Acadia Realty Trust (AKR) 2009 Q2 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 Heather and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll facilitate the question-and-answer session toward the end of this conference. (Operator Instructions). Please be aware that statements made during the call that are not historical, may be deemed forward-looking statements 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 the 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 those non-GAAP financial measures with the most directly comparable GAAP financial measures.

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 discussion, there will be an opportunity for all participants to ask questions. At this time, I would like to turn the call over to Mr. Bernstein. Please proceed, sir.

Thank you. Good afternoon. Thank you for joining us. As we did on the last call, I'm going to reserve my observations for later on in the call. So, today we're going to start with Jon, who will review our earnings, the key drivers and our outlook, then Mike Nelsen will discuss our balance sheet, debt financing and liquidity, and then I'll discuss the trends and moving pieces that 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. In general, our year-to-date earnings in portfolio performance are consistent with or above our expectations and as we noted in our press release, we've increased our full-year 2009 earnings guidance. FFO for the second quarter was $0.30. The primary positive earnings driver was the buyback of our convertible debt. We purchased $38.5 million of our notes for $32.8 million and recognized a gain of $3.9 million, or $0.10 a share. Partially offsetting this gain were three items, which totaled $3.1 million, or $0.08 per share. These were: One, during the quarter we recorded a $1.7 million reserve against a mezzanine loan; two, we recorded a reserve of $2.4 million against Fund III's preacquisition costs for the George Washington Bridge project, of which the REIT shares is 20%, or $500,000; and then three, we also reserved against the accounts receivable balances totaling $900,000 for two existing tenants at our Third Avenue property located in the Bronx, and we're in the process of recapturing these spaces and redeveloping this property. And Ken will discuss both the George Washington Bridge project, as well as our core redevelopment projects later in this call.

Looking at our core portfolio metrics, the core is performing in-line with expectations. Second quarter occupancy of 94.2% represents a 20-basis point decline from first quarter of 94.4% and it's a 110-point basis drop from year-end 2008, which was 95.5%. Looking forward to the balance of the year we anticipate another 100-basis point drop in short-term occupancy and this is the result of the reanchoring of our Absecon, New Jersey property, which Ken will discuss on the call, as well. So, this will put us at a cumulative 210-basis point decline for the year and this is consistent with our previous occupancy guidance range of minus 100 to minus 300-basis points for all of 2009.

Same-store net operating income for the quarter was essentially flat at minus 23-basis points and year-to-date NOI was down 2.5%. Half of this decline, or 1.2%, was the result of the Circuit City bankruptcy. The anticipated loss of rents at Absecon, as I just mentioned, in the second half of 2009 will represent an additional short-term 80-basis point decline in same-store NOI so that this combined 3.5% decline in NOI is consistent with our previous guidance range of between -2% and -5% for the entire year. Current portfolio occupancy and same-store NOI do not include the Ledgewood Mall and the Third Avenue properties, which we mentioned in the press release, as these are now under redevelopment. And all historical comparative periods have been adjusted, as well, which provides for an apples-to-apples comparison. As we also reported, new and renewal leasing spreads were down 10.8% this quarter. This represents 11 tenants comprising 58,000 square feet and specifically one tenant at our Naperville, Illinois, property, which expanded from 7,000 to 10,000 square feet but it was at a 40% reduction in rent. So that excluding this one tenant, spreads would have been plus 2.3% on a cash basis and plus 8.5% on a GAAP basis.

Now, I'd like to turn to our mezzanine portfolio and provide an overview of this portfolio, and in our supplement on page 23, we provide additional details as it relates to the loan portfolio. As of June 30th, principle and accrued interest totaled $125 million. Of this, 75%, or $94 million, represents two investments, which we made in 2008, collateralized by a portfolio in Georgetown, Washington, D.C. and a development at 72nd Street in New York City. 15% of the overall balance represents three first mortgage notes totaling $18 million and then the last 10%, or $13 million, represents four mezzanine loans. Excluding the 72nd Street loan, for which the collateral is under construction, the average yield on the remaining portfolio is 12.5% of which half of this is paid currently and the other half is accrued.

Briefly, to review Georgetown and 72nd Street, as you recall, Georgetown is a $48 million senior preferred equity investment and a portfolio of 23 properties located primarily in Georgetown, Washington, D.C. It's a solid portfolio in an extremely high [vary-to-entry] location with high-quality national tenants and the vast majority of the senior debt does not mature until 2016. 72nd Street is the second mezzanine investment, also made last year. It's a $34 million loan, collateralized by a mixed-use retail and residential development at 72nd Street and Broadway on the upper west side of Manhattan. To date, the construction is on schedule with completion slated for the middle of next year. And as previously discussed, the developer has signed leases with Trader Joe's and Bank of America for the retail component of the property, and the core and shell construction of the rental units is now complete. At this project, the underlying mortgage matures July 2011 and it has one additional one-year extension option. And while the D.C. portfolio and 72nd Street assets are assets we would be happy to own in our basis, we believe that that's unlikely to occur.

As I mentioned in my earnings discussion, we recorded a reserve against a mezzanine loan during the second quarter. This relates to our loan that's collateralized by the Hitchcock Plaza, located in South Carolina. During the quarter, the center experienced the loss of one of its anchors and -- in connection with our ongoing evaluation of the entire loan portfolio and as a result of the specific events at Hitchcock, as well as the overall economic environment, we determined it prudent to increase the reserve against this note. Including reserves established over prior quarters, the total reserve is now $2.9 million for this loan. After the receipt of $1.2 million on the loan during the quarter, and this additional $1.7 million increase in the reserve, our net exposure is $1 million. And over the life of this investment with Hitchcock, Acadia has invested a total of $6.4 million in cash and received payment of $5.4 million, such that the realization of the $1 million would return 100% of our cash investment. We're comfortable with the current status with the remaining portfolio. That being said, we continually review the portfolio for any changes in the condition of the collateral and will adjust the carrying value of our loans accordingly.

I'd like to take a few minutes and step back to discuss our investment strategy as it relates to our preferred equity and mezzanine portfolio. Over the years we've made these investments for a variety of reasons. In some instances, to plant seeds for possible future investment, as was the case in Tollway, or to establish relationships with potential future partners, as was the case in Hitchcock. But as I just reviewed, the vast majority of the mezzanine balance today is for loans secured by the Georgetown portfolio and 72nd Street. These were made at a time when almost all other alternative investments were less attractive and in hindsight, would have lost money.

For example, had we bought the Cortlandt Town Center at the same time we made these loans, the purchase price would have been north of $140 million and even if we had financed this acquisition with modest leverage we would have experienced a precipitous decline in value, based on the fact that we bought the property in 2009 for $78 million. So, instead, we've invested $119 million to date in the mezzanine program and even after taking into consideration current reserves, as well as conservative position on the accrued portion of the portfolio, these investments will have been significantly more attractive on an overall basis than core investments made during the same period. And look forward, we intend to repatriate this capital when the loans mature and given the investment opportunities we're currently seeing, we're confident we can reinvest the proceeds at attractive returns.

Lastly, I'd like to turn to 2009 guidance and as we've detailed on page 12 of our supplement, we've increased our full-year 2009 FFO guidance from a previous range of $0.96 to $1.09 to a current range of $1.07 to $1.16. The key positive drivers of this increased guidance are: One, additional year-to-date gains from the purchase of our convertible debt; two, a $2 million decrease in interest expense as a result of the pay down of our lines of credit and the buyback of our convertible bonds; three, the receipt of $1.7 million in the first quarter related to a forfeited sales contract deposit on our Ledgewood Mall; and then also, a $1 million reduction in our annual G&A as a result of cost-cutting measures that we put into place at the beginning of the year. Partially offsetting these positive drivers are the reserves in the current quarter for mezzanine and the George Washington Bridge project totaling $2.2 million and then the -- also the dilutive effect from the issuance of 5.75 million common shares in April of this year.

So, in summary, as it relates to our core portfolio, tenant defaults and business failures have not yet occurred at levels reflected at the low end of our forecast and to date, occupancy and NOI are in-line with expectations. Core earnings are tracking ahead of budget as a result of ongoing lower interest expense, as well as G&A savings. We continue to monitor all of our key components and we'll keep you posted as the balance of the year progresses.

Now I'll turn the call over to Mike.

Thanks, good afternoon. As we previously announced in April we enhanced our balance sheet strength by completing a follow-on offering of the 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 advantage of future opportunities. To date we have paid down borrowings from existing lines of credit in the amount of $43 million and we used $47 million to purchase $57 million of our convertible debt at an 18% discount. When added to prior-year's purchases we have bought back a total of $65 million of convertible debt at a 19% discount. In terms of debt maturities at the core portfolio we have no significant 2009 or 2010 debt maturities. In 2011 the only debt maturing is the remaining $50 million balance of our original $115 million of convertible notes, which can be dealt with utilizing our current cash on hand. Remember that the convertible notes are our only unsecured debt and they're not subject to any covenants.

In considering the maturities beyond 2011, $54 million of our secured credit line borrowings mature in 2012, which includes all extension options. Based on the strength of the properties collateralizing this debt, as evidenced by a debt yield of 24% and debt service coverage of 2.7 times, based on the current NOI of $13.4 million, even in a debt-constrained market, we don't expect to have any problems in refinancing these loans. Beyond 2012 debt maturities are staggered through 2017. So at June 30th, we have a total core liquidity of $130 million, which includes cash of $71 million and line availability of $59 million. It is important to remember that our lines are nonrecourse, revolving term notes with fixed maturities secured by first mortgages. We provide a detailed calculation of our debt yield, which is NOI divided by total debt, as well as other key balance sheet ratios on page 30 in our quarterly supplement.

Debt yield has become a more incre -- an increasingly more important metric utilized by lenders in this environment. At the core our current debt yield is a strong 14% and if we net a total core debt with cash on hand this net yield increases to an even stronger 17%. Including our pro rata share of the opportunity funds, our debt yield is approximately 13%, and on a net debt basis, it increases to 15%. Similarly, all of our other balance sheet metrics remain solid.

Now, looking at the debt balances at the opportunity funds level, we have no net debt exposure at Fund I. With regard to Fund II, 2009 debt maturities are being dealt with as follows. At the Forner project we're currently finalizing an extension of our existing construction loan beyond its 2010 maturity, including options. In July, we extended the loan on Liberty Avenue for one year with an additional one-year extension option. At City Point, where we have a relatively small $8 million exposure, we have given notice to exercise our first six months extension option. We expect that a portion of this loan will be paid down and the balance will be extended. Finally, the Fund II subscription line will be repaid by investors' unfunded capital commitments.

Now, turning to Fund III. Fund III is capitalized with investors' unfunded capital commitments, net of the subscription line balance of approximately $250 million. Currently, total debt at Fund III, excluding the subscription line, aggregates $81 million. While we are currently in discussions with the special servicer to extend the $34 million Storage Post loan, which matured during June of 2009, the entire 2009 maturities can be repaid from either the -- a subscription line draw or investor capital contributions. The remaining $42 million of Fund III debt matures in 2013, including all extension options. In terms of new Fund III financings, we've closed on a $47 million loan to finance our $78 million acquisition of the Cortlandt Town Center, at terms consistent with those discussed on our last call. The loan matures in three years with two one-year options with an interest rate at LIBOR plus 400 basis points for the initial term. The proceeds of this loan will be used to pay down a portion of the current subscription line balance.

In summary, our core portfolio is currently financed with 100% fixed rate debt at an average all-in rate of 5.5%, and including our pro rata share of opportunity fund debt we're 86% fixed rate at a sub 5% all-in rate. And as evidenced by the Cortlandt financing and other recent activity, we have been able to finance at relatively attractive terms. We continue to access the debt markets for loans up to $50 million at spreads of 300 to 400 basis points over LIBOR. which we can hedge at an all-in rate of 6% to 7% as we deem appropriate. Finally, while we've always maintained a strong balance sheet, our recent equity raise has further enhanced our financial condition. 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.

Now I'd like to turn the call back to Ken.

Thanks, Mike. Thank you, Jon. First, I'd like to talk about our portfolio performance. I'd like to discuss our core portfolio performance and the trends at the operating level that continued to emerge in the second quarter. In contrast to the fourth quarter of last year and the first quarter of this year, in the second quarter we entered into what I'd characterize as a less-worse operating environment. And even post the end of the second quarter, what we're seeing in recent increase in tenant activity continues to validate this point of view.

Looking at the relatively stable quarterly same-store NOI and occupancy in the second quarter, both are probably reflective of this less-worse operating environment. Keeping in mind that 85% of our portfolio consists of primarily supermarket-anchored or value and discounter-anchored properties and they're primarily in high vary-to-entry supply constraint markets we'd expect to see some level of stability. That being said, we still need to carefully watch the moving pieces and even if the worst is, in fact, past us we need to be prepared for a bumpy road ahead. In terms of tenant performance, to date, looking at default rates and rent reductions actually executed, they're not as significant as we initially feared in the first quarter. And while we do expect to continue to see the impact of the recession translate, in many instances, into reduced tenant performance and in some instances, reduced rents, the decline may not be as sudden or severe as we had once anticipated, at least for those locations that remain in high demand by tenants.

In terms of bankruptcies at the tenant level, in our portfolio, they're still relatively low. Separate of Circuit City, where we had two locations, our portfolio so far has not been materially impacted by the other major bankruptcies to date and overall, there've not been as many bankruptcies in our industry as we once anticipated. In terms of Circuit City, we had two locations, as I mentioned, the first in Ledgewood, New Jersey, at our Ledgewood Mall, which we're now teeing up for redevelopment -- and I'll talk about that shortly. The second was in Bloomfield Hills, Michigan, which, fortunately, subsequent to the end of the second quarter, we successfully replaced that vacant Circuit City with a new lease with Best Buy and we'll be talking about that in our third quarter call. Looking forward in terms of future bankruptcies there's certainly a possibility, so our goal is to make sure we have a portfolio that will remain as resilient as possible, whether vacancies arise from bankruptcy or the more normal tenant rollovers.

Turning now to the two redevelopments in our core portfolio, first, Ledgewood, New Jersey, it's a well-located property, it's an unclosed 500,000 square foot mall with three anchors that's already dominated by open-air anchors including Wal-Mart, Marshall's, Sports Authority, Barnes & Noble. And as we discussed on previous calls last year, we had entered into an agreement to sell the property, it did not close, so now, we're going to commence the redevelopment ourselves. We'll enter into an agreement to expand the Wal-Mart from about 120,000 square feet to 160,000 square feet. The Circuit City was adjacent to the Wal-Mart so it'll be part of the Wal-Mart expansion. We're vacating in-line space, when appropriate, and then we'll move for an overall demalling of the property to turn it into an open-air center, which we think will be its best and highest use. The exact timing and scope is being finalized so we will update you in subsequent calls.

Second redevelopment is our Third Avenue property in the Bronx. It is a 40,000 square foot building in a key retail corridor in the Bronx. It currently consists of two New York-based tenants. We're in the process of recapturing those spaces, then we're going to do a gut renovation and anchor it by a national tenant that we think is going to be very well suited for that location. Along with these two redevelopments, as Jon mentioned, we have one reanchoring that is likely to impact our performance this year. That's in Absecon, New Jersey. Fortunately, in our core portfolio we only have one dark, but paying anchor and that's Acme Supermarket in Absecon and we anticipate entering into an agreement with them to recapture the space, either some point in the third quarter or the fourth quarter of this year, and in conjunction with that entering simultaneously into the reanchoring of approximately two-thirds of the space. If we do this the long-term impact will be positive. The short-term impact would be -- well, first, we would receive lease termination income but there would also be a short-term loss of NOI and occupancy during the retenanting. This is incorporated into Jon's forecast.

So, in regard to property performance in summary, as it relates to our second quarter core portfolio performance, as well as look forward, we're aggressively working to maintain stability and are going to have to work hard to do it. Whether it's redevelopments, reanchorings or general leasing and collections to maintain stability, we're going to have to do that, but that's the new reality of how we're going to operate going forward. More significantly, we believe that those properties that are well located in supply-constrained markets should hopefully remain more resilient in the long run.

Like to turn now to external growth. An important driver of our growth is our investment fund. The structure of the funds provides us with access to discretionary capital, enabling us to take advantage of opportunities as they emerge without having to be overly dependent on the public markets to capital. As we pointed out in the past, our funds are discretionary and they also come along with access to attractively-priced subscription lines. In general, our investments break into two broad categories. The first is opportunistic and then the second is the value-add side. In terms of existing investments, Fund I, which was our first fund, it's already delivered north of a 30 IRR, approximately a 2X equity multiple, and there should be more profits to follow as we continue to dispose of the balance of the Fund I assets, which includes our Kroger-Safeway investment, half of our Mervyn's investment and a few other redevelopments.

In terms of Fund II, that was characterized by both opportunistic investments, as was the case with our retailer controlled property, or RCP venture, as well as value-add projects, such as our New York urban infill developments. Our RCP venture for Fund II included half of Mervyn's, as well as all of Albertson's. To date, approximately two times our original equity investment in those investments has already been achieved. And in the second quarter the only significant RCP activity was in connection with a relatively-small equity investment we had made in Marsh Supermarkets, where the partnership distributed an amount equal to our total equity investment of $1.6 million, which is obviously an important first step toward making that a profitable investment.

That, in terms of our value-added side, which is our New York urban infill program, we continue to make steady progress toward the stabilization of that portfolio, as we break out in detail on pages 42 and 43 of our supplement. Of the nine Fund II developments the construction of six of them are now complete. A seventh project, Canarsie, Brooklyn, construction has commenced. That leaves two remaining projects and I'll update them shortly. As Mike discussed, we have limited debt issues at the fund level, including these development projects. For those properties that have already been completed, the retail is 84% leased, the office is 71% leased.

During the second quarter the following progress occurred. In Pelham Manor, in the second quarter, B.J.'s Wholesale Club, which is our anchor, opened for business with strong sales. The center is currently 74% pre-leased. Fairways Foods is slated to open later this year on an adjacent center and that should enable the 25% remaining vacant balance to successfully lease up. Second, Canarsie, Brooklyn, in the second quarter we commenced construction on Canarsie Plaza, which is now slated to be a 265,000 square foot project anchored by also a B.J.'s Wholesale Club. B.J.'s will represent approximately 77% of the retail, 67% of the total project. Additionally, we're finalizing a lease with a New York City municipal tenant who is anticipated to occupy 100% of the office space, or an additional 12% of the overall project. Upon execution of this office lease, which we expect to get done shortly, the project will be 80% pre-leased. We expect to have B.J.'s open in the fourth quarter of 2010 with the balance of the tenants to follow.

With respect to the final two projects in Fund II, we continue to focus on pre-leasing, cost control and financing. The key from our perspective is not to start a project that we can't successfully finish, either in terms of the amount of speculative leasing that we're taking on or unrealistic financing needs. So first, downtown Brooklyn City Point, as we previously discussed, we built into our development agreement with Target for the ability for either party to underwin -- unwind that agreement if we were not comfortable beginning the project this year, which we are not, so that was unwound in the second quarter. We like Target as an anchor. We believe that it's very likely at some point in the future that they would be the ideal anchor for that project, but they only represented about half of the retail space and we fortunately did not put ourselves in a position where we had to commence a project with that much speculative lease out. We now anticipate that we'll commence the project in rational-sized phases and we're working through a plan that would have a smaller first phase and then develop the balance in phases over time.

Second project in northern Manhattan on Broadway and Sherman Avenues, we've similarly have been finalizing commercial leases with several city agencies and similar users, but like City Point, we're only going to start it when we're satisfied that we have the appropriate leases in place and the appropriate financing.

I'd like to turn now to Fund III. As you know, it was launched in the middle of 2007 with just over $500 million of equity commitment. We remained substantially on the sidelines through most of 2008, only utilizing about 20% of the fund. Even after including our first quarter acquisition of Cortlandt Town Center it brings our allocation of Fund III equity to approximately 30%, or $150 million. In terms of our existing Fund III investments, first Sheepshead Bay in Brooklyn, it's still in design stage. We have strong tenant interest, due in part to its strategic location, so we hope to continue to move that forward. Similarly in Westport, Connecticut. That redevelopment is also working through a design phase and we've recently received some very positive tenant interest. So, hopefully that will enable us to commence that redevelopment at some point in the not distant future.

As you know, we also made a ten property self-storage investment in Storage Post in Fund III and we continue to make steady progress there. At the end of the second quarter our overall occupancy for those ten properties was up to 76.9% from 70% occupancy at acquisition in the beginning of 2008. In the second quarter the four stabilized properties in that portfolio gained 180 basis points in occupancy from 85% to 86.8%. The six repositioned, or redevelopment projects in that portfolio are beginning their lease up, as well, and the occupancy grew quarter over quarter from 68.3% to 71.2%. So, while we're seeing additional rental concessions in the market and those are somewhat muting short-term revenue growth, we're pleased with these occupancy gains and look forward to stabilizing that portfolio. As you know, in addition to these ten properties we have four additional self-storage projects that we developed in conjunction with our urban infill projects and we have successfully completed the construction on those and we're now beginning their lease-up as well.

In terms of new Fund III investments in 2009, as we announced on our last call at the end of January, we closed on the Cortlandt Town Center. It is a 640,000 square foot property in northern Westchester. The property is the dominant retail shopping center in its market, it's anchored by quality tenants that have strong sales, including Wal-Mart, A&P Supermarkets, Marshall's, Best Buy. The two key of moving pieces in that investment are first, the lease up of the former Linens & Things vacancy, which we're making nice progress with. And then secondly was putting property level financing to replace our line, and Mike discussed that and we successfully got that done. So, with a going-in yield of about 9% and now with the financing in place, but before taking into account the lease up of the vacant Linens & Things, we're now on a run-rate basis, achieving going-in levered in the low to mid teens. And then there'll be future upside potential from the lease up of the vacancy, as well as capital appreciation. So, as we contemplate redeployment of dollars, whether it's from repatriation of mezzanine investments or elsewhere, we see a nice roadmap for the successful reinvestment of capital.

In terms of future investments, while we have about two-thirds of the fund available we didn't elect to close on any new investments in the second quarter. Overall, we feel we're still in the early phase for opportunistic investments, but it is very clear that opportunities are going to be forth coming. Whether they're one-off investments, like Cortlandt, or large pools of assets, we're relatively indifferent. Our size enables even single-asset acquisitions to move our needle in a meaningful way. So, our goal is to remain disciplined and opportunistic. With Fund III equity available until 2012 we have plenty of time to put the money to good use and are confident that our liquidity, coupled with our opportunistic acquisition capabilities and our value-added redevelopment skills, puts us in a good position to capitalize on these opportunities and if a yield does not meet our requirements, then we're going to pass.

That was the case with George Washington Bridge. Given the changing landscape for development, projected returns that would have been very interesting in a less-distressed environment, it may not be that attractive in today's environment. And while we had secured the rights to develop the project we did not close on, or acquire the site and have no ongoing financial commitments to it. We still think it's a fascinating location with real potential, but on previous calls we made it clear, we'll only commence if and when we're ready and if the risk-adjusted returns justifies it. And given the returns that we're seeing elsewhere we feel we were better off putting this on hold. Our partners, PA Associates, are still pursuing the project, but we feel at this point it's more likely than not that we're not going to participate, at least as it's currently structured, unless we took the reserve.

So, today, to conclude, we continue to work through a challenging economic landscape, both in terms of the capital markets and property level fundamentals. While we need to remain prepared for setbacks and in any case, a long road ahead before recovery we do feel strongly that we're well-positioned to respond to the difficulties and more so, to capitalize on them. We're going to continue to focus on maintaining a stable core portfolio. We will make sure that our balance sheet remains solid with sufficient liquidity as we await a more complete thawing of the capital markets. And third, we're going to continue to position our acquisition platform to take advantage of any unique opportunities as they arise.

I'd like to thank our team for their hard work during the quarter and at this point we're happy to take any questions.

(Operator Instructions). Your first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Yes, hi. I'm on the line with Jordan Sadler, as well. Ken, just wanted to follow up on some of your comments on the prepared remarks. I was wondering, it sounds like you still expect to see some distress out there in the coming quarters on the retailer side and you think that you're in the early phase of opportunistic investing but you don't expect to see too much deterioration in your core portfolio's fundamentals, can you just reconcile that a little bit?

Well, I guess one depends on what you consider too much. As you see in our guidance we've suggested negative 2% to 5% so that's pretty significant so far. Jon forecasted another 100-basis point decline. It could be more than that. We've taken all year a pretty conservative point of view, but counterbalancing that is what I pointed out is for the majority of our assets, these are in high vary-to-entry markets, necessity-based, such as supermarkets or discounters. So, we're hoping we're going to see some firming up. So far, the signs are consistent with our guidance.

The distress that I expect to see is not going to be simply distress associated with operating fundamentals. We're going to deal with that reality for awhile, but the distress is coupling that with the significant amount of leverage and ensuing deleveraging that's going to have to occur, especially in the private side of the business, as developers and owners reconcile the new reality of the levels of debt that will be tolerated on assets. And that is going to force many guys to successfully extend -- or now I guess the term is extend and pretend with their lenders. So, it may not be a huge amount of transactions but there's going to be a ton of guys who are unable to simply do that. Those assets will come to market. either in the form of recapitalization, in the form of foreclosures or in the form of just straight-out sales, and we believe they will be sufficient enough. at least for a company of our size, to do one-off transactions. like Cortlandt, as well as our transactions.

Okay. On the operational side, though, is it your sense that the bankruptcy issue is behind us at this point, or do you think it's more of maybe a 2010 story on the retail -- for the retailers?

It's interesting and hard to forecast. On our last call, we discussed the fact that there were fewer bankruptcies, due to the look of dip financing and not because of the strength of the retailer's balance sheets. So, that can always change and you might see an increase in bankruptcies, even as the economy gets better or gets less worse, simply because retailers are in a position where they can successfully get through a shortened and more difficult Chapter 11 process. Retailers are very hesitant to go into bankruptcy if they believe more likely than not it results in a chapter 7 liquidation.

So, I can't predict -- or I'm not going to, how this plays out. Past history shows that the bankruptcies of national retailers may or may not correlate with when the recessions hit and when the recoveries hit. We just need to be prepared for it. But if we go back to a more standard Chapter 11 type of bankruptcy process, as opposed to the Circuit City's where it quickly went to 7, then you're going to start analyzing which stores have strong enough rent-to-sale ratios that they're part of the survivor pool. And our focus has always been, and it'll be continue to be, make sure we own the properties that are survivors or, as we did back in the late '90s, 2000, if we have strong locations we're more than happy to get back the Caldor's that we turned into Wal-Marts or the Grand Unions that we then turned into Stop & Shops. So, we need to stay flexible as to when it hit. I'm not going to predict how it plays out. We just need to make sure we're prepared.

Okay, and then one more question. Regarding your mezzanine investment portfolio, you had the write-down on Hitchcock but the balance of your loans, are they all performing or are there any others that are on your watch list or of a concern to you?

They're all performing, correct, Jon?

They're all performing, yes.

And every single property in our mezzanine portfolio and outside of our mezzanine portfolio today better be on our team's watch list. Not, meaning that they're in trouble, but we're watching every asset, every investment closely so that if there's a change in circumstance, we can address it.

Okay. Thank you.

Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.

Hello, guys. Good afternoon. When you look at RCP, Ken, what's left in there and who exactly is managing that and how is the progress on what are probably a bunch of vacant boxes at this point?

Yes, and fortunately, Rich, it isn't a bunch of vacant boxes, but the two major investments, which are the vast majority, are the Mervyn's/REALCO portfolio, which, at this point -- and we went through it in the last call and I don't have the data specifically in front of us, but it's probably only about a third of what was originally the Mervyn's portfolio, and of that about half has already been released to other tenants. That is being operated/managed by our partnership with (inaudible) and fortunately, there's very little debt at the REALCO level. It's really just associated -- there's no debt at the REALCO level and it's just associated with a couple of add-on investments we made there. So, our goal with the Mervyn's would be to lease up the balance of the boxes, which are primarily on the West Coast, strong locations, and then those will continue to be liquidated.

The second big one -- big investment is Albertson's operated by similar consortium to the Mervyn's. That has been very successful to date. Those are not vacant boxes. Those are primarily operating supermarkets. We've already gone 2X on that investment with the expectation that more will follow from that. That is going to be less about the releasing of vacant boxes to other tenants and more about maximizing the value of those supermarket portfolio.

Okay. So, the count roughly,you may not want to give an exact count but when you think about how many Mervyn's and how many Albertson's are in there, how many boxes are we talking roughly?

Jon, do we have the number of vacant Mervyn's?

For Mervyn's, it's approximately three million square feet.

Right.

And that's the total, Jon, or is that just --?

That's the total for Mervyn's --

Okay.

-- of which probably 0.5 million square feet to 0.75 million square feet are distribution centers and then the rest are boxes. And an average Mervyn's box is --

100 plus.

Say 100 plus, so that's the math.

Okay. All right, good. Albertson's is smaller, I thought, no?

Yes. I don't have the specific number of stores here. We will get that and see that it is posted --

All right, great, thanks. And then as you think about the whole concept of distressed retailers as opposed to retail real estate would you guys -- or have you seen any opportunities out there to think in terms of more RCP-type adventures?

Yes. Adventure's an interesting term. It's been such a successful investment, that phase that we did, that chapter, that we did it with no regrets but with the realization that a few things are different. First of all, that was during a time when there was a fair amount of LBO debt available for those type of transactions. That helped facilitate those large consortium and club deals. There is clearly still going to be distressed retailers out there. Our focus with the distress retailers will be those that own or have ownership-like real estate characteristics that we can make a meaningful investment into. So, simply, just being a distressed retailer isn't going to cut it in terms of us participating in it and it's unlikely that you'll see the same lar -- or at least us participate in these same large LBO-like transactions. But there are, separate of that, a host of circumstances that we're currently looking at that could be really interesting and more so now than ever, retailers who have real estate that they want to monetize are going to need value-added partners to do the heavy lifting because back in the days of Mervyn's it was pretty easy -- I'm not saying it was easy work, but there was a long list of tenants for almost every single one of our Mervyn's boxes. Now, going forward, it's going to be a lot more heavy lifting and we're going to need to be a lot more thoughtful because there's fewer tenants to fill those gaps.

Right. I got you. Okay, thank you. And then I was -- and I don't see the page here, I had it. But I seem to recall that you have a good number of anchor expirations in Fund I in 2011, I think it is. Are you looking forward to those -- I know you're not looking forward to them -- and are you guys doing -- are you preplanning what you're going to do to address those?

Rich, Fund I, the bulk of banker expirations are Kroger Safeway and those we're dealing with over the next couple of years. We just sold a half-dozen locations in the first quarter and we'll continue to monetize those over the next year or two. So we are dealing with those currently.

Do you have to get the renewal or the new tenant, Jon, before you sell those?

Yes. Most of those have options. Most of those either have renewed or are in the process of renewing..

And the sales have been back to Kroger and Safeway.

Right.

And that's the most likely eventuality as we liquidate. This has been a very successful investment, Rich, in some most cases. This was originally structured back in the '80s as a sale leaseback from Kroger and Safeway and we'd expect to see a fair amount of repatriation as part of that.

Okay, great. Good.Thank you, thanks, Ken. Then, the last thing, do you guys have any thoughts -- and this may sound a little crazy, but do you have any thoughts on TALF and just general thoughts and maybe what it means to you guys, if anything?

Yes. What it means to us is probably less relevant than what it means to the industry. Fortunately for the deals of our size and for a company of our size, we are able -- and Mike walked through -- to identify loans at what at least currently look like more attractive rates and terms than what TALF is providing. So, we probably don't need to utilize it. TALF is going to ideally help jump-start larger loans and that's going to be essential for the financing industry to get back on its feet. So we are big proponents of seeing the program get launched. We understand it may be, at least initially, a bit expensive. But in order for our industry's liquidity to get back on its feet, that's going to have to happen and as a utilizer/borrower of it, we probably wouldn't be, at least in the early stages until the rates compress. Participants that helped facilitating it, investment, et cetera, may be but that's still a little bit early.

Okay, great. Thank you, guys.

Thanks, Rich.

your next question is from the line of Craig Schmidt with Banc of America-Merrill Lynch. Please proceed.

Good afternoon.

Good afternoon.

While acknowledging that we're still in the midst of a tough retailing market I'm wondering if in the last six months whether the New York urban investment opportunities look more inviting, or they still look more challenging?

Well, again, two pieces to that, as you've correctly identified. One is the fundamentals, which are going to continue to be challenging I think throughout the country. What we're seeing when we talk to our tenants is the realization that they can now get into locations that they were, previously in New York, otherwise outbid for or just outmaneuvered for. So we're very pleasantly surprised by the resilience and the level of interest of national and international tenants to come in, albeit the rents are not going to be at 2007, 2008 levels. From an investment perspective, though, still a little early but we think that there could be some real meaningful opportunities and we're certainly looking at a host of them. Because, again, it has to do as much with the amount of leverage that was put on these investments and the need to recapitalize as it does to the fundamentals.

Thank you.

Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Hi. Jon, in your comments at the beginning heard the comment you thought you were unlikely to own the 72nd Street real estate, did you make the same comment about Georgetown, as well, or was that just about Broadway and 72nd?

That's in regards to both of them.

That was both. Okay.

Yes, yes.

And with respect to City Point, you talked about phasing it now. Was that phasing the retail, or the retail and the residential and would the first phase be -- would you suspect something with a larger anchor, like a target? Can you walk us through how this thing may evolve?

Yes. The first phase would probably be smaller and not include a larger anchor and not include a significant amount of the residential. I think the goal overall is to bring those phases online as the market demand and the financing, et cetera, is available. So, the first would be bite size because that can be leased, that can be financed and create less pressure. And then as the markets solidify that would be the appropriate time to bring in -- bring back in a Target or the several other tenants that are very interested on the anchor side that would be the right time, hopefully vis-a-vis, the economy for the smaller tenants to complete it, as well as the ignore significant portion of the residential.

Okay. Okay, great. That's it. Thanks.

Thank you.

Your next question comes from the line of Quentin Velleley with Citi. Please proceed.

Good afternoon, everyone. I'm here with Michael Bilerman and Manny Coachman. Just wondering if we can go back to the notes receivables section on page 23 where you outline your earlier investments, except for the first mortgages, and also the other mezz notes. Can you just remind us exactly what the assets are behind those lines?

In the other mezzanine notes?

Yes. All the earlier investments, you've got the first mortgage notes, $15.9 mil of principle, and also the other mezz notes, which is now $11.7 mil.

We can provide further detail. I'm not -- right now, I don't think we have it handy so I don't want to misquote any of those.

Okay, we can follow up afterwards.

Yes.

And the other question relates to this segment of the business, as well. I know you said you wanted to repatriate forward capital over time and look for other opportunities with that capital. Given the effective yield on these assets is so high, how do you think about repatriating the capital once you get back into other investments? Are you going to be looking for high-yielding investments to try to reduce some of the FFO dilution that you'll get from them?

Yes. And I thought I touched on that a little bit as it related to Cortlandt and that investment there. We are total return focused and we are very much not focused specifically on short-term FFO yield or dilution, but if you look at Cortlandt alone right now on a run rate basis on the debt that we just put in place, our yield is already in the low to mid teens before the lease up and so that counterbalance is pretty closely to what our mezzanine yield is. So if we continued that then I don't think that there should be any significant dilution. If there's short-term dilution, so be it, but I'm fairly confident that the new investment opportunities that we're going to see in this environment should provide returns. Whether they're current -- and more likely I think they will be current, but whether current or total returns I think that they should, in fact, be accretive. Equity capital is so scarce and it will get the returns that it deserves over the next five years, so we would welcome getting that money back as soon as we can. We're also, as Jon pointed out though, capitalized and prepared to be patient, so if we have to be patient, that's fine, too. But I don't lose a lot of sleep worried about if our borrowers repay us early how we put that money to work. That would be a nice high-class problem that we look forward to.

Hey, guys, it's Manny here. Just a question turning to your guidance. It seems like even with the new guidance range in place that the run rate for the final two quarters is -- seems kind of low compared to the $0.71 you already had in the first half. Are there any one-time items that you guys are thinking about in there, or is it just a matter of that occupancy drop you already spoke about?

In terms of the balance of the year, there's no other one-time items factors into the guidance.

I think it is just the retenanting that Jon talked about and I talked about.

Yes.

Absecon, New Jersey

Okay. And then with Third Avenue, what was driving the timing to start on a new redevelopment in this sort of environment? Is that tenant driven or is it just something you guys have wanted to do for awhile.

It's a combination of tenant driven, having the right tenant at the right time, and being in a position where we now think we can get back the space.

Okay, thanks, guys.

Thank you.

your next question comes from the line of Phil Wilhelm with O'Connor. Please proceed.

Hi, in aggregate, what is the fixed coverage and average loan-to-value of your loan portfolio?

Fixed coverage is 3X. And I'm sorry, what was the second part of the question?

The second part of the question was what is the -- I'm sure you calculate this in real time. What's the loan-to-value do you believe?

Tell me what cap rate we should use in determining value and I'll tell what you the LTV is.

That's why we've shifted in (inaudible) to the debt yield. In general, a 13% yield is -- takes you to the 60%. We're at the 15% yield, which takes you down to --

50% to 55%.

Yes, and below.

And do you -- would you be able to articulate your -- if you have one, your impairment methodology, if, indeed, you needed to take impairments at some point?

In terms of the notes receivable?

Yes, just in terms of the notes receivable.

What we do is we look at the underlying collateral, we look at any senior debt and then to the extent that there's not sufficient value in terms of our own evaluation to cover our note then we record an impairment charge.

And that value would be based on a growth asset value calculation that you would use or some other metric?

It's based on a gross asset by calculation that we do.

Okay. Well then, you should be -- if you have that number you should be able then to answer my question about loan-to-value if you are calculating values?

Yes, and it depends again. We're pro -- for purposes of impairment we are probably using today's rates spot cap rates and that probably takes us into the 40s today, is that right?

Probably, yes. Yes.

Okay, that's very helpful. One last question. Do you have any buy/sell provisions with your private equity partners that -- you're extraordinarily well capitalized but perhaps there are some private equity partners running into trouble, is there any risk that they will be forced to sell?

It's really two different issues. The partners -- the limited partners and investors all have binding obligations and there's not a buy/sell where they could say we are selling our interest, you have to buy it. There could always be situations where is a partner comes and says we either want to approach the secondary market or we would like you to consider but there's no forced buy/sell mechanism, if that answers your question.

Yes, it does. Thank you.

Sure.

ladies and gentlemen, this brings us to the conclusion of our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Great. Thank you all for your time. I'm sure you're all jumping on to the next call. We look forward to speaking to you again shortly.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

Thank you.