding during the nine months ended September 30, 2008 and 2007 was approximately 3.90% and 6.62%, respectively; and for the year ended December 31, 2007 was approximately 6.51%.

The loan agreement (the “Revolver Loan Agreement”) that evidences the Revolver includes restrictions on property liens and requires compliance with various financial covenants. Financial covenants include the maintenance of at least $1,500,000 in operating cash accounts, a minimum unencumbered cash and liquid investments balance and tangible net worth, limitations on permitted secured debt and compliance with various debt and operating income ratios, as defined in the Revolver Loan Agreement. The Company was in compliance with the Revolver Loan Agreement's financial covenants as of September 30, 2008 and December 31, 2007.

5.      Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of Company shares outstanding during the period.  Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares.  There were no potential dilutive shares outstanding at September 30, 2008 and 2007.

6.      Discontinued Operations

During 2007, the Company sold five properties.  Accordingly, each of the five properties sold are classified as discontinued operations on our financial statements.  Income from discontinued operations was approximately $1,259,000 for the nine months ended September 30, 2007. 

The operating results for these real estate assets have been reflected as discontinued operations in the condensed consolidated statements of income for all periods presented, and are summarized below:

 
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Rental revenue
  $ -     $ 335     $ -     $ 4,057  
Rental operating expenses
    -       (176 )     -       (1,116 )
Real estate taxes and insurance
    -       (117 )     -       (610 )
Depreciation and amortization
    -       (114 )     -       (1,080 )
Interest income
    -       -       -       8  
Net income from discontinued operations
  $ -     $ (72 )   $ -     $ 1,259  

7.      Business Segments

The Company operates in two business segments: real estate operations (including real estate leasing, interest income on interim acquisition and other financings and asset/property management) including discontinued operations and investment banking/investment services (including real estate acquisition, development services and broker/dealer services).  The Company has identified these segments because this information is the basis upon which management makes decisions regarding resource allocation and performance assessment.  The accounting policies of the reportable segments are the same as those described in the “Significant Accounting Policies” in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2007.   The Company’s operations are located entirely in the United States of America.

12


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

7.      Business Segments (continued)

The Company evaluates the performance of its reportable segments based on Funds From Operations (“FFO”) as management believes that FFO represents the most accurate measure of the reportable segment’s activity and is the basis for distributions paid to equity holders.  The Company defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments to exclude non-cash income (or losses) from non-consolidated or Sponsored REITs, plus distributions received from non-consolidated or Sponsored REITs.

FFO should not be considered as an alternative to net income (determined in accordance with GAAP), as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.  Other real estate companies may define this term in a different manner.  We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income and cash flows from operating, investing and financing activities in the consolidated financial statements.



13


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

7.      Business Segments (continued)

The calculation of FFO by business segment is shown in the following table:

(in thousands)
 
Real Estate
Operations
   
Investment
Banking/
Investment
Services
   
Total
 
Three Months Ended March 31, 2008
                 
Net Income
  $ 7,874     $ (488 )   $ 7,386  
Equity in income of non-consolidated REITs
    (793 )     -       (793 )
Distributions from non-consolidated REITs
    546       -       546  
Depreciation and amortization
    8,464       34       8,498  
                         
Funds From Operations
  $ 16,091     $ (454 )   $ 15,637  
                         
Three Months Ended June 30, 2008
                       
Net Income
  $ 7,182     $ 3,352     $ 10,534  
Equity in income of non-consolidated REITs
    (694 )     -       (694 )
Distributions from non-consolidated REITs
    1,731       -       1,731  
Depreciation and amortization
    8,677       35       8,712  
                         
Funds From Operations
  $ 16,896     $ 3,387     $ 20,283  
                         
Six Months Ended June 30, 2008
                       
Net Income
  $ 15,056     $ 2,864     $ 17,920  
Equity in income of non-consolidated REITs
    (1,487 )     -       (1,487 )
Distributions from non-consolidated REITs
    2,277       -       2,277  
Depreciation and amortization
    17,141       69       17,210  
                         
Funds From Operations
  $ 32,987     $ 2,933     $ 35,920  
                         
Three Months Ended September 30, 2008
                       
Net Income
  $ 7,673     $ (253 )   $ 7,420  
Gain on sale of assets, net
    -       -       -  
Equity in losses of non-consolidated REITs
    (680 )     -       (680 )
Distributions from non-consolidated REITs
    1,561       -       1,561  
Depreciation and amortization
    8,747       37       8,784  
                         
Funds From Operations
  $ 17,301     $ (216 )   $ 17,085  
                         
Nine Months Ended September 30, 2008
                       
Net Income
  $ 22,729     $ 2,611     $ 25,340  
Gain on sale of assets, net
    -       -       -  
Equity in losses of non-consolidated REITs
    (2,167 )     -       (2,167 )
Distributions from non-consolidated REITs
    3,838       -       3,838  
Depreciation and amortization
    25,888       106       25,994  
                         
Funds From Operations
  $ 50,288     $ 2,717     $ 53,005  



14


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

7.      Business Segments (continued)

(in thousands)
 
Real Estate
Operations
   
Investment
Banking/
Investment
Services
   
Total
 
Three Months Ended March 31, 2007
                 
Net Income
  $ 6,548     $ 3,184     $ 9,732  
Equity in losses of non-consolidated REITs
    583       -       583  
Distributions from non-consolidated REITs
    281       -       281  
Depreciation and amortization
    8,960       30       8,990  
                         
Funds From Operations
  $ 16,372     $ 3,214     $ 19,586  
                         
Three Months Ended June 30, 2007
                       
Net Income
  $ 28,464     $ 4,012     $ 32,476  
Gain on sale of assets, net
    (21,590 )     -       (21,590 )
Equity in losses of non-consolidated REITs
    142       -       142  
Distributions from non-consolidated REITs
    442       -       442  
Depreciation and amortization
    8,468       31       8,499  
                         
Funds From Operations
  $ 15,926     $ 4,043     $ 19,969  
                         
Six Months Ended June 30, 2007
                       
Net Income
  $ 35,012     $ 7,196     $ 42,208  
Gain on sale of assets, net
    (21,590 )     -       (21,590 )
Equity in losses of non-consolidated REITs
    725       -       725  
Distributions from non-consolidated REITs
    723       -       723  
Depreciation and amortization
    17,428       61       17,489  
                         
Funds From Operations
  $ 32,298     $ 7,257     $ 39,555  
                         
Three Months Ended September 30, 2007
                       
Net Income
  $ 9,306     $ 180     $ 9,486  
Gain on sale of assets, net
    (1,942 )     -       (1,942 )
Equity in losses of non-consolidated REITs
    (105 )     -       (105 )
Distributions from non-consolidated REITs
    476       -       476  
Depreciation and amortization
    8,977       30       9,007  
                         
Funds From Operations
  $ 16,712     $ 210     $ 16,922  
                         
Nine Months Ended September 30, 2007
                       
Net Income
  $ 44,318     $ 7,376     $ 51,694  
Gain on sale of assets, net
    (23,532 )     -       (23,532 )
Equity in losses of non-consolidated REITs
    620       -       620  
Distributions from non-consolidated REITs
    1,199       -       1,199  
Depreciation and amortization
    26,405       91       26,496  
                         
Funds From Operations
  $ 49,010     $ 7,467     $ 56,477  


15


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

7.      Business Segments (continued)

The following table is a summary of other financial information by business segment:

(in thousands)
 
Real Estate
Operations
   
Investment
Banking/
Investment
Services
   
Total
 
                   
Three Months Ended September 30, 2008
                 
Revenue
  $ 28,320     $ 604     $ 28,924  
Interest income
    167       10       177  
Interest expense
    1,108       -       1,108  
Capital expenditures
    2,407       -       2,407  
                         
Nine Months Ended September 30, 2008
                       
Revenue
  $ 83,699     $ 7,372     $ 91,071  
Interest income
    629       28       657  
Interest expense
    3,351       -       3,351  
Capital expenditures
    5,874       -       5,874  
                         
Identifiable Assets as of September 30, 2008
  $ 991,487     $ 5,573     $ 997,060  
                         
Three Months Ended September 30, 2007
                       
Revenue
  $ 28,608     $ 1,326     $ 29,934  
Interest income
    634       16       650  
Interest expense
    1,823       -       1,823  
Capital expenditures
    4,146       88       4,234  
                         
Nine Months Ended September 30, 2007
                       
Revenue
  $ 80,335     $ 14,571     $ 94,906  
Interest income
    1,819       45       1,864  
Interest expense
    6,121       -       6,121  
Capital expenditures
    9,195       88       9,283  
                         
Identifiable Assets as of September 30, 2007
  $ 1,029,002     $ 5,591     $ 1,034,593  

8.      Cash Dividends

The Company declared and paid dividends as follows (in thousands, except per share amounts):

Quarter Paid
 
Dividends
Per Share
   
Total
Dividends
 
             
First quarter of 2008
  $ 0.31     $ 21,849  
Second quarter of 2008
  $ 0.31     $ 21,849  
Third quarter of 2008
  $ 0.19     $ 13,391  
                 
First quarter of 2007
  $ 0.31     $ 21,938  
Second quarter of 2007
  $ 0.31     $ 21,937  
Third quarter of 2007
  $ 0.31     $ 21,938  


16


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

9.      Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code").  As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only.  The Company must comply with a variety of restrictions to maintain its status as a REIT.  These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.

One such restriction is that the Company generally cannot own more than 10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”).  In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 20% of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company’s assets.   FSP Investments LLC and FSP Protective TRS Corp, which are subsidiaries of the Company, are TRSs and operate as taxable corporations under the Code and have accounted for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”).

Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities.  In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.

The Company follows the provisions of Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which has not resulted in recording a liability or recognition of any accrued interest or penalties.  Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future.  The Company’s effective tax rate was not affected by the adoption of FIN 48.  The Company and one or more of its subsidiaries files income tax returns in the U.S federal jurisdiction and various state jurisdictions.  The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2004 and thereafter.

The income tax expense reflected in the condensed consolidated statements of income related to the TRS was a tax benefit of $519,000 for the nine months ended September 30, 2008 and tax expense of $352,000 for the nine months ended September 30, 2007.  The expense differs from the amounts computed by applying the Federal statutory rate of 34% to income before income taxes as follows:

   
For the
Nine Months Ended
September 30,
 
(in thousands)
 
2008
   
2007
 
             
Federal income tax expense (credit) at statutory rate
  $ (438 )   $ 297  
Increase in taxes resulting from:
               
State income taxes (credit), net of federal impact
    (81 )     55  
Revised Texas franchise tax
    182       162  
    $ (337 )   $ 514  

No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRS.

In May 2006, the State of Texas enacted a new business tax (the “Revised Texas Franchise Tax”) that replaced its existing franchise tax, which the Company became subject to.  The Revised Texas Franchise Tax is a tax at a rate of approximately 0.7% of revenues at Texas properties commencing with 2007 revenues.  Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts.  Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure it is considered an income tax and is accounted for in accordance with SFAS No. 109.  The Company recorded a provision in income taxes on its income statement of $182,000 and $162,000 for the nine months ended September 30, 2008 and 2007, respectively.


17


Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

10.       Subsequent Events

The Company declared a cash distribution of $0.19 per share on October 17, 2008 to stockholders of record on October 31, 2008 payable on November 20, 2008.

On October 15, 2008, the Company closed on a $75 million unsecured term loan facility (the “Term Loan”) with three banks. Proceeds from the Term Loan were used to reduce the outstanding principal balance on the Revolver.  The Term Loan has an initial three-year term that matures on October 15, 2011.  In addition, the Company has the right to extend the initial maturity date for up to two successive one-year periods, or until October 15, 2013 if both extensions are exercised.  The Company fixed the interest rate for the initial three-year term of the Term Loan at 5.84% per annum pursuant to an interest rate swap agreement.  As part of the Term Loan closing, the Company also amended the Revolver Loan Agreement to, among other items, conform its loan covenants and definitions to the Term Loan.

On October 31, 2008, a wholly-owned subsidiary of the Company entered into an agreement for the purchase and sale of an office property located in Chicago, Illinois.  The purchase price is $130 million and the Company expects to consummate the transaction either during the fourth quarter of 2008 or the first quarter of 2009.

On October 31, 2008, a wholly-owned subsidiary of the Company entered into an agreement for the purchase and sale of an office property located in Maryland Heights, Missouri.  The purchase price is $19.75 million and the Company expects to consummate the transaction during the fourth quarter of 2008.

18


Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2007.  Historical results and percentage relationships set forth in the condensed consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations.  The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements.  Accordingly, readers are cautioned not to place undue reliance on forward-looking statements.  Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation changes in economic conditions in the United States, disruptions in the debt markets, changes in economic conditions in the markets in which we own properties, changes in the demand by investors for investment in Sponsored REITs, risks of a lessening of demand for the types of real estate owned by us, changes in government regulations, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments.  See the factors set forth below under the caption, Item 1A. “Risk Factors”.  Although we believe the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.

Overview

FSP Corp. or the Company, operates in two business segments: real estate operations and investment banking/investment services. The real estate operations segment involves real estate rental operations, leasing, secured financing of real estate for interim acquisition or other property financing, and services provided for asset management, property management, property acquisitions, dispositions and development.  The investment banking/investment services segment involves the structuring of real estate investments and broker/dealer services that include the organization of Sponsored REITs, the acquisition and development of real estate on behalf of Sponsored REITs and the raising of capital to equitize the Sponsored REITs through sale of preferred stock in private placements.

The main factor that affects our real estate operations is the broad economic market conditions in the United States.  These market conditions affect the occupancy levels and the rent levels on both a national and local level.  We have no influence on the national market conditions.   We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.

Our investment banking/investment services customers are primarily institutions and high net-worth individuals.  To the extent that the broad capital markets affect these investors our business is also affected.  These investors have many investment choices.  We must continually search for real estate at a price and at a competitive risk/reward rate of return that meets our customer’s risk/reward profile for providing a stream of income and as a long-term hedge against inflation.

Due to the transactional nature of significant portions of our business, our quarterly financial metrics have historically been quite variable.  We do not manage our business to quarterly targets but rather manage our business to longer-term targets.  Consequently, we consider annual financial results to be much more meaningful for performance and trend measurements.

Critical Accounting Policies

We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies.  We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances.  On an on-going basis, we evaluate our estimates.  In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information.  The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007.

Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates.  We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations.  No changes to our critical accounting policies have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2007.


19


Trends and Uncertainties

Economic Conditions

The economy in the United States is currently experiencing unprecedented disruptions, including increased levels of unemployment, the failure and near failure of a number of large financial institutions, reduced liquidity and increased credit risk premiums for a number of market participants.  Economic conditions may be affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, recessionary concerns, changes in currency exchange rates, the availability of debt and interest rate fluctuations. The current disruptions in the U.S. economy have affected our business and may affect real estate values, occupancy levels, property income and the propensity and the ability of investors to invest in Sponsored REITs in the future.  At this time, we cannot predict the extent or duration of any negative impact that the current disruptions in the U.S. economy will have on our business.

On July 21, 2008, we announced that we had reduced our regular quarterly dividend to $0.19 per share of common stock for the three months ended June 30, 2008, which was paid on August 20, 2008.  In our July 21, 2008 announcement, we noted that we had experienced a significant slowing of activity in, and lower profit contribution from, two transactional components of our business, investment banking/investment services and property dispositions, since the onset of the current disruptions in the U.S. economy.  We also noted that our ongoing/recurring real estate operations continued to show solid performance and that our board of directors believed it was prudent to better align our regular quarterly dividends with the results of our current real estate operations only, without taking into account the results of our less predictable transactional operations.  During the third quarter of 2008, our real estate operations have again shown solid performance and, on October 17, 2008, we announced a dividend of $0.19 per share of common stock for the three months ended September 30, 2008, which will be paid on November 20, 2008.

Real Estate Operations

Our real estate portfolio was approximately 93% leased as of September 30, 2008.  While we were able to maintain occupancy rates during the quarter, new leasing activity has slowed in most of our markets, and we do not expect to see an increase in the pace of leasing until the broader economic markets stabilize and there is new job growth.

While we cannot predict when existing vacancy will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at current market rates for locations in which the buildings are located, which in some cases may be below the expiring rates.

Investment Banking/Investment Services

Unlike our real estate business, which provides a rental revenue stream that is ongoing and recurring in nature, our investment banking/investment services business is transactional in nature.  Equity raised for Sponsored REIT syndications for the three and nine months ended September 30, 2008 was $4.8 million and $57.4 million, respectively compared to $10.0 million and $119.2 million for the three and nine months ended September 30, 2007, respectively.  The resulting total decrease in equity raised was $5.2 million and $61.8 million comparing the three and nine months ended September 30, 2008 to the same periods in 2007, respectively.  The slowdown in our investment banking business actually began in the third quarter of 2007 and, at this point, it remains unclear when or if a higher volume of equity investment will return.  Business in this area, while always uncertain, continues to be adversely affected by the current turmoil in the financial, debt and real estate markets.  Investors who have historically participated in our private placement real estate offerings continue to express concern and uncertainty about investing in this environment.

In addition to difficulties in raising equity from potential real estate investors in this market, our property acquisition executives are now grappling with greater uncertainty surrounding the valuation levels for prime commercial investment real estate.  We believe that the current turmoil in the debt markets, as well as perceptions about the future U.S. economy and interest rates, are producing a larger than normal divergence in the perception of value and future relative investment performance of commercial properties.  While we generally believe that such an environment has the potential to produce some exceptional property acquisition opportunities, caution, perspective and disciplined underwriting standards can significantly impact the timing of any future acquisitions.  Consequently, our ability to provide a regular stream of real estate investment product necessary to grow our overall investment banking/investment services business continues to remain uncertain as the fourth quarter of 2008 begins.  We also continue to rely solely on our in-house investment executives to access interested investors who have capital they can afford to place in an illiquid position for an indefinite period of time (i.e., invest in a Sponsored REIT).  We continue to evaluate whether our in-house sales force is capable, either through our existing client base or through new clients, of raising sufficient investment capital in Sponsored REITs to achieve future performance objectives.


20


Discontinued Operations

During the year ended December 31, 2007, the Company disposed of five office properties.  The five office properties are located in Greenville, South Carolina; Alpharetta, Georgia; San Diego, California; Westford, Massachusetts and Austin, Texas.  The operating results for these real estate assets have been reflected as discontinued operations in the financial statements for the three and nine months ended September 30, 2007.

We continue to evaluate our portfolio, and in the future may decide to dispose of additional properties from time-to-time.  However, because of the current uncertainty surrounding the valuation levels for real estate and the current uncertainty in the capital and debt markets previously discussed, we do not expect the level of disposition activity to be as significant as the prior three years.

The following table shows results for the three months ended September 30, 2008 and 2007:
(in thousands)
                 
   
Three months ended September 30,
 
Revenue:
 
2008
   
2007
   
Change
 
   Rental
  $ 27,927     $ 27,109     $ 818  
   Related party revenue:
                       
Syndication fees
    304       687       (383 )
Transaction fees
    300       604       (304 )
Management fees and interest income from loans
    380       1,497       (1,117 )
   Other
    13       37       (24 )
Total revenue
    28,924       29,934       (1,010 )
                         
Expenses:
                       
Real estate operating expenses
    7,159       7,151       8  
Real estate taxes and insurance
    4,590       4,398       192  
Depreciation and amortization
    7,666       7,756       (90 )
Selling, general and administrative
    1,927       1,787       140  
Commissions
    208       406       (198 )
Interest
    1,108       1,823       (715 )
Total expenses
    22,658       23,321       (663 )
                         
Income before interest income, equity in earnings (losses) in non-consolidated REITs and taxes
    6,266       6,613       (347 )
Interest income
    177       650       (473 )
Equity in earnings (losses) in non-consolidated REITs
    679       147       532  
                         
Income before taxes
    7,122       7,410       (288 )
Income tax expense (benefit)
    (297 )     (206 )     (91 )
                         
Income from continuing operations
    7,419       7,616       (197 )
Discontinued operations:
                       
   Income from discontinued operations
    -       (72 )     72  
   Gain on sale of assets, less applicable income tax
    -       1,942       (1,942 )
      Total discontinued operations
    -       1,870       (1,870 )
                         
Net income
  $ 7,419     $ 9,486     $ (2,067 )

Comparison of the three months ended September 30, 2008 to the three months ended September 30, 2007:
Revenues
Total revenue decreased by approximately $1.0 million to $28.9 million for the quarter ended September 30, 2008 compared to the quarter ended September 30, 2007.  The decrease was primarily a result of:

21

o
A $0.7 million decrease in syndication fees and transaction (loan commitment) fees, which was principally a result of the decrease in gross syndication proceeds in the quarter ended September 30, 2008 compared to the same period in 2007.

o
A decrease in loan interest income of approximately $1.1 million, which was principally a result of a larger loan receivable balance during the third quarter of 2007 as compared to the third quarter of 2008, from which interest income is derived.  The impact of this decrease was also greater as a result of lower interest rates charged for the third quarter of 2008 compared to the same period in 2007.

These decreases were partially offset by:
o
An increase to rental revenue of approximately $0.8 million arising primarily from the acquisition of a property in Texas in May 2008, which was partially offset by net decreases in leasing rates related to new leasing that has occurred over the last twelve months.

Expenses

Total expenses decreased by $0.7 million to $22.7 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The decrease was primarily a result of:

o
A decrease in interest expense of approximately $0.7 million primarily resulting from lower average loan balances outstanding during the three months ended September 30, 2008 compared to the three months ended September 30, 2007 and lower interest rates during the three months ended September 30, 2008 compared to the three months ended September 30, 2007.

o
A decrease in commission expense of $0.2 million, which was principally a result of the decrease in gross syndication proceeds in the three months ended September 30, 2008 compared to the same period in 2007.

These decreases were partially offset by:

o
An increase in real estate operating expenses and real estate taxes and insurance of approximately $0.2 million, which was primarily from the acquisition of a property in Texas in May 2008.

Interest income

Interest income decreased $0.5 million to $0.2 million during the three months ended September 30, 2008, which was primarily a result of lower average interest rates in effect on invested funds and lower average balances of cash and cash equivalents in 2008 compared to the same period in 2007.

Equity in earnings (losses) in non-consolidated REITs

Equity in earnings (losses) in non-consolidated REITs increased approximately $0.5 million to $0.7 million, which was principally a result of our preferred stock investment in East Wacker acquired in December 2007, and increased equity in earnings of other non-consolidated REITs in the third quarter of 2008, compared to the third quarter of 2007.

Taxes on income

Taxes on income decreased approximately $0.1 million to $0.3 million in the third quarter of 2008 compared to the third quarter of 2007.  The decrease was primarily due to a lower taxable income from the investment banking and investment services business in the 2008 period compared to 2007.  During the third quarter in each of 2008 and 2007, we had an effective tax rate of 40.3%.

Income from continuing operations

The resulting income from continuing operations for the third quarter of 2008 decreased $0.2 million to $7.4 million from $7.6 million in the third quarter of 2007 for the reasons discussed above.
22


Discontinued operations and gain on sale of assets

During 2007, we completed the sale of five properties.  Accordingly, the properties sold are reported as discontinued operations on our financial statements for the relevant periods presented.  There was loss from discontinued operations of $0.1 million for the three months ended September 30, 2007 related to the properties sold.  During the three months ended September 30, 2007, we sold one of these properties and reported a $1.9 million gain on sale of assets.

The Company will continue to evaluate its portfolio, and from time-to-time may decide to dispose of other properties.

Net income

Net income for the three months ended September 30, 2008 decreased by approximately $2.1million to $7.4 million compared to $9.5 million for the three months ended September 30, 2007, for the reasons discussed above.


The following table shows results for the nine months ended September 30, 2008 and 2007:
(in thousands)
                 
   
Nine months ended September 30,
 
Revenue:
 
2008
   
2007
   
Change
 
   Rental
  $ 82,283     $ 75,110     $ 7,173  
   Related party revenue:
                       
Syndication fees
    3,766       7,090       (3,324 )
Transaction fees
    3,606       7,446       (3,840 )
Management fees and interest income from loans
    1,364       5,176       (3,812 )
   Other
    52       84       (32 )
Total revenue
    91,071       94,906       (3,835 )
                         
Expenses:
                       
Real estate operating expenses
    20,973       19,026       1,947  
Real estate taxes and insurance
    13,375       12,490       885  
Depreciation and amortization
    22,616       21,710       906  
Selling, general and administrative
    6,557       5,675       882  
Commissions
    2,020       3,720       (1,700 )
Interest
    3,351       6,121       (2,770 )
Total expenses
    68,892       68,742       150  
                         
Income before interest income, equity in earnings (losses) in non-consolidated REITs and taxes
    22,179       26,164       (3,985 )
Interest income
    657       1,864       (1,207 )
Equity in earnings (losses) in non-consolidated REITs
    2,167       (611 )     2,778  
                         
Income before taxes
    25,003       27,417       (2,414 )
Income tax expense (benefit)
    (337 )     514       (851 )
                         
Income from continuing operations
    25,340       26,903       (1,563 )
Discontinued operations:
                       
   Income from discontinued operations
    -       1,259       (1,259 )
   Gain on sale of assets, less applicable income tax
    -       23,532       (23,532 )
      Total discontinued operations
    -       24,791       (24,791 )
                         
Net income
  $ 25,340     $ 51,694     $ (26,354 )



23


Comparison of the nine months ended September 30, 2008 to the nine months ended September 30, 2007:
Revenues
Total revenue decreased by $3.8 million to $91.1million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The decrease was primarily a result of:
o
A $7.2 million decrease in syndication fees and transaction (loan commitment) fees, which was principally a result of the decrease in gross syndication proceeds for the nine months ended September 30, 2008 compared to the same period in 2007.

o
A decrease in loan interest income of approximately $3.8 million, which was principally a result of a larger loan receivable balance during the nine months ended September 30, 2007 as compared the nine months ended September 30, 2008, from which interest income is derived.  The impact of this decrease was also greater as a result of lower interest rates charged for the nine months ended September 30, 2008 compared to the same period in 2007.

This increase was partially offset by:
o
An increase to rental revenue of approximately $7.2 million arising primarily from the acquisition of a property in Maryland in June 2007, and a property in Texas in May 2008, which was partially offset by net decreases in leasing rates related to new leasing that has occurred over the last twelve months.

Expenses

Total expenses increased by approximately $0.1 million to $68.9 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The increase was primarily a result of:

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