Acadia Realty Trust (AKR) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Acadia Realty Trust earnings conference call. My name is Fab, and I'll be your coordinator for today. At this time, all participants are on a listen-only mode. We will facilitate the question-and-answer session towards the end of the conference. (Operator Instructions) Please be aware that statement made during the call that are not historical may be deemed forward-looking statement within the meaning of the Securities and Exchange Act of 1934. Actual results may differ materially from those indicated by such forward-looking statements. Due to the variety of risks and uncertainties which are disclosed in the company's most recent form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, and the company undertakes no duty to update them.

During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Please note funds from operations for calendar year 2008 have been adjusted as set forth in the reconciliation. Participating in today's call will be Kenneth Bernstein, President and Chief Executive Officer, Michael Nelsen, Chief Financial Officer and Jon Grisham, Chief Accounting Officer. Following management's discussions, there will be a opportunity for all participants to ask questions.

At this time, I would like to turn the call over to Mr. Bernstein. Please proceed.

Thank you. Good afternoon. Thank you for joining us. In order to make more efficient use of our time today, I'm going to reserve my overview and observations until after Jon and Mike present their portions. So today, first Jon will review our earnings, the key drivers and our outlook, then Mike will discuss our balance sheet, key ratios, and the liquidity in light of our recent equity issuance. I will then update you on the status and trends we're seeing, both with respect to our existing portfolio as well as our external growth platform. So with that, I'll turn the call over to Jon.

Good afternoon. First quarter performance was in line with expectations, both in terms of earnings and portfolio performance. As it relates to earnings, we are on track with our 2009 guidance and all of our five major earnings components. As a reminder, these are one core portfolio income which includes interest income in G&A, two, our pro rata share of fund income, three, asset-based fees, which is asset management ,property management fees, four, transactional fees and then five, our promote RCP and other income. So starting with the core portfolio, for the first quarter, the core portfolio has tracked to our expectations, which as you'll recall, at year end, our forecast t was minus 2% to minus 5% same store Noi. And given the environment -- the abysmal economic environment, our core portfolio has held up relatively well. Tenant defaults, business failures, rent reductions have not yet occurred at levels reflected in our projected low case of our forecast, but that being said, we're far from declaring that we've made it through the worst of this recession. As we reported in our press release, same store NOI for the quarter was down $425,000 or 3.3%. The main driver behind this decline was the loss of two Circuit City locations which represent about $300,000 of rent or 2.2% of NOI. So adjusting for these Circuit Citys, same store NOI would have been down only $125,000 or 1.1% for the quarter.

Another area in our core activity in which we are performing favorably against budget is G&A. During the quarter, we continued our initiative to reduce overhead expenses. As part of that, we reduced our headcount by 13, which represents an excess of 10% of our main office staff. In connection with this, we recognized severance and other related costs of approximately $900,000 in the first quarter, and so as a result of this initiative, for the year, we have reduced G&A $0.5 million to $1 million dollars below our 2009 budget range which was $25.5 million to $26 million.

Looking at the next earnings component, our pro rata share of fund income. In our '09 forecast, we anticipated fund three acquisitions would generate $1.5 million to $2 million of pro rata earnings. And as a result of our first quarter acquisition of Cortlandt, we've already achieved the low end of this range. Turning to both asset management and transactional fee income, the first quarter fee income is consistent with our '09 forecast. Transactional fee income for the quarter consisted primarily of construction and leasing fees related to our Fordham and Pelham projects. The majority of the remaining projected leasing income for the year relates to signed leases at these two locations, including the BJ's lease at Pelham. We don't recognize these leasing fee income until these tenants actually are in and paying rent. And then as it relates to the construction income, the majority of our remaining forecasted construction income also relates to these two projects, plus our Kanarcy project.

The last earnings bucket is promote, RCP and other income. And as I discussed on the previous earnings call, our '09 guidance for this included income related to our RCP investments, Mervyn's and Albertson's, promote income from fund one and also the gains on the buyback of our convertible debt. The four significant transactions in this area during the quarter were one, as it relates to our convertible notes. During the quarter, we repurchased $18.5 million of face value and recognized a gain of approximately $3.2 million. And then subsequent to the quarter in April, we've repurchased another $11 million which represents an additional gain of about $1.2 million. Keep in mind that these gains are computed under the new accounting rules for convertible debt which lowers the accounting basis of the debt component of the converts. The cash gain is actually for these two -- for the first quarter and April purchases, the cash gains is actually $6.4 million, which is based on the total face value of the debt and represents a 22% discount to face and in excess of a 13% yield to maturity over the next two and a half years.

The second item in this earnings bucket is promote income. During the quarter, fund one sold six Kroger locations, two Kroger supermarkets for about $14.5 million, or $50 per square foot. Fund one's allocated share of proceeds after the repayment of debt was about $8 million. Acadia recognized promote income of $650,000 on the $5.6 million gain. Kroger/Safeway has been a very successful investment for fund one. To date, we've already received $20 million on our original $11 million of equity or about a 1.8 multiple. And even if we were to ascribe no value to the remaining 18 locations that we now own debt free, we still have received a 17% IRR to date.

Also during the quarter, we recognized income related to a forfeited deposit. This relates to the sale of our Ledgewood Mall which did not close and as a result, we recognized that $1.7 million deposit as income. This is a quality location in Ledgewood, New Jersey, anchored by Walmart, Marshall's, Sports Authority and Barnes and Noble. But it's an enclosed mall and that configuration need to be addressed. Although the sale would have been at an attractive price given the great location and the solid existing anchors, we're inclined to redevelop this property ourselves and as such, we're currently in the early stages of coordinating the redevelopment plan. Offsetting these three positives, there was an impairment charge at the Realco level related it our Mervyn's investment during the quarter. So through Mervyn's one and two, we recognized our share of this impairment charge, this non-cash impairment charge, and it represents a loss of $3.1 million at the fund level. So our share of this non-cash loss, net of taxes, is about $400,000. More importantly today on a cash basis, we've received a 1.8 multiple on our invested capital, and there's still approximately 2.8 million square feet of retail owned by Realco, and it's all debt free. So as a result of these items and including the $1.2 million of gain related to the April repurchase of bonds, we're already at the upper end of our 2009 guidance as it relates to the RCP promote and other income, which was $5.5 million to $6.5 million. And we're not currently expecting any more income in this area for the balance of the year.

So to conclude, we're on plan with the 2009 guidance for all of our earnings components, and in fact are tracking to the upper half in several of these categories. As we previously announced, we've revised our FFO per share guidance to 96 to $1.09, and that's solely due to the effect of the equity issuance earlier this month. Now I'll turn the call over it Mike.

Thanks. Good afternoon. As always, one of our primary goals is maintaining and enhancing the strength of our balance sheet. As such, in April, we successfully completed a follow-on offering of 5.75 million shares which generated net proceeds of approximately $65 million. We've utilized this additional liquidity to address debt maturities through 2012 and to provide dry powder to favorably position Acadia to take care and advantage of future opportunities. In that regard, we've paid down borrowings from existing lines of credit in the amount of $33 million. We've also used $9.3 million to purchase our convertible debt in April and another $13.9 to replenish the cash that we have outlaid to purchase the converts in the first quarter, as Jon mentioned. This $23.2 million of cash utilization reduced our 2011 maturities by $29.6 million.

After giving effect to these transactions, we have increased our liquidity by about $41.8 million to a total of approximately $150 million which includes cash of $100 million and line availability of $50 million. It's important to remember that our lines are non-recourse, revolving term notes, with fixed maturities which is secured by first mortgages. As a result of these transactions, today at the core portfolio, we have no 2009 debt maturities. We only have $2 million of maturities in 2010 and the remaining balance of our original $115 million of convertible notes, which is now $77.4 million, matures in 2011. The convertible notes are our only unsecured debt and are not subject to any covenants. While all of these maturities can be dealt with with our current cash on hand of $100 million, in considering maturities beyond 2011, $62.5 million of our secured credit line borrowings mature in 2012, including all extension options. Based on the strength of the properties collateralizing this debt as evidenced by a debt deal of almost 20% and a debt service cover of 2.1 times, based on our 2009 forecasted NOI of $12.7 million, we believe we'll be able to replace this debt at maturity, even if the condition of the credit markets doesn't improve. Beyond 2012, our debt maturities are staggered through 2017. Additionally, while the debt market for larger loans is still shut down, there are still lenders making loans under $30 million for assets in good locations with high quality sponsors, at rational leverage levels at a price in between 6% and 7%. This is evidenced by the fact that we are currently in the process of closing on two financings at the core totaling approximately $20 million.

Looking to the opportunity fund level. We have no net debt exposure at fund one. At fund two, other than the subscription line which is fully collateralized by the investors' unfunded capital commitments and the Fordham loan, we expect to be able to either extend or refinance all of the other remaining fund two at debt at maturity. At the Fordham project, we are currently in discussions with lenders to extend the existing $95 million construction loan against which we have drawn $85 million through March 31. We anticipate being able to accomplish this without any material adverse effect to the fund. In addition, fund two has $54 million of available, unfunded investor commitments, net of the subscription line balance which would be available to deal with any petition -- any potential refinancing issues. Looking to fund three, again, other than the subscription line, we have $81 million of debt maturing through 2013. Investors' unfunded capital commitments net of that subscription line balance of approximately $250 million is available to deal with any potential refinancing issues. In addition, we have an executed term sheet for a five year, $47.5 million loan at a rate of 6% to finance our $78 million acquisition of the Cortlandt Towne Center. The proceed of this loan will be used to pay down a portion of the current subscription line balance.

Finally, in relation to our dividend policy, while the decisions regarding the amount, timing, and composition of Acadia's dividends is determined by the company's board of trustees, we plan to keep the total cash dividend for 2009 the same as the amount which would have been paid based on our current annualized $0.84 a share dividend on the original 34.1 million shares outstanding before the additional 5.75 million shares issued in the offering. In summary, while we have always maintained a strong balance sheet, a recent equity raise has further enhanced our position -- our financial position. This should put us in a favorable position to be able to continue to execute our business plan and to take advantage of opportunities as they arise. I'll now turn the call back to Ken.

Thanks, Mike.

First I'd like to discuss our core portfolio performance and the trends that we're seeing beginning to emerge. To understand what shapes our perspective, I think it's important to keep in mind the composition of our portfolio. 57% of our portfolio is supermarket or drug store anchored, 27% is value or discounter anchored and about 16% is urban or street retail. The strength and hopefully long-term resilience of our portfolio is the result of our asset recycling program, whereby over the past several years, we sold off the bottom half of our portfolio and refocused the portfolio into higher barrier to entry supply constrained markets. We reduced our core portfolio square footage from about 10 million square feet down to five million square feet, and while this certainly exacerbates the law of small numbers, when we look back at having sold those asset at the prices that we got, we certainly are not second guessing the fact that we sold them.

So when we look at our portfolio performance, both our same store net operating income, our occupancy in the first quarter, our leasing spread, they're all somewhat reflective of the law of small numbers. And they're consistent with our prior forecasts with the downward pressure being driven by the two Circuit City leases that Jon discussed. In terms of replacements for those two vacancies in Bloomfield Hills, we are working with a national tenant and hope to get a lease finalized with them over the next several months. And in Ledgewood, New Jersey, as Jon discussed, that property will be a part of a Walmart expansion and redevelopment and the Circuit City vacancy will be dealt with through that redevelopment process.

Separate of Circuit City, our portfolio so far has not been impacted by the other major bankruptcies to date and overall, there just has not been as many bankruptcies in our industry as perhaps was anticipated so far. A few thoughts on that. First of all, it may still be early. There are still several weak tenants out there, and they have not filed bankruptcy. Our view is that one of the factors is chapter 11 bankruptcy is not as hospitable, a place for tenants to reside as it used to be. There's less debtor in possession financing available. There's a significantly shorter timeframe that tenants can remain in chapter 11, so they must have a game plan when they go into chapter 11 or else they will face a real risk of going into chapter 7 liquidation as was the case with Circuit City. We certainly hope that the bankruptcies remain low, but we need to be prepared if that's not the case. And if tenants go into chapter 11 and that evolves into chapter 7 liquidations, then we need to expect that there will be more store closings across the board, and less short-term differentiation between higher quality locations and lower quality locations as is the case in a more traditional chapter 11 filing. But longer term, we are quite confident that higher quality locations will prevail, and we fear that secondary locations very likely could face functional obsolescence. The challenge to all of us in the investment community will be differentiating between the temporary, short-term vacancies and the ones that could potentially be more permanent.

In terms of our tenant's performance, in discussions with key tenants, their performance seems to be consistent with what we're all seeing in the national data, and that is that the necessity based tenants, the supermarkets, drug stores, the discounters and the value retailers are certainly outperforming their full-priced and discretionary peers. And outside of those tenants, in the first quarter, it appeared, and our tenants certainly reflected to us that the consumer was frozen at all levels of the economic spectrum. Now since then recently, we're seeing some signs of thawing. But I put it into the category of things getting less worse rather than actually better. We're seeing some encouraging signs.

As Jon mentioned before, aside from the already announced bankruptcies, the default rates in our portfolio have so far to date been more similar to prior years than reflective of the significant economic distress that's going on in the marketplace. And the rent reductions that we were all reading about have not been as significant as anticipated or feared. But still, it is too early to declare that the worst is past us on the fundamentals. Those tenants who are expanding are doing it very cautiously and very opportunistically. And until we see more significant data in terms of job formation, in terms of consumer spending, our outlook's going to remain cautious.

Turning now to external growth. As many of you know, an important driver is our investment fund business. The structure of our investment funds provides us with access to discretionary capital that enables us to take advantage of opportunities as they emerge without having to be overly dependent on the public markets for equity. As we pointed out, our fund are discretionary, not subject to near-term redemptions, have solid, long-term investors and also provide us access to attractively priced subscription lines.

Our investments break into two broad categories. First is opportunistic, which includes our purchase distressed assets, distressed debt and our retailer controlled property, or RCP investments. The second category is our value-added component which includes our New York, urban infill redevelopment platform. Terms of existing fund investments in fund one, our first fund has delivered in excess of a 30 IRR, approximately 2X on our equity multiple with hopefully more profits to follow as we dispose of the balance of the fund one assets including Kroger/Safeway, half of the Mervyn's investments and a few other developments. In terms of fund two, that was characterized by both opportunistic investments as was the case with our RCP venture as well as value-add projects that included a significant portion of our urban infill redevelopment portfolio. In terms of RCP for fund two, it include both Mervyn's and Albertson's. To date, we've achieved approximately two times our original equity investment on those investments. In terms of the value-added component, our New York urban infill pipeline, we continue to make steady progress toward the stabilization of that portfolio. Notwithstanding legitimate concerns as to the health of the New York City economy, so far, the data has not yet supported a worst-case scenario.

The boroughs of New York City remain under retailed, and so far, tenant interest remains solid. In the first quarter of this year, one of the more difficult periods to sign leases anywhere, we saw successful leases completed with tenants ranging from BJ's wholesale club in Kanarcy, Brooklyn, to Trader Joe's on 72nd Street in Manhattan. As we break out in detail on pages 41 and 42 of our supplement, the construction of five of the nine fund two developments is now substantially complete. A sixth project is under construction, and that will be completed this summer. Kanarcy, Brooklyn, the seventh project, construction will commence shortly as we have a signed lease with BJ's Wholesale Club. Then we have two remaining properties that are in design phase.

As Mike discussed, we have limited debt issues at the fund level, including these development projects. And for those properties that have been completed, the retail is 84% leased, the office is 71% leased and the significant remaining moving pieces are as follows: In Fordham Road in the Bronx, the retail component is fully leased and open, performing well. Construction of the office component is now complete. To date, it is approximately one-third leased, and we're receiving interest primarily from governmental agencies and similar users that will hopefully lease up the balance. Telematter construction on our anchor, which is BJ's Wholesale Club, and that replaced Home Depot, is complete, and we anticipate that they will open in the next few weeks. The center is currently just under 75% pre-leased, and we look forward to the lease up of that project. In Kenarsy, Brooklyn, in March we executed a lease with BJ's Wholesale Club at Kenarsy. That's going to be a 250,000 square-foot commercial project. BJ's will represent approximately 70% of the total GLA of the project. Additionally, we're in the final stages of lease negotiation with a New York City municipal tenant who will occupy 100% of the office space, or an additional 13% of that project's GLA. So upon execution of that lease, the project then will be approximately 83% pre-leased, and we will then be able to begin that project.

In terms of the last two projects in fund two, they remain in the design phase where we'll continue to focus on pre-leasing, cost control, and the financing of those projects. Those two projects are Sherman Avenue Manhattan and City Point in downtown Brooklyn, and we'll keep you posted as those projects progress. Turning now to fund three, the fund was launched in the middle of 2007 with just over $500 million in equity. We remain substantially on the sidelines from the commencement of that fund through 2008, only utilizing about 20% of the fund. And then even after our recent acquisition in the first quarter of this year of the Cortlandt Towne Center, it brings our allocation of fund three equity to about 30% or $150 million. In terms of the existing fund three investments, Sheepshead Bay in Brooklyn and our Main Street Westport, Connecticut, are progressing through design phase.

Our storage post self-storage acquisition, the 11 properties, continued to operate consistent with our expectations. You may recall four of them are stabilized properties. They have held their occupancy, and the sixth repositioned the or redevelopment projects are beginning their lease up. We don't expect self-storage to be immune to the economic slowdown, and we do expect that the lease up of the redevelopment projects and the repositions will take longer than if we were in a stronger economy.

In terms of first quarter investments, we discussed on a previous call our acquisition of Cortlandt Towne Center which we closed in January. It's a 640,000 square-foot center located in northern Westchester. The property is the dominant retail shopping center in that market with very high barrier to entry. It's anchored by quality national tenants with strong sales performance including Walmart, A&P Supermarkets, Marshall's, Best Buy. The property was initially developed in the early 1970's and expanded 10 years ago. It historically has remained well over 90% occupied and historically had a stabilized NOI above $9 million. It faced recent vacancies through the bankruptcies of Linens and things and Levitz, and it brought occupancy to below 85% an the NOI to about $7 million, which is the level when we purchased it. We purchased the properties for $78 million all cash, which was approximately a 9% yield on that reduced NOI.

So the two key moving pieces are the lease up of those vacancies and then the financing of the project since we purchased it all cash and used our subscription line. In terms of new leasing, in the first quarter, we opened a new Panera Bread that has opened very successfully a few weeks ago. We recently signed another lease for a 5,000 square-foot tenant that will open this summer. And with respect to the most significant, the Linens and Things vacancy, we have strong national tenant interest. We are working with an ideal tenant for that space and hopefully will finalize that over the next several months. Given that our cost basis was fair and appropriate, we can afford to be realistic in terms of our leasing assumptions, and we can also afford to be patient. Our goal is to simply get back to the historic NOI that was there several years ago and do that over the next three to five years. And that would then provide us with an attractive unleveraged deal and an attractive leverage deal.

Mike discussed the status of the financing of this asset, and we are pleased with lender interest in this. We expect about a 60% loan to value loan. Probably it will be five-year fixed rate at 6% to 7% all in. In terms of future investments, while having deployed only 30% of the fund is about half the pace that we would have normally deployed over the same time period, we feel that we're still in the early phase in terms of opportunistic investments, and we're confident that some of the more interesting opportunities are certainly in front of us. Furthermore, with the fund three equity being available through 2012, we have plenty of time to put the money to good use, and we're certainly in no rush. So while it's still early, we're beginning to see exciting opportunities, and these are going to include both relatively stable properties such as our acquisition of Cortlandt. But there will also be a wide variety of distressed opportunities as the disruption in the capital markets, coupled by a certainly weak retailing environment continues to play out. Given our opportunistic acquisition capabilities as well as our value-add redevelopment skills, we think that we're well positioned to capitalize on these opportunities as they arise.

Finally, turning to our mezzanine and preferred equity investments, we discussed them in detail on our last call. And on page 20 of our supplement, we include a general breakout of these investments. The two most significant, and I'll touch on them again today, are our Georgetown, Washington, DC, investment and the development at 72nd and Broadway in Manhattan. In terms of Georgetown, we made a $48 million senior preferred equity investment in a portfolio of 23 properties, located primarily in Georgetown, Washington, DC. A very solid portfolio, and extremely high barrier to entry position with strong tenants. Our original underwriting put us in the 65% to 85% loan to value portion, which even if revalued, puts us at an acceptable collateral position and more importantly, an attractive ownership basis. And given that, we would welcome increasing our ownership in the Washington, DC, area. We feel very comfortable there. Furthermore, the vast majority of the senior debt in front of us does not mature until 2016, thus there is no material concern of maturity default.

The second mezzanine investment we made last year was $34 million, and it was collateralized by mixed use retail and residential rental development at 72nd Street and Broadway on the upper west side of Manhattan. To date, the construction is on time, on budget, well underway, with the completion slated for June of next year. In the first quarter of this year, the developer signed leases with Trader Joe's and Bank of America for the retail components at rents that were consistent with our underwriting. And while our initial underwriting earlier this year brought us to a loan to value of up to approximately 70% upon stabilization, even with the shifts in the market values and the residential rental rates, we believe we're adequately protected.

So to conclude, we're working our way through what is most likely going to turn out to be one of the most difficult economic periods of our generation. And while we're seeing glimpses of improvements in the capital markets and things may be getting at least a little less worse at the tenant level, we need to remain prepared for setbacks and, in any case, a long road ahead before we have a clear, full-blown recovery. We do feel strongly that we're well positioned to respond to the difficulties and more so to capitalize on them. We'll continue to focus on maintaining a stable core portfolio, we'll make sure that our balance sheet remains solid with sufficient liquidity as we await a more complete thawing of the debt markets, and third and finally, we're going to continue to position our acquisition platform to take advantage of any unique opportunities that may arise. I'd like to than our team for their hard work during this busy quarter and at this point, we'll open the call for questions.

Thank you. (Operator Instructions) And your first question will come from the line of Michael Bilerman from Citi. Please proceed.

Hey, guys, it's (inaudible) here with Michael. A couple quick questions for you. In terms of acquisitions, do you see those meaning funds or for your core portfolio?

Primarily the funds. Our main focus has been to utilize the funds as the external growth platform. Remember, we co-invest 20%, and assuming that the promotes kick in, you can effectively get 40% plus or minus of the economics for an investment of 20%. So it works quite well in these opportunistic times.

But if you did anything else in mezz, that would probably be with your own money?

I don't envision us making more mezzanine investments. And we're comfortable with what we did. If we could have all that money back in the form of cash, we'd be thrilled. And we're sure we would have good places to redeploy it.

And Ken, can you just give us an update on what's happening with the George Washington Bridge? Is that just on hold?

We're continuing to work through the issues. We did not go firm on finalizing all of the details to proceed with the redevelopment. And as you can imagine, given the changes in the environment, we're thinking long and hard before we start any redevelopment without having the debt financing in place, without having the tenants in place, et cetera. It is a great location. The tenant interest remains very strong. So I'm still hopeful that we're going to do something. But I'd rather be overly prudent than cavalier as it relates to new development, because there's going to be a lot great opportunities out there, and we need to make sure we are allocating our resources appropriately.

And then my last question was in terms of Kanarcy, it looks like you guys are targeting the first half 2011 completion, now that BJ's is the anchor there. Back when we were dealing with Home Depot being the anchors, second half '09 delivery? Is it the tenants pushing out the timeline? Is it just construction and planning? What's going on there that's taking so much longer?

It is purely the construction process. But just to remind everybody, Home Depot had a signed lease, they volunteered to not proceed. They paid us $24.5 million, and our total purchase price in the land was $26 million. So we felt that that adequately compensated our stakeholders for the delays that were going to be inevitable in the process of then finding another anchor tenant, going through the design approval and now the construction process. So I believe our patience will be rewarded, but it certainly does take time. And that's just the reality of successful developments. There's a host that are far less successful and don't have a replacement anchor for and they just sit. And fortunately, that's not the case here.

It's not the tenant saying we'd rather have an 2011 opening than a 2009 or 2010?

No, no. We have a great construction team, but I think they would tell me, "Ken, there's only so many hours in the day. And this is complicated construction.

Great. Thanks, guys.

Your next question will come from the line of Michael Mueller from JPMorgan.

Yeah, hi. I may have missed this in the prepared comments, but I think, Jon, did you mention you bought bonds back in the second quarter? If so, there any gains that are known at this point?

Yes. There are. We bought back about $11 million of Vaughn's in April this month. And the gains will be about $1.2 million that you'll see in the second quarter.

Okay. And then shifting gears, just thinking about leasing, and I know given the redevelopment pipeline, it's a little bit different than generalizing about normal shopping center in the suburbs. But from a tenant perspective, is there any difference in terms of the conversation when somebody is looking at taking space in a redevelopment project or a new development project right now versus something that's just a normal vacancy someplace else?

Yes, I think so. One of the huge differences are that there is a much smaller universe of tenants who are stepping up to sign new leases. And inherent in the cost of a redevelopment is that the fact -- generally, that space is going to be fairly expensive, and so it better be extremely well located and very desirable for a tenant to step up for new space. And that's -- thus in the five boroughs, we're seeing tenant interest at strong rents, and it has to be strong rents. Otherwise, you just can't sign the leases. Conversely, in existing boxes, the tenants know that they can drive good deals, potentially at significant discounts to where rents were a while ago. And I think you'll see that in terms of the industry. I think you're going to see that across the board where those same strong tenants in secondary market or in elsewhere are going to be able to do deals at $9, $10, $14 that previously were significantly higher, and landlords will have to pick and choose if they want to do that. I alluded somewhat in Cortlandt that we can afford to be opportunistic and do deals at today's pricing if the right tenants come in, and we can also afford to be patient. So we feel pretty good in terms of existing vacancies from that perspective. We'll have to see how it plays out.

When you look at the different types of tenants and break them up between retail and office, is the activity level very different from one bucket to the next?

I don't think either side feels fabulous. What I'll tell you is fortunately, in terms of our office, New York City and agencies in the federal government tend to be the main users of our type of space. And whether it's stimulus driven or just otherwise having demand for the use, we're seeing a relatively consistent use, but -- and that takes a long time. You need to be very patient, and there's a real skill set to dealing with those type of agencies and tenancies. Separate of that in the office side, it's not really our business, and it's not our portfolio. But everything I can tell is it's pretty quiet on that front. And then on the retail side, again, the obvious tenants are stepping up and signing leases. Either because they're getting great rents or they're able to get into locations that they could otherwise would not be able to afford or would be caught up in a bidding war. And so we're seeing activity there and elsewhere than it remains relatively quiet.

Okay. Great, thanks.

Thanks.

Your next question will come from the line of Sheila McGrath from KBW.

Good afternoon. Ken, I was wondering if you could give us your perspective on -- we saw four city just sold an asset in Queens for a 7.75 cap rate. Just wanted your thoughts on that and how it might relate to your urban retail portfolio.

Without commenting specifically on that transaction and then everyone has their own particular views of why their portfolio's better or xyz, given that, there's been a lot of chatter about cap rates being in the 8.5 to 9.5 range, seeing a transaction priced sub-8 cap is I think an encouraging affirmation of the fact of what we believe, which is high barrier to entry properties in supply constrained markets will trade at superior pricing. So I am pleased to see that that transaction occurred. I'm sure it is good for Forest City, it's one more data point. In any other economic environment, talking about a single transaction as a data point would be a little amusing. But there certainly has been a lack of transactions. Good if see core trade like that.

If you had to guess what that would be at the peak, like two years ago or so or year and a half ago, would it be just around six or sub-six, or --

Either. If I recall correctly that traded to a core fund. And we're not seeing a lot of core fund activity right now. When that heats up again and you have core retail buyers, my hunch is they're going to be far more than demanding of high barrier to entry asset like that type an asset, and it -- last time you heated up, you saw sub-six cap rate. I don't know if we'd go back to that. We're certainly not basing our investment thesis on it going back to it. And I suppose I could say, oh my gosh, look, it used to be a 6, now it's a 7.75. But keep in mind how significantly all of our stock prices have declined and the implied cap rates there. Everything has adjusted, and we just have to take that into account.

Okay. Thank you.

Your next question will come from the line of Rich Moore RBC Capital Markets.

Hello, guys. Good afternoon. Hey guys, how are you?

Good.

I'm curious. It seems like all of the public reads and I'm guessing a lot of the private guys too, are putting properties up for sale to raise capital to pay down debt basically. I mean, it seems like there must be a million properties for sale listening to everybody on the conference calls and everything. I'm curious, are you not seeing good opportunities, or has the pricing not hit the right spot? How would you characterize things?

The millions of properties that are for sale are for the most part probably not in markets that I'm real excited about. And I'm not even sure that that's true, Rich. I think that there's people certainly exploring it. But the number of highly motivated sellers who are willing to accept whatever the highest bid is out there for high-quality assets is not nearly as significant so far as we suspect it will be when you look at the level of debt maturities and just the common sense in patience that certainly investors will have over the next year or so. So I would question the thought that there are a lot of very willing sellers. Just one piece, though. On the private side, one thing to keep in mind. If you went out and borrowed conservatively which would have been defined a few years ago as 75% of loan value, it's very likely that if you went to market today that your asset's not worth its debt. So when you say all of these people are going to market, they don't have anything to sell unless their lender is willing to take a writedown, or unless your lender has all right taken the asset. And that process is just beginning. So only the under levered owners can even entertain selling at the prices that we think is fair to buy so far. That process is going to play out. That's when things are going to get interesting.

Really the product is not there at the level that it seems like everyone's making it sound like it is.

Yes.

Okay. That's fair. And then same kind of thing on the retailer side, Ken. I mean, I completely agree with you that the bankruptcy season didn't seem to be nearly as bad as it was supposed to be. But at the same time, it seems like there would be retailers, large or small, that didn't have to be one of the big guys. But someone out there that's got good real estate that would be an attractive RCP sort of play. Are you not seeing those? Are they not really popping up? We are starting to. It's still early, Rich. This is going to play out for a while. We're going to have a few quarterly calls that feel unnecessarily boring -- No, your call wasn't boring.

No, but we'll be rewarded for being disciplined. The issue now is a couple of years ago, we could be part of a consortium that would require a retailer that had valuable real estate. We would have a list for every single property of five or 10 tenants ready to step up and take that space. And we would have to work very hard to convince our lenders to lend us less money into the transactions. Today, it's very different. So when we step into these transactions, we need to be prepared. To hold the real estate for an extended period of time without having a tenant for each space. We need to be prepared to put a lot of equity into these transactions. And I think all of us are far more realistic and humbled by how difficult it is to be a retailer. So I don't think we're all going to jump in and say, oh, we can go operate (inaudible). So as this process plays out, we're going to be very thoughtful about it. That being said, I do expect us to be active.

Okay. All right. Good. Thank you. And then I'm curious, Jon or Mike, if -- if you could remind me how the Kroger gain, the gain on the sale of the Krogers flows through the income statement. Because I know the $5.6 million is booked as a gain on the income statement. And then what happens?

Yes. No, you're right. The $5.6 million is the gain at the fund one level. Then also in the GAAP income statement, there was a minority interest that relates to that gain. So once you back that out in net income, you only have $1.6 million of net gain, if you will, in the GAAP financials. Then when you go to from GAAP to FFO, you can see in our reconciliation where we back out 900 of that $1.6 million, and that represents our pro rata share of the gain, our 22% in fund one of the gain. And that leaves us with just the promote piece of the $1.6 million, which is about $650,000, and that we treat as a success fee which we do recognize for FFO. That being said, the $900,000 that we back out, it's money that we take to the bank, and we'll take it all day long. But that component isn't included in FFO.

Okay. I got you, very good. Yes. Then last thing, year-end occupancy target? What do you think for the core portfolio? What are you guys thinking there?

When we gave guidance at year end, we said it would be anywhere from minus 100 to minus 300 basis points was our range. And for the time being, that's still our range.

Okay. Excellent. Great, thanks, guys.

Okay.

That does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Bernstein for closing comments.

Great. We got it done within an hour. I'd like to thank everybody for their time. Look forward to seeing everyone again soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.