Rithm Property Trust Inc (RPT) 2007 Q3 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and welcome to the third quarter 2007 Ramco-Gershenson Properties Trust earnings conference call.

  • Your host for today's call is Dawn Hendershot, Director of Investor Relations.

  • My name is Phil, and I am your conference coordinator today.

  • Throughout the conference call all participants will be in a listen only mode with a Q&A session following the presentation.

  • (OPERATOR INSTRUCTIONS).

  • I would now like to hand the program to your host for today's call, Director of Investor Relations, Dawn Hendershot.

  • Please go ahead, ma'am.

  • Dawn Hendershot - Director, IR

  • Good morning.

  • Thank you for joining us for Ramco-Gershenson Properties Trust third-quarter conference call.

  • I am hopeful that everyone received our press release and supplemental financial package, which are available on our website at RGPT.com.

  • At this time management would like me to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

  • Although Ramco-Gershenson believes the expectations reflected in any forward-looking statements are based on reasonable assumption, it can give no assurance that its expectations will be obtained.

  • Factors and risks that could cause actual results to differ from expectations are detailed in the press release and from time to time in the Company's filings with the SEC.

  • Additionally, we want to let everyone know that the information and statements made during the call are made as of the date of this call.

  • Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made.

  • Also, the contents of the call are the property of the Company, and any replay or transmission of the call may be done only with the consent of Ramco-Gershenson Properties Trust.

  • I would now like to introduce Dennis Gershenson, President and Chief Executive Officer and Richard Smith, Chief Financial Officer, who will be making prepared remarks this morning, as well as Thomas Litzler, Executive Vice President of Development who is available to answer questions.

  • At this time I would like to turn the call over to Dennis for his opening remarks.

  • Dennis Gershenson - Chairman, President, CEO

  • Thank you, Dawn.

  • Good morning and welcome.

  • At a time when the direction of the REIT market is influx and subprime issues, gas prices, as well as the perceived mood of consumers creates angst in the hearts and minds of investors on a macroeconomic level, and with our sector you're experiencing uncertainty in cap rates and wider debt spreads than those available just a few months ago, then add our own additional burden of the marketplaces view of Michigan and the number of assets we have located in the state, I thought it would be important to let you know where we stand relative to our prospects for growth over the near-term.

  • The economic changes and conditions I've just described create uncertainty and hesitation for some and opportunity for others.

  • Thus, today we find ourselves purchasing a growing number of opportunistic acquisitions, pursuing more value add redevelopments than ever before.

  • And as we approach 100% occupancy at our River City Marketplace, we have undertaken the municipal entitlement phase for four new development projects.

  • In the last quarter we purchased the Old Orchard Shopping Center in West Bloomfield, Michigan, completing our $450 million ING venture.

  • At the same time, we are approaching the halfway mark in our $450 million Heitman joint venture.

  • The latest purchases, as well as those planned for the balance of this year, are primarily core plus and opportunistic in character.

  • Each acquisition, including those not yet closed, has already generated interest from either existing anchor tenants who have expressed a desire to expand their premises, or from new mid-box retailers who have signed letters of intent to become part of our plans to reinvigorate or expand these shopping center acquisitions.

  • Each of these shopping centers is located in densely populated, high-income infill locations in metro markets.

  • Wherever cap rates settled for the shopping center sector as a whole, our financial projections for these new center purchases, including a conservative terminal sales price, showing midteens internal rate of return, thus producing superior returns for our partners and excellent returns on our invested capital.

  • A concrete example of the tenant interest we are generating in these newest acquisitions can be seen in the progress we've made with three of the centers purchased just in the last 12 months.

  • They are included in our seven current value add redevelopments underway in Georgia, Michigan and Florida.

  • Further, we will be increasing the number of value add redevelopments, the majority of which are in wholly-owned core properties where we are actively negotiating leases with anchor and mid-box retailers who will complement and expand the draw of our centers.

  • At least seven of these to-be-announced redevelopments are at properties that are currently over 90% occupied, requiring us to relocate or terminate a number of existing smaller tenants.

  • As a result, in the short-term these changes will put a drag on our net operating income as we commence these projects over the next 15 months.

  • However, the benefit of extended terms for existing credit anchors and the addition of new national credit draws to our centers will significantly improve net asset value and our bottom line.

  • With seven active redevelopments and 14 planned, we will be improving and adding considerable value to over 20% of our portfolio during the next 24 to 30 months.

  • On the development front all four of our planned construction projects have been highlighted, which have been highlighted in our press release, are located on infill sites at expressway interchanges.

  • At each center we have already identified at least two anchor tenants.

  • We are presently negotiating understandings with these retailers and are today announcing an agreement with Meijer for a 200,000 square foot superstore at our Hartland Towne Square development in Heartland, Michigan.

  • Our practice has always been and will continue to be the pre leasing of those anchor tenants who are critical to the success of the development before construction is commenced.

  • The prospects we are pursuing in acquisitions, asset management and development are not being undertaken in a vacuum without regard to the conditions we find in the marketplace.

  • We are certainly more cautious as we analyze these opportunities.

  • However, ours has always been a long-term view like many of the national retailers who plan their store numbers well into the future.

  • Although we cannot be cavalier about market dips, we have been at this business long enough to know that these times, too, will pass.

  • And we must position ourselves for tomorrow as we deal with today's issues.

  • A good example of our cautious optimism can be seen in the recent changes in the debt market.

  • Although loan spreads rocketed from less than 100 basis points over treasuries, approximately 120 days ago to well over 200 basis points, we have seen these numbers come down over the last several weeks.

  • An expression of that change is evident in the fact that we have just locked a rate on a loan last week for a new acquisition in the Midwest at less than 6%.

  • Therefore, with core plus and opportunistic acquisitions that should produce midteens internal rates of return and development projects that show unlevered 10% returns on cost, as well as the significant number of value add redevelopments in our core portfolio that have historically delivered approximately a 12% return on new dollars invested, we are comfortable with our plans in all three of these profit centers.

  • Our external growth and redevelopment plans are complemented by the continuation of strong rental and same center statistics in our core portfolio.

  • Lease renewals for the quarter were a healthy 11.6% ahead of prior rental rates.

  • And the nine-month number, although dragged some by anchor renewals, was still a healthy 9.6%.

  • We continue to achieve significant growth in rental rates for new leases signed, both for the quarter and nine months at 48 and 59%, respectively.

  • Excluding new anchor lease rates, which are significantly higher than those for existing older major tenant agreements, nonanchor rental rates were still up over 19% for the quarter, and 27% for the nine months.

  • Over the last several quarters I have provided a breakdown of our Michigan leasing statistics compared to rental rates achieved in Florida.

  • This quarter in Michigan our renewal rental rates grew by 9% while in Florida they increased by 12%.

  • For the nine-month period Michigan's numbers grew 8.6%, and Florida's renewal rate was up by 10%.

  • Both numbers showed healthy increases.

  • For new leases signed Michigan produced an increase over portfolio averages of 22.6% for the quarter and 24% for the nine months.

  • During the same periods Florida achieved new lease rental rate increases of just 1% for the quarter, but 26% for the nine-month period.

  • Again, both sets of numbers for lease renewals and new leases signed show that our shopping centers are desirable places to do business and that tenants are willing to pay for the opportunity to be part of our center success story.

  • Our same center net operating income, especially for the nine months at 4.4% shows continued strength in our operating results.

  • And please note our continued high operating expense recovery ratio which compares favorably to all of our peers.

  • Our occupancy rate presently stands at 93.7%.

  • However, if you just add those anchors and mid-box retailers who have signed leases and whose premises are presently under construction but not yet open, the number rises to 94.5%.

  • So with a company that has outlined both a healthy growth plan and an ability to produce solid core portfolio statistics, why are we not standing at the front of the line with our peers?

  • I believe there are several reasons we are not attracting the attention we deserve.

  • First, the constant drumming Michigan receives in the press makes for potential investors as they search out opportunities to often conclude that they don't need to burden themselves trying to understand the Michigan story.

  • In answer, I would merely like to add to the statistics I have quoted on past calls the following.

  • With Nordstrom's opening two new stores in Macomb and Oakland Counties, as well as their existing Somerset location they will have three stores in the market.

  • In the entire United States there are only 11 other markets wherein Nordstrom's is represented by three units.

  • Also, 12 new retailers are entering Michigan for the first time, validating the fact that this state boasts above average household incomes with a relatively low cost of living.

  • Michigan is also home to 24% of the world's fresh water supply, a fact that cannot be lost on businesses that are presently suffering under drought conditions in the Southeast.

  • The density of the population base within five miles of our Michigan centers, the affluence in these markets and the number of value add redevelopments that have already taken place, plus those underway and are planned primarily in our centers that are almost 100% leased, tells the real story of our Michigan assets.

  • We are here to acquaint you with the facts and show you our centers.

  • Please do not hesitate to call.

  • The other concern I believe impacts our multiple and thus our stock price, is the market's interest in understanding our capital plan.

  • Over the last several quarters I have talked about an additional joint venture, which through the contribution of a number of our assets, will generate sufficient sums to execute our 2008 business plan.

  • Over the same period I've received numerous calls from our investors who want the Company to retain the benefits of our new development projects and the upside results from our value added redevelopments.

  • Because a prospective institutional partner is interested in the same opportunities which would produce oversized returns for the Company, these two goals are in conflict.

  • Whereas my objective had originally been to create an entity that would have satisfied a twelve-month plan, I now feel that we need to focus on a longer-term objective.

  • We have made provisions to contribute a stable, high-quality asset to an existing joint venture at an aggressive price, which will ensure the capital we need in the short run.

  • Although I am sure you will press for more information, we plan to outline for our capital generating -- we plan to outline our capital generating ideas at the earliest possible date.

  • As a public company we have the advantage of numerous capital options.

  • One option we do not plan to exercise is the issuance of common stock at our current price.

  • I beg your patience as we finalize our plans and prepare appropriate financial information that will detail the effects of the new capital funding.

  • We have an outstanding portfolio of assets with significant upside potential.

  • Our ability to source acquisitions and developments provides excellent external growth opportunities.

  • We are focused on securing the most intelligent source of capital possible in order to continue our growth plans.

  • I am actively working with our Board and seeking input from a number of investment advisers in order to determine which is the most intelligent course to pursue to satisfy our capital needs while maximizing shareholder value.

  • I would now like to turn this call over to Rich Smith, our CFO, who will deal with our financial details.

  • Richard Smith - CFO

  • Thank you, Dennis, and good morning everyone.

  • For the third quarter our delivered FFO per share was $0.66, which met First Call estimates.

  • This represented a 4.8% increase from the $0.63 reported in 2006.

  • On a gross basis our delivered FFO increased $623,000.

  • We went from $13.5 million in 2006 to $14.1 million in 2007.

  • Some significant changes quarter to quarter included a decrease in interest expense, an increase in other income, a decrease in other operating expense.

  • These contributions were offset by decreases in minimum rents and gains on sale of real estate, as well as an increase in G&A.

  • Our interest expense decreased $1,880,000 over the same period last year, $1,313,000 of the decrease was due to reduce borrowings at a lower average interest rate, along with a $489,000 increase in capitalized interest on development and redevelopment projects, and a $169,000 decrease in debt service amortization costs.

  • These decreases were offset by a $78,000 reduction in previously favorable amortization of fair market value of debt taken off balance sheet.

  • Our other income increased $737,000 from the same quarter last year, primarily due to additional lease termination fees.

  • The $493,000 decrease in our other operating expenses for the quarter was mostly the result of an increase in our allowance for doubtful accounts in 2006.

  • Our minimum rents for the three months decreased $1,226,000.

  • They were negatively impacted $2.9 million by contributing assets to joint ventures, $420,000 by assets taken off line for redevelopment.

  • These charges were offset by contributions from acquisitions of $1.8 million and from core assets of $290,000.

  • The gain on sale of undepreciated assets decreased $269,000 in 2007 compared to 2006.

  • In 2006 the gain was $1,179,000 compared to $910,000 in 2007.

  • And lastly, for the quarter the $715,000 increase in G&A expense was primarily the result of quarter to quarter increases in legal, audit and tax fees, as well as increase in salaries and fringe benefits.

  • For the nine months ended September 30, our delivered FFO per share increased 2.1% or $0.04.

  • We went from $1.88 in 2006 to $1.92 in 2007.

  • On a gross basis our delivered FFO increased $688,000.

  • We went from $40.6 million in 2006 to $41.3 million in 2007.

  • Some significant changes for the nine months ended consisted of a decrease in interest expense, an increase in our recovery margin, an increase in our fee income, an increase in our other income and a decrease in our other operating expenses.

  • The contributions were offset by decreases in minimum rent, contributions from unconsolidated entities, as well as decreases in the gain on sale of real estate.

  • Our interest expense decreased $1,677,000 over the same period last year, $1,430,000 of the decrease was due to reduced borrowings at a lower average interest rate, and $668,000 increase in capitalized interest on developed and redevelopment projects.

  • The decreases were offset by $184,000 increase in loan amortization costs, and a $237,000 reduction in previously favorable amortization at fair market value of debt, which was taken off balance sheet.

  • For the nine months ended we recovered 98.2% of our operating expenses compared to 96.5% recovered last year.

  • This resulted in a $500,000 improvement in our recovery margin.

  • Our fee income increased $1.1 million, which was made up of a $1,577,000 increase in acquisition fees, a $523,000 increase in management fees, which were offset by a $1 million decrease in development fees.

  • Our other income increased $533,000, primarily from interest and miscellaneous income.

  • And as discussed before, the decrease in our other operating expense was the result of an increase made to our allowance for doubtful accounts in 2006.

  • Our minimum rent for the nine months decreased $2,243,000.

  • For the nine months ended the minimum rents were negatively impacted $6.2 million by contributing assets to joint ventures and $1.2 million for taking assets off line for redevelopment.

  • These charges were offset by contributions from acquisitions of $3.6 million and from core assets of $1.6 million.

  • Our earnings from unconsolidated entities decreased $550,000.

  • The decrease was for the most part the result of bringing River City Marketplace online this year.

  • After we add back depreciation expense, earnings from joint ventures contributed a positive $513,000 to our change in FFO.

  • And lastly for the nine months our gain on sale of undepreciated assets decreased $1.4 million in 2007 compared to 2006.

  • In 2006 the gain was approximately $2.9 million compared to $1.5 million in 2007.

  • At quarter end our debt was $676.4 million with an average rate of 6.1% and an average term remaining of about 4.3 yrs.

  • 82.4% of our debt was fixed at an average rate of 5.9% and only 17.6% of our debt was floating with an average rate of 6.9%.

  • And availability at quarter end under our credit facilities was almost $70 million.

  • Our EBITDA interest coverage for the quarter was 2.3 times, up from the 2.1 times reported last year, and our fixed charge coverage ratios is 1.9 times up from the 1.6 times reported last year.

  • For the quarter our debt to market cap was 49.4%.

  • We've announced in November we will redeem our 9.5% series B preferred shares at a cost of approximately $25 million.

  • This should have a positive impact on our fixed charge coverage.

  • For the quarter our capital expenditures totaled $31.9 million, $13.8 million was spent on development.

  • $9.8 million on acquisitions, $7.3 million on expansion and renovation projects, $564,000 on non recoverable CapEx and $393,000 on recoverable [cam].

  • For the nine months our capital expenditures totaled $93.7 million.

  • We spent $43.9 million on development projects, $26.6 million on acquisitions, $19.9 million on expansion renovation projects, $1.7 million on recoverable [cam] and $1.6 million on non recoverable CapEx.

  • As Dennis mentioned, we are currently exploring a number of options to fund our growth.

  • The most obvious and controllable way to fund is through the continued sale of assets.

  • If we no longer wish to remain in the market, we will sell the assets outright.

  • If we want to remain in the market, we will contribute them to new or an existing joint venture.

  • Our joint venture program is not only raised significant capital, but it has allowed us to invest when considering recurring fees at development type returns.

  • This program has also allowed us to remain active in selected markets.

  • Our long-term goal is do the majority of our development on balance sheet, capturing all the upside for our shareholders.

  • In the near-term, however, balancing our debt levels, FFO growth and risk tolerance we will do a portion of our development on balance sheet and a portion off.

  • This approach will [limit] our capital requirements and generate fee income during the development process.

  • As in the past, other sources of capital will include retaining cash from operations by refinancing assets which have been expanded or renovated in prior periods, by raising capital when accretive and drawing on our credit facilities.

  • And lastly, we maintain our FFO per-share guidance of between $2.61 and $2.69 cents per share.

  • Phil, we would like to open the call for questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) Philip Martin.

  • Philip Martin - Analyst

  • Good morning, everybody.

  • A couple of things to start off with here.

  • First of all, Rich, on your credit facility I know that that's expandable by an additional 100 -- by $100 million to $250 million?

  • Richard Smith - CFO

  • $100 million is correct.

  • Philip Martin - Analyst

  • Okay.

  • If you wanted to today, are you able to do that, or are you in breach of any covenants with the bank, etc.?

  • Richard Smith - CFO

  • I think we could do that today or pretty close to do that today.

  • We could clearly exercise the expansion feature.

  • We would have to have a number of unencumbered assets to be able to draw the facility.

  • But I think we are pretty close to that.

  • Philip Martin - Analyst

  • Okay.

  • Now in terms of asset sales over the next 12 months, I know it is difficult to estimate that, but what could the range of assets sale be?

  • Dennis Gershenson - Chairman, President, CEO

  • Well, Philip, that obviously will be part of the overall capital program.

  • What I am desirous of achieving is really a significant enough transaction that we will write the balance sheet and have more than enough dry powder in order to continue the type of program that we've outlined in acquisitions and development.

  • And obviously working with our core assets.

  • So I think you are probably talking somewhere between 100 and $200 million easily as far as asset sales are concerned.

  • And again, along the line of Rich's comments, if they are in markets where we have a small presence and really not interested in increasing that presence, then we may sell those assets outright.

  • But obviously our preference because we can achieve the same types of cap rates would be to sell them into joint ventures where we not only retain an interest in the existing cash flow and in the upside, but generate fees, as well.

  • And we have found at least in the past, that by doing that the sale/contribution was relatively neutral.

  • Philip Martin - Analyst

  • Okay.

  • Now if we take the midpoint of that 100 to $200 million in asset sales, just estimating after debt is paid on those assets, cash to you, and I am figuring just an outright sale here rather than a sale to a joint venture just to make the math easier, would that equate to about 80, 75 to $100 million of cash?

  • Richard Smith - CFO

  • I would say the assets we are looking at are probably look at loan to value is somewhere around 50%, maybe a little bit less, but easily call it 50%.

  • So if you raised $200 million in sales basically you will pay down debt so don't lose track of that from your debt to market cap.

  • The debt goes down, but you also get free and clear cash of $100 million.

  • Philip Martin - Analyst

  • About 100 million, okay.

  • Dennis Gershenson - Chairman, President, CEO

  • And understand, too, that if you look at our assets many of the assets are truly unencumbered.

  • So a sale, indeed on many of those assets could be 100% cash.

  • Philip Martin - Analyst

  • Exactly, okay.

  • So now in terms of guidance, I mean guidance is still pretty wide obviously in the fourth quarter, $0.69 to $0.77.

  • Is that primarily related to the potential volatility with fee income and the credit markets?

  • Richard Smith - CFO

  • I think it is fee -- Philip, I think it is also Cathy is working very hard on acquisitions, so the fee income as it pertains to acquisitions.

  • But it is a difficult market still in acquisitions.

  • So trying to get our business plan done I think that we would be in good shape but I think there is still risk associated with that, even though like I said Cathy has a number of assets she is looking at, some under contract.

  • Dennis Gershenson - Chairman, President, CEO

  • Let me and, too, that we had planned at least one additional sale out lot sale in Jacksonville in the third quarter.

  • And just based on entitlement requirements, that one as well as a number of others, will occur in the fourth quarter.

  • So there are still a number of onetime events, partly based on acquisitions, partly based upon sales of out lots that impact exactly where the FFO falls.

  • Philip Martin - Analyst

  • Are the investment transactions, whether they are part of JV's or on your own balance sheet, are they occurring a little -- is it better-than-expected?

  • I know the tighter credit markets increased lending standards, etc., has the potential to certainly slow down the process and slow investment volumes.

  • Is it better-than-expected in the fourth quarter than you thought or about as expected?

  • Can you give us some feel there?

  • Dennis Gershenson - Chairman, President, CEO

  • On the acquisition side, I can tell you that even though we are winning in more cases than we are not, assets are still highly competed for.

  • We don't hear from the broker the exact number of people who are actually out there trying to acquire the centers that we are, but we do know that we are being pushed very hard relative to prices.

  • But again, we are producing based upon our expectations and our analysis, the midteens type of returns.

  • So the initial cap rates are nowhere near as problematic as they might be.

  • So I'd say that we are a little more conservative in our approach to things.

  • But I am not sure there have been dramatic shifts in any of the activities that we are pursuing or in the people who we are competing with.

  • Philip Martin - Analyst

  • Is it fair to say then that the competition is still there but versus a year ago you are winning a higher percentage of the transactions you are bidding on?

  • Dennis Gershenson - Chairman, President, CEO

  • I would like to think that the vast majority -- we spent a lot of time culling through those opportunities, and typically when we go after something we really don't lose all that often.

  • And especially once we moved out of the area where you are really competing with the institutional buyer for core.

  • We have been able to be successful more times than not.

  • Philip Martin - Analyst

  • Okay, and my last question is, Dennis, you mentioned righting the balance sheet.

  • Can you define that for us, what you mean by righting the balance sheet?

  • Dennis Gershenson - Chairman, President, CEO

  • I can claim I am a relative lay men in financial terms.

  • What I really mean is that when you look at our debt to market cap, certainly being, although many of our brethren have increased their debt ratios, I certainly want to be in a position where as, and we've seen a few of the reports that have come out already concerning us and at least one of them has a banner headline which says that based upon debt levels and lack of capital will that constrain ramp those growth prospects.

  • We certainly want to be in a position where those questions would not be asked.

  • Optimally I would like to say we could be have our debt in the low 40s, in the high 30s with plenty of ability to execute a plan that I think based on our history and what we have on our plate, can demonstrate that we've got the team in place.

  • And if we have the capital, there is no end to the growth that we can undertake.

  • Philip Martin - Analyst

  • Okay.

  • Fair enough.

  • Thank you very much.

  • Operator

  • [Jeff Dansay, Kotler Capital Management]

  • Jeff Dansay - Analyst

  • Looking at your debt maturity schedule and I see a $40 million piece come in due maturing in December of this year.

  • And (inaudible) portfolios.

  • Just wondering what you guys were going to do for that and how any conversations have gone in terms of refinancing or just what your plans are.

  • Richard Smith - CFO

  • I think that there is really two in once.

  • There is the Morgan Stanley debt comes due, it is roughly about $40 million.

  • I think that will take a couple of those assets, put financing on those and that should cover that $40 million.

  • We are in the process of doing that as we speak.

  • The other is really the line debt, and the line debt is expandable and extendable, so it goes [co-term risk] with our term loans with the same bank group.

  • And that is like 2010.

  • So we can extend that, which we plan on doing.

  • Jeff Dansay - Analyst

  • Okay, so out of that seven property portfolio, maybe five or four, five, something would be all free and clear?

  • Richard Smith - CFO

  • Yes, I think there are two very good assets albeit in smaller markets; two assets in that pool are brand-new super Wal-Marts, brand-new leases.

  • So I think we could finance that out.

  • Another option would be maybe sell some of those assets or put a bridge on it and sell them after the fact.

  • So the $40 million I think is, doesn't bother me that much, to be honest with you.

  • Jeff Dansay - Analyst

  • Okay, and how about just the interest rates that you guys are in discussions for on those.

  • Richard Smith - CFO

  • You know, the interest rate, on that if we do a bridge are probably my guess is -- probably our bankers are on here, probably about 150 over would be my guess.

  • And Dan if you are on here, 130 would be better.

  • If we put permanent debt on that thing with the Wal-Mart credit I have got to believe that we are around 6% on that, as well.

  • We just did a deal at 595, a lock rate on that.

  • Jeff Dansay - Analyst

  • Okay, all right.

  • Great.

  • Thank you.

  • Operator

  • Richard Moore, RBC Capital Markets.

  • Richard Moore - Analyst

  • Thank you for the color, Rich, on what happened this quarter versus year-over-year; I thought that was great.

  • But I am a little bit curious as I look -- I'm a little perplexed, I guess.

  • I am looking this quarter versus Q2 '07 at a couple of things.

  • And it strikes me, number one, that base rents were down about $0.02 quarter to quarter, second quarter to third quarter, yet all of the operating metrics seemed to good.

  • Occupancy, lease spreads, etc.

  • Could you guys shed some light on that?

  • Richard Smith - CFO

  • Yes, I think that the decrease in base rents had to do with if you think of an asset sale.

  • We contributed some assets into joint ventures.

  • So you lost rents there, minimum rents.

  • I didn't really look at quarter to quarter but just logically that would make sense to me.

  • Richard Moore - Analyst

  • So I guess these occurred late, second quarter, or these contributions?

  • Or early this quarter, the contributions in joint ventures?

  • Richard Smith - CFO

  • Again, if they were made last I think you would get full quarter effect this quarter over the previous quarter.

  • Right?

  • Richard Moore - Analyst

  • Okay, now is any of this taking properties off-line, or they are taking tenants down for redevelopment?

  • Richard Smith - CFO

  • Yes, I think I mentioned that in the call on the quarter to quarter and nine months to nine months, (multiple speakers) magnitude of those dollars.

  • Richard Moore - Analyst

  • And that seems to be accelerating.

  • Is that true?

  • Richard Smith - CFO

  • I think as you would expect, as we are redeveloping more assets you're going to take more of that off-line.

  • Again, I think Dennis talked about last quarter Aquia is going to be not an insignificant asset to take off-line.

  • Richard Moore - Analyst

  • Is that also impacting the interest expense?

  • As I look at the balance sheet from second quarter to third quarter --

  • Richard Smith - CFO

  • I think you will see an acceleration of capitalized interest.

  • Bringing River City -- again, River City is not done at this point in time -- substantially complete but there is still some development activities going on there.

  • So the redevelopment activities, the development activities that we have going on and bringing River City online I think increased the capitalized interest there, as well.

  • Richard Moore - Analyst

  • Okay, but again this is falling from 2Q to 3Q.

  • Is there -- how much more Rich --

  • Richard Smith - CFO

  • When we think of River City again you've got full quarter effect this year or this quarter from Q2 to Q3.

  • And I think, again, our development activities I think that will keep ramping up unless we take some of those off-balance sheet and redevelopments that will keep ramping up, as well.

  • Richard Moore - Analyst

  • So of the three new redevelopments that you guys announced, are those ones that you are taking substantial amounts of tenants off-line?

  • Richard Smith - CFO

  • Redevelopments?

  • Richard Moore - Analyst

  • Redevelopments, I'm sorry.

  • Richard Smith - CFO

  • Yes, the redevelopments, like I said, there is generally when you do the redevelopment there is an anchor involved.

  • I think the big redevelopment like I said is Aquia.

  • Dennis Gershenson - Chairman, President, CEO

  • And I couldn't say, Philip, I'm sorry Rich, without looking at the numbers.

  • But when we bought the Old Orchard Shopping Center in West Bloomfield we terminated a lease, albeit it was off-balance sheet we terminated the lease with A&P.

  • I think probably the biggest numbers you're going to see relative to this reduction in rental rates is probably Aquia.

  • As we demolish more of that shopping center because ultimately we are knocking down over 200,000 square feet in order to make way for the new development.

  • The flip side of that obviously is we will bring some income back online with the new office building in the first quarter of 2008.

  • But there is a balancing act there between bringing income online from the redevelopments that are being completed and the new ones that we are commencing.

  • Richard Moore - Analyst

  • Thank you, Dennis.

  • That's good.

  • I appreciate that.

  • As you look forward, though, is there more of this to come, or how much more I guess should we anticipate in terms of lost rent from things you anticipate in the short run taking off-line for redevelopment?

  • Dennis Gershenson - Chairman, President, CEO

  • Just based upon the number of redevelopments we've talked about, as well as the Aquia project, it will not be insignificant.

  • But what we want to do during the fourth quarter and it all, again, blends in with our capital plan is it is important for us to truly give you a picture in this fourth quarter of what we'll look like in 2008.

  • Richard Smith - CFO

  • If you look at Aquia, just to give a little more color, if you look at Aquia as being from our perspective it is a redevelopment.

  • But just based on the sheer size of it, it can be considered a development; when we talk on the road we [talk] as a development, big project for us.

  • I think we've talked about taking some on balance sheet, some off balance sheet just based on size of this project and our balance sheet.

  • That may be one that is likely; so if you lose income from that and again hypothetically if you take it off-balance sheet and put it into a joint venture you're going to raise capital in doing so because you are not going to put it in for free.

  • So you may lose income, but you may reduce interest expense as well if you do that.

  • Richard Moore - Analyst

  • Just out of curiosity, why doesn't occupancy come down when you guys do this?

  • Occupancy trended up nicely for the quarter (multiple speakers)

  • Richard Smith - CFO

  • Basically what we do, Rich, is if we have a space, and again Tel-Twelve is a great example where we had a mall there that toward the end of that mall if someone came to us and wanted to lease the space you wouldn't least it.

  • You would just to take it off the market.

  • Therefore, we take that out of the denominator and take it out of the numerator because it is just not leasable space.

  • Richard Moore - Analyst

  • I got you.

  • Okay, thanks.

  • Richard Smith - CFO

  • So you are doing it with the anchor the same thing holds true.

  • Richard Moore - Analyst

  • And then when you look at the recovery ratio, again looking for the second quarter, it looked light recoverable expenses actually grows from 2Q to 3Q.

  • But tenant recoveries fell.

  • So the operating expense recovery ratio dropped.

  • Richard Smith - CFO

  • I think you maybe look at this a little bit differently than we do.

  • You probably pick up your other operating costs.

  • We pick up and ours just comp with what we can build back which is the common area maintenance, the real estate taxes, electricity and the other recoverable expenses, and that is the ratio of what we can bill back.

  • And actually that ratio increase didn't decrease.

  • Richard Moore - Analyst

  • That's fair enough.

  • I'll take a look at that.

  • Thank you, Rich.

  • And then year end '07 occupancy, how do you guys see that trending?

  • Is that still a positive?

  • And I guess a broader question, there seems to be as I think you guys alluded to, a great deal of talk out there that the world is coming to an end because of all this subprime stuff and the housing market situation.

  • So what do you guys see the retailers telling you at this point, just for your portfolio?

  • Richard Smith - CFO

  • I don't think the world is coming to an end.

  • I don't think we said that.

  • Richard Moore - Analyst

  • No, I didn't think you said it either, but you hear so much out there that there is so much dislocation and potential retailer pullback, consumer spending pullback.

  • What are you guys seeing from retailers?

  • Dennis Gershenson - Chairman, President, CEO

  • Primarily from the national retailers, they are continuing albeit maybe a little more cautiously as far as total stores committed.

  • They continue to commit to our shopping centers.

  • I think where we are seeing some velocity fall-off with the local retailers and the mom-and-pas.

  • And I think you also see that as a trend in the retailers that are having any issues as far as ability to pay rents is the individual store owner.

  • But as I mentioned with our four new developments, at each we are well in negotiations with one or two anchor tenants.

  • As a matter-of-fact at our Jackson Shopping Center I am trying to hold back our small tenant leasing because we are receiving a lot of interest.

  • Until we really have been able to publicly identify our anchors because that will impact our ability to get even higher rents.

  • So as you see with the increased rents we've gotten both for new leases, as well as basically double-digit increases for the tenants who are presently in occupancy and rolling over their leases, at least in our centers we're doing very nicely.

  • Richard Moore - Analyst

  • So positive occupancy trends for year-end '07?

  • Dennis Gershenson - Chairman, President, CEO

  • Yes.

  • Richard Moore - Analyst

  • Okay, and then on the joint venture side, kind of flipping around; what are you hearing I guess you obviously added a couple properties, Dennis, in the quarter.

  • But what are you hearing from your partners on the JV side?

  • Is capital still out there, are they still interested, or are they kind of pulling back?

  • Dennis Gershenson - Chairman, President, CEO

  • No, not only are they still interested, but we have received a number of calls -- we had proceeded with negotiations with at least several companies concerning this 450 to $750 million joint venture.

  • Albeit that both existing partners and potential new partners want the deals that have the higher internal rates of return.

  • We are not really discovering those institutions who are looking for core assets with 6 and 6.5% levered or unlevered returns.

  • So that is what created that conflict between just proceeding ahead and making shorter term decisions, which is a year at a time as opposed to really making a more significant statement that we would not be having these conversations on an annual basis.

  • Richard Moore - Analyst

  • And the cap rates on those kinds of acquisitions, have you seen them rise for the value added properties or are those fairly stable?

  • Dennis Gershenson - Chairman, President, CEO

  • The value added cap rates were somewhat higher than the B+ and A centers.

  • I think that more and more people are moving into this area as "the desirable asset to buy" because lots of people can speculate as to how much value they can add, and therefore can be more aggressive in the cap rates they pay.

  • What we have done, and we are on the cusp of announcing a -- as a matter-of-fact I just signed the papers today to close on an acquisition that we are very excited about in the Midwest -- where we've already talked to one of the anchors who wants to expand, and we are talking about bringing in another retailer et cetera.

  • So you can be a little more aggressive in a cap rate for those as long as you really are confident you've got a value add in place.

  • And so to the extent that that is our forte we are finding cap rates for those really haven't moved very much.

  • Richard Moore - Analyst

  • And the last question I have is I think you guys have done a terrific job cleaning up the balance sheet, so I'm not exactly sure why the huge emphasis on the capital structure.

  • I think you've done a good job of that but I am intrigued by your comments.

  • First, would a preferred possibly be part of what you are thinking?

  • Is that, I realize common equity is not on the agenda but how about a preferred to replace the preferred that you are taking out.

  • Richard Smith - CFO

  • Rich, I think we would certainly look at that.

  • It really depends on pricing at this point.

  • Right now the pricing is a little volatile even in that market.

  • Richard Moore - Analyst

  • Thank you, Rich.

  • And it also sounds a bit like, is there some thought here, Dennis, that you might sell the company or sell part of the company?

  • Is this large thing you are talking about possibly taking that form?

  • Dennis Gershenson - Chairman, President, CEO

  • I don't remember that in my prepared remarks.

  • Richard Moore - Analyst

  • No, no -- (multiple speakers)

  • Dennis Gershenson - Chairman, President, CEO

  • If that was a possibility, I am not sure I would comment on at the moment.

  • We are always looking to maximize shareholder value, Rich.

  • So we've got a great growth plan here.

  • We've got lots of developments on the table.

  • We've got a very good team who can articulate and execute a growth plan.

  • I would tend to think that that probably then would benefit our existing shareholders if we could do that in the public market.

  • Richard Moore - Analyst

  • Very good.

  • Thank you, guys.

  • Operator

  • Nathan Isbee.

  • Nathan Isbee - Analyst

  • I'm here with David, as well.

  • Most of my questions have been answered, but just a few quick ones.

  • Can you just talk about your guidance range, still $0.08 with just about two months left of the year, I understand you do have some moving pieces down at River City.

  • Is it safe to assume that if you hit your land sale gain targets, which have previously been communicated, that you are going to be at the higher end, or are there some other pieces in there that --

  • Richard Smith - CFO

  • Nate, I think there is two real pieces that are still moving and could really put us at either end of the range right now.

  • One is certainly land sales in our River City, and the other is acquisitions and fee generation from acquisitions.

  • As much as you like to think you control both of them, you don't.

  • You don't control the marketplace in either case.

  • You don't control the entitlement process in the land sale piece.

  • Nathan Isbee - Analyst

  • And switching to the acquisition, do you have anything lined up?

  • Richard Smith - CFO

  • We have assets we are working on all the time.

  • As Dennis mentioned, he just signed a contract on one today for one of our ventures.

  • So that's a good thing.

  • But there is still more that needs to get done.

  • Dennis Gershenson - Chairman, President, CEO

  • And again, one of the things even though I can tell you that we are in contract for up to three acquisitions for our joint ventures in the fourth quarter, you are in the due diligence phase.

  • And as a matter-of-fact, the one we will close Thursday of this week really was intended to close in the second quarter.

  • But we saw a few things during due diligence -- I'm sorry, in the third quarter.

  • We saw things in our due diligence that caused us to extend the closing date into this quarter.

  • And so those are the things that we really don't have control over.

  • But when we finally do close on them, we are 100% certain that we bought an asset without any real hair on it.

  • Nathan Isbee - Analyst

  • Okay.

  • So are you still holding it for your 3 to $4 million of land sale gains?

  • Richard Smith - CFO

  • Yes, I think that again, Dennis had talked about one at River City being delayed.

  • I think that we are probably in the three to four but probably in the low end of that range.

  • Nathan Isbee - Analyst

  • Okay, and just one last question.

  • Can you talk about the residential space down at the Stafford project, what the status of that is?

  • Thomas Litzler - EVP, Development, New Business

  • We are talking with a number of multi-family developers that we would partner with or JV with.

  • There is a lot of interest from a variety of developers that want to participate with us.

  • Nathan Isbee - Analyst

  • Okay, so there is still demand even given the current environment?

  • Thomas Litzler - EVP, Development, New Business

  • It would most likely be rental, but there still is demand.

  • This is in a location that is deemed desirable at this point.

  • Nathan Isbee - Analyst

  • Okay, great.

  • Thanks.

  • Operator

  • Christeen Kim, Deutsche Bank.

  • Christeen Kim - Analyst

  • Good morning.

  • It looks like your same-store pool changed a little bit from Q2 to Q3.

  • Does that have any impact on the occupancy gain?

  • Richard Smith - CFO

  • I think our same-store I think in last quarter is a little higher than this quarter.

  • My guess is that it could be termination fees.

  • I don't know if that is in there or not.

  • But let me go back and look at that, Christeen, and I will call you off-line.

  • Christeen Kim - Analyst

  • I mean more in terms of occupancy.

  • Richard Smith - CFO

  • Oh, occupancy.

  • Christeen Kim - Analyst

  • You had a pretty significant ramp up, what looks like a significant ramp up.

  • I am just wondering if you had sold off some lower occupancy assets.

  • Richard Smith - CFO

  • My guess is that we had is we probably had some of the redevelopment plays in the last quarter and we moved them off same center as that ramped up.

  • Christeen Kim - Analyst

  • You know what the sequential occupancy change would have been just at the 49 centers that are in your current same-store pool, then?

  • Richard Smith - CFO

  • I don't, but I will find that out for you.

  • Christeen Kim - Analyst

  • Okay, great.

  • And in terms of the redevelopment ramp, and I'm sorry if you had mentioned this before, but how quickly do you expect that program to ramp?

  • And do you have any scope in terms of what sort of drag that is going to create on earnings?

  • Richard Smith - CFO

  • As far as timing, an Aquia you are probably looking at probably a two-year build out, third year stabilization.

  • The other ones I think from a redevelopment standpoint I think should be quicker probably not three years, but two years.

  • From a drag, I hate to give you a number, because as I talked about it before Aquia being the biggest one depends on if we keep that on balance sheet or off-balance sheet.

  • If we take it off balance sheet we sell it to the off-balance sheet venture, get some reduced interest expense as a result of the capital that is generated from that.

  • So you are not going to see the full effect.

  • Dennis Gershenson - Chairman, President, CEO

  • But Christeen, really in answer to your question we will be developing because it is important to your understanding of FFO and FFO growth, that there are not an insignificant number of redevelopments that will remain on balance sheet that will be impacted as we move tenants around, etc.

  • And we think it is important that we give you color on what exactly is happening.

  • Christeen Kim - Analyst

  • I guess my question really is it sounded like you were going to try to do more projects than what you currently have in your pipeline.

  • I am just trying to assess how quickly that changes.

  • Does that make sense?

  • Dennis Gershenson - Chairman, President, CEO

  • It is an imperfect art.

  • Thomas Litzler - EVP, Development, New Business

  • Dennis articulated it well.

  • It is an art more than it is a science but let's just talk about a few for examples.

  • Dennis is talking about a deal we are going to close on this week.

  • During the period of the due diligence we get enough intelligence from some of the retailers in the center that we know they want to expand.

  • So some of those deals can happen very quickly.

  • The deal that we just bought in West Bloomfield, we happened to know that it was a very desirable location so we are in the process of actually soliciting tenant interest during the due diligence period and right after we buy it.

  • So in some of these we take them off-line for a short period of time, and we get a retailer in there quickly.

  • In some where you need to move a number of tenants around and warehouse some space, it will be off-line longer.

  • Christeen Kim - Analyst

  • Okay, I can follow up with you guys off-line.

  • Thanks.

  • Operator

  • I am showing no more questions, sir.

  • Dennis Gershenson - Chairman, President, CEO

  • Again, thank you everybody for your interest.

  • We look forward to talking with you again either at the end of the next quarter or if you would like to call us directly or come out and spend some time with us, we would encourage you to do so.

  • Thank you for your attention.

  • Operator

  • Thank you, sir, and thank you ladies and gentlemen for your participation in today's call.

  • This concludes the call.

  • You may now disconnect.

  • Thank you.