Franklin Street Properties Corp. 2012 Annual Report

Fellow Stockholders

Our Company’s operating profit performance rose in 2012 – the second consecutive year of increase since the financial crisis and subsequent recession began in 2008. Profits as measured by funds from operations, or FFO1, increased by approximately $7.8 million or 9.2% from $0.87 per share in 2011 to $0.95 per share in 2012. We paid a $0.76 per share dividend during 2012. In the current low interest rate environment, we believe the income yield provided by our cash dividend distributions was more valuable than ever to investors. In the past, we had repeatedly referred to 2010 as our “hump year” and said that we thought 2011 would be our first year of profit increases since the economic recession in 2008. We further said that, barring any new significant downturn or “double dip” in the U.S. economy, 2011 would be a transitional year to a longerterm upward trend in the commercial/office real estate cycle which would result in continued growth in FSP’s profits for 2012 and beyond. In fact, the U.S. economy did experience sustained slow growth during 2012 and marginal improvement in employment metrics, and our profits in 2012 grew as anticipated.

We were pleased with the performance of our property portfolio in 2012 and the significant progress we made strengthening our balance sheet and improving occupancy in the midst of a mixed macroeconomic environment. During the year, we acquired two high-quality office properties for a total of $207 million. In addition, we invested approximately $41.6 million in mortgage loans secured by properties owned by our affiliated Sponsored REITs. We fortified our balance sheet with a larger credit line, increasing total capacity to $900 million, taking advantage of lower interest rates and extending the term to 2017. Our new credit facility provides the Company with significant liquidity and investable capital, and with a debt-to-total market capitalization ratio of 37.7%, our leverage remains low. Additionally, by year-end 2012, we achieved 94% occupancy in our operating portfolio. When compared to the year-end national office occupancy rate of about 83%, this achievement illustrated the quality of our properties and their market locations. In addition, one of our Sponsored REITs, FSP Phoenix Tower Corp., took advantage of increasing capital demand for high-quality office assets by selling its approximately 624,000 squarefoot office complex in Houston, Texas for $123,750,000. FSP’s first mortgage loan investment of $15 million was repaid, and we realized

As we look to 2013 and beyond, we remain committed to our core principles of owning high-quality real estate in attractive markets around the country, anchored by a strong balance sheet to provide liquidity and support opportunistic growth. The economy, though hampered by uncertainty in Washington and the imposition of higher taxes, continues a course of slow, steady improvement, and unemployment is back below 8.0% for the first time since 2009. The Federal Reserve appears committed to keeping interest rates low for the foreseeable future, which should support a continuation of the modest economic expansion we have been experiencing. Regardless of the economic backdrop, we believe that FSP’s investment and operating strategy can succeed throughout the cycle, and we remain committed to opportunistic real estate investing. In fact, a slow steady recovery works to our advantage in several ways.

First, we expect continued improvement in office fundamentals. Job growth is positive, which drives absorption for office space. With office construction still constrained, due to a lack of credit availability for speculative projects and rising construction costs, even a slow improvement in demand can support fundamental improvement in office market occupancy rates and, ultimately, rental rates. Because a significant percentage of our leases were signed during the last five years, future lease expirations should provide potential opportunities for upside in revenue, net operating incomes, and asset values. Second, institutional capital investment has been slower to return to the office property sector (particularly suburban office) compared to other real estate sectors, and investment yields continue to offer a wide spread to financing costs. We will continue to look for attractive investment opportunities, in high-quality properties and faster-growing submarkets. To that end, we have continued to invest capital in cities such as Houston, Dallas and Denver in which we see significant employment growth coming from businesses in the rapidly-expanding energy industry. Finally, we are committed to simplifying our Company, with an ever-sharper focus on our core business: owning and operating a high-quality office portfolio in attractive markets nationwide. To this end, we have wound down our investment banking activities, and will continue to manage the Sponsored REITs, recommending that the Sponsored REIT shareholders agree to sell their respective real estate assets when we believe we have best maximized value for those shareholders. While these activities have provided FSP with attractive returns in the past, we believe our Company’s valuation will benefit from the simplification of our business model and the growth of our wholly-owned portfolio. In addition, we remain dedicated to harvesting gains and recycling capital to maximize returns, taking advantage of both specific value-added successes achieved on individual properties in our portfolio as well as broader cyclical economic trends. With a strong balance sheet and ample cash flow, our disposition timing is determined on an asset-by-asset basis, rather than driven by capital needs or arbitrary dates.

In closing, I’d like all shareholders to know that our team of dedicated professionals at FSP has continued to work hard over the past year. We believe that FSP is very well positioned as the economy continues its slow improvement and that the efforts of the past few years have given the Company an excellent opportunity to generate increased profits from our strengthening property portfolio and enhanced balance sheet.

Thank you for your continued trust, confidence and support.

George J. Carter
Chairman & Chief Executive Officer

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