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Winthrop Realty Trust (NYSE:FUR)

Q3 2013 Earnings Call

November 07, 2013 12:00 pm ET

Executives

Beverly Bergman

Carolyn Tiffany - President, Trustee and Member of Ethics & Compliance Committee

John Andrew Garilli - Chief Financial Officer, Member of Ethics Committee, and Member of Compliance Committee

Michael L. Ashner - Chairman and Chief Executive Officer

Analysts

Mitchell B. Germain - JMP Securities LLC, Research Division

Charles Fischer

Brett Reiss

Operator

Greetings and welcome to the Winthrop Realty Trust Third Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Beverly Bergman, Vice President for Winthrop Realty Trust. Thank you, Ms. Bergman, please go ahead.

Beverly Bergman

Thank you, Brenda. Good afternoon, everyone. Welcome to the Winthrop Realty Trust conference call to discuss our third quarter 2013 financial results. With us today from senior management are Michael Ashner, Chairman and Chief Executive Officer; Carolyn Tiffany, President; John Garilli, Chief Financial Officer; and other members of the management team.

This morning, November 7, we issued a press release and posted on our website supplemental financial information, both of which will be furnished on a Form 8-K with the SEC. Both the press release and the supplemental financial information are available on our website at www.winthropreit.com. The press release is in the News and Events section and the supplemental financial information is in the Investor Relations section.

Additionally, we are hosting a live webcast of today's call which you can also access from the website's News and Events section. At this time, management would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in any forward-looking statements, including NAV analysis, are based on reasonable assumptions, we can give no assurance that these expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in the press release and from time to time in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Please note that in the press release, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. This can be found in the FFO table of the press release. Please note that all per share amounts are on a diluted basis. I'd now like to turn the call over to Carolyn Tiffany. Carolyn?

Carolyn Tiffany

Thank you, Beverly. Thank you all for joining us this afternoon. As we reported in our press release this morning, FFO for the third quarter was $0.51 per common share as compared to FFO of $0.14 per common share reported last quarter. In addition, fully diluted earnings for the third quarter were $0.27 per common share as compared to $0.17 per common share reported last quarter. In a few moments, John will discuss the components of this quarter's FFO and earnings, but I think this quarter-over-quarter comparison certainly highlights the dynamic nature of our investing strategy and its effects on our quarterly financial results.

During the first part of the year, we waited patiently to invest despite being overweighted to cash. As we discussed on our last call, acquisition activity during the first half of the year had lessened considerably from prior year. The interest rate volatility in the second quarter, however, created several opportunities for the company.

In the second quarter, we observed deals unraveling due to the inability of purchasers to obtain financing on projected terms. Our patience was paid off and we were well-situated to take advantage of broken deals. Michael will discuss further the $61.4 million of operating properties and loan asset acquisitions made in the third quarter, as well as the additional $225 million invested since the end of the quarter.

In addition to our cash reserves and financing proceeds, these acquisitions were funded using approximately $30 million from the public issuance of additional common shares as well as $24.4 million in returns of capital from our equity investments and proceeds from the sale of properties and loan repayments. Keeping in mind the parameters of REIT regulations with regard to asset dispositions, we continue to review our stabilized assets to determine those that are eligible for timely and profitable divestiture.

During 2013, we sold Andover, Massachusetts; Deer Valley, Arizona; Seabrook, Texas; and Denton, Texas properties. We currently have under contract, subject to diligence and/or lender approval, our Meriden, Connecticut, property and our Lisle, Illinois, property located at 701 Arboretum. We are also preparing to market for sale in 2014 certain other qualified properties in the portfolio.

Loan repayments this quarter included Metrotech from which we received over $13 million, and approximately $5.9 million was received from Concord as the result of the repayment of the Thanksgiving Tower and One Riverwalk loans. We received partial repayments of $5.6 million on our Queensridge loan from the sale of additional Queensridge condominium units. Last quarter, we fully satisfied the debt collateralizing the Queensridge loan with KeyBank. Subsequent to the end of the quarter, we received repayment of $6.3 million towards our preferred equity investment in the venture that holds the office building in Sorrento Mesa, California, leaving us with $200,000 preferred equity and a 50% equity interest in the property. We continue to report our realized returns on an asset-by-asset basis which you can find in our quarterly supplemental report and have a pooled, weighted internal rate of return equal to 31% for the investments made and liquidated since January 1, 2008.

Turning to continuing property operations, occupancy at our consolidated properties was relatively stable at approximately 88.6% as of September 30, 2013, compared to 89.6% at December 31, 2012. Overall, operating income from both consolidated and nonconsolidated properties and from both our same-store properties and new store properties increased during 2013. The full impact of the improvement is not reflected in continuing operations as certain of our improved properties were sold and are classified as discontinued operations.

On November 1, our 10-year lease renewal for the entire building with Ingram Micro at our Amherst, New York, property commenced. During the quarter, we repaid the $15 million mortgage on that property, which was scheduled to mature on October. We received cash distributions from our joint venture investment in the Vintage Housing portfolio of $1.7 million during the quarter and the properties continued to maintain a consistent average occupancy of 97%. Concerning our Sealy venture properties, as anticipated, the Nashville, Tennessee, property was given back to its lender. The property was both overleveraged and in default on its mortgage. We had carried that investment on our balance sheet at 0 and as a result, there is no gain or loss from its disposition. The 2 Sealy venture properties located in Atlanta, Northwest Business Park and Newmarket, released 74% and 57% [ph] at September 30 respectively, as compared to 70% and 50% respectively at December 31, 2012. The Newmarket investment is also carried on our balance sheet at 0 and the property's mortgage remains in Special Servicing.

Occupancy at our 4 Marc Realty properties in which we hold an equity interest remained relatively stable and was 79% at September 30, 2013, as compared to 78% at December 31, 2012. To date, execution of the business plan for 701 Seventh Ave. in Times Square is progressing better than we had originally underwritten. And as a result, we have elected to participate in the proposed approximately 450-room hotel addition. We are excited with our investment in 701 Seventh Ave, and we have increased our commitment from $68 million up to $120 million.

Similarly, our investment in One South State Street in Chicago is performing better than expectations. In September, we bought from our partner its 50% ownership in the mezzanine loan, giving us 100% ownership of that loan. And in October, the $110.6 million first mortgage loan was refinanced with a new $113 million first mortgage, reducing the interest rate on the loan from 11% down to 4%, as well as eliminating the cash trap.

Turning to our loan portfolio, all of our loans are performing in accordance with their term. We have been advised that the new office property located in Playa Vista, California, which collateralizes our loans is being marketed for sale and we expect that loan will be repaid together with an additional amount on account of our equity participation. The value of the collateral appears to be substantially in excess of our loan. We hold a 49% interest in Concord CDO which has resumed distributions to us. We expect to receive distributions of cash flow from the CDO of approximately $1 million during the fourth quarter.

We continue to wind down our securities portfolio and at September 30, had 1,365,000 shares of Cedar Realty Trust, down from 2 million shares at June 30.

And lastly, our reported estimated range of net asset value per common share for the quarter ended September 30, 2013, was $12.98 to $14.29. Though the net asset value per common share has declined due to the additional shares issued in connection with the September public offering of common shares, the offering provided us with sufficient capital to execute new investments. We believe that the near-term dilution will be offset through the long-term value accretion when this capital is fully deployed. The NAV information, including the methodology used to calculate the range of value, is included in Pages 7 through 11 of the supplemental financial report. And now, I'll turn the call over to John Garilli. John?

John Andrew Garilli

Thank you, Carolyn. Good afternoon, everyone. I'll provide an overview of Winthrop's financial results, as well as a review of our business segments. For the quarter ended September 30, 2013, we reported net income of $8.8 million or $0.27 per common share compared with net income of $12.3 million or $0.37 per common share for the quarter ended September 30, 2012. Funds from operations, or FFO, for the third quarter of 2013 was $17.1 million or $0.51 per common share, compared with FFO of $19.3 million or $0.58 per common share for the third quarter of 2012.

For the 9 months ended September 30, 2013, we reported net income of $25.3 million or $0.76 per common share compared with net income of $20.2 million or $0.61 per common share for the quarter ended September 30, 2012. FFO for the 9-month period in 2013 was $37.5 million or $1.13 per common share compared with FFO of $41.5 million or $1.25 per common share for the same period in 2012. During the 9-month period in 2013, we had $10.9 million in gains on sale of real estate which are excluded from the FFO calculation.

As Carolyn mentioned, we have disposed of certain assets in 2013. During the quarter ended September 30, 2013, we sold our Denton, Texas, and Seabrook, Texas, properties and recognized a $1.4 million gain on sale of assets in the quarter. Additionally, we have entered into a contract to sell our 701 Arboretum property and recognized a $2.75 million impairment charge on this property in the current quarter. Both the gain on sale and the impairment are included in income from discontinued operations. While the impact of these items is reflected in our overall net income, they do not impact our FFO.

In addition, we had significant uninvested cash reserves of $165.8 million at September 30, 2013, which do not contribute any revenue until such time as those cash reserves can be invested. Operating results by business segment for the quarter ended September 30, 2013, were as follows: with respect to our operating properties business segment, operating income was approximately $12.7 million for the 3 months ended September 30, 2013, compared with operating income of approximately $8.6 million for the 3 months ended September 30, 2012; operating income from our consolidated operating properties increased by $400,000, while operating income from our equity investment operating properties increased by $3.6 million during this period.

With respect to our consolidated operating properties, operating income from our same-store properties was $6.8 million for the 3 months ended September 30, 2013, down approximately $900,000 from the comparable period last year, primarily due to a decrease in revenue of $869,000. Our new stores generated operating income of $1.3 million in the current period.

Revenue from same-store properties decreased to $11.4 million during the 3 months ended September 30, 2013, from $12.2 million during the same period in 2012 due to the amendment to the lease terms at our Houston, Texas, property and a decrease in occupancy at our River City property. Partially offsetting these items was increased average occupancy at our Crossroads I property in Englewood, Colorado, and at our Ontario property located in Chicago, Illinois. Same-store properties operating expenses remained relatively stable during the period at approximately $3.4 million.

Our new store properties, which consist of our office properties in Philadelphia, Pennsylvania, and Cerritos, California, and our residential property in Greensboro, North Carolina, generated revenue of $3.7 million for the quarter. New store operating expenses were $1.9 million for the current period and Real Estate tax expense was approximately $600,000. Net operating income from operating property equity investments was $4.5 million for the 3 months ended September 30, 2013, compared to net income of $900,000 for the 3 months ended September 30, 2012. The increase was due primarily to a $1.1 million increase in operating income from our vintage portfolio, primarily as a result of a decrease in amortization of lease intangibles and a $1 million increase in operating income from our Sullivan Center investment.

Additionally, we recognized operating income of $1.1 million from our 701 Seventh Avenue, Times Square investment, which closed October 16, 2012, and $239,000 in operating income from our WRT-Fenway Wateridge investment which closed December 21, 2012. Winthrop also recognized a $700,000 decrease in operating loss from our Sealy Newmarket investment, primarily as a result of having recognized losses which brought our investment balance to 0 at December 31, 2012, which resulted in the suspension of the recognition of additional losses. Our Loan Assets and Loan Securities business segment reported net operating income of $13.3 million for the 3 months ended September 30, 2013, compared to net operating income of $15.7 million for the 3 months ended September 30, 2012. This decrease in quarter-over-quarter earnings is primarily the result of $10.3 million in earnings recognized in the third quarter of 2012 from our Southern California office portfolio loan, which was fully repaid during 2012.

During the current year quarter, we recognized $2.7 million in earnings from our 10 Metrotech Loan LLC equity investment as a result of the payoff at par of the underlying loan asset, as well as the $6.6 million in earnings from our Concord equity investments, primarily as a result of the payoff of 2 of the underlying loans.

Turning to our REIT Securities Business segment, operating income was $69,000 for the 3 months ended September 30, 2013, compared with operating income of $3.4 million for the 3 months ended September 30, 2012. The decrease in REIT Securities operating income for the comparable periods was primarily due to the fluctuations in the market price of our holdings of Cedar Realty Trust shares. These securities continue to trade at a price well above our initial cost and during the quarter, we sold 635,000 shares for total proceeds of approximately $3.3 million. As of September 30, 2013, our securities holdings had a fair value of $7.1 million and an original cost of $6.3 million. And lastly, at September 30, 2013, we had cash and cash equivalents of $165.8 million compared to a balance of $97.7 million at December 31, 2012. Now, I'll turn the call over to Michael Ashner. Michael?

Michael L. Ashner

Thank you, John. That was very complicated. All right. I want to underscore several points that Carolyn has made. First and foremost, I'm extremely pleased with both FFO and earnings for the quarter and for the year-to-date. From my standpoint, when I look at both our FFO and earnings, I do so on an aggregate basis. Consequently, the 9 months FFO of $1.13 per common share, and 9 months earnings of $0.76 a share per common share, are more meaningful to me than 1 quarter's earnings regardless of how favorable it was. Having said that, I expect that FFO will continue to be strong and somewhat less volatile in the future in view of the deployment of capital into new investments that we made over the past 4 months. On the other hand, we will continue to sell mature assets and earnings will retain a greater level of volatility on a quarter-to-quarter basis than FFO, although I also expect it to trend favorably. As Carolyn indicated, the May, June 100 basis point increase to interest rates' related volatility created investment opportunities for us during the second and third quarters in which our strong cash position permitted us to capitalize. Most significant, of course, is the ST [ph] transaction which recently closed. Initially, we were at first unsuccessful bidders, then we were unsuccessful financiers to the winning bidder, who proved unable to perform under his purchase contract -- [indiscernible] contract but ultimately, we became a successful bidder for 4 of the assets and at our original pricing. Volatility brought us the deal, cash on hand closed the deal. Our investment thesis for ST [ph] Is for the company's downside -- the company's investment downside would be a market-rate, multi-family return on a best-of-class set of assets as against a much higher potential return if it cannot monetize its exit by participating in the condo conversion on one or more of these buildings.

Our Times Square investment also came to us from somewhat of a distressed environment, albeit earlier in the year. The development-related progress made to date to get the higher valuations attributable to its uniqueness, increased our enthusiasm for the investment as demonstrated by our increased investment. We believe that the company's investment will be well rewarded, particularly in view of the proposed 452-room hotel addition. Both this investment and the ST [ph] residential investment are indicative of our desire to make larger investments and higher quality assets. Together with Summit Pointe, our recent preferred equity investment in a new-multi-family project, they all point to a direction to structure new investments with equity-like returns, if not direct equity participation. My personal view is that markets and investors presently view the glass as half full.

Interest rates have once again stabilized at relatively low levels, the Fed continues to avoid tapering, corporate earnings are strong, et cetera, et cetera. We saw that viewpoint expressed in the investment doldrums of February through May. That said, I believe the interconnectedness of global capital markets, the impact of the Fed reserve tapering, as well as any number of other unpredictable factors may change those views abruptly and return the sentiment to a half empty glass as it did in June and July. And once again, the company will be there to pursue investment opportunities. Let's see what happens. And now, let's open the meeting to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Mitch Germain with JMP Securities.

Mitchell B. Germain - JMP Securities LLC, Research Division

Just curious on the apartment transaction. I know that these 4 assets are part of a larger portfolio. I know you mentioned you were first a potential financier. What -- I guess I'm curious what happened to the other assets. Is that a deal that may come back to you, either on the equity or finance side?

Michael L. Ashner

No, they're not going to come back to us. We couldn't meet the bid. What they decided to do is break up the portfolio. And the other assets went for prices that we just thought were higher than we were willing to pay. I believe they have sold 3 of the assets that we liked very much. They're still holding on to the -- and they're going back to market with, the APEX in Los Angeles and I understand they're close to doing a deal on the Las Vegas assets. So we got what we're getting or we get what we've gotten, yes, whatever.

Mitchell B. Germain - JMP Securities LLC, Research Division

And where does the Times Square project stand right now? I know that leases were brought out and there was some preplanning. Has the initial construction commenced yet?

Michael L. Ashner

No. I believe the construction mini-perm loan will close relatively shortly. It's tied up with the payment date on the existing -- to pay off the existing loan, so I don't think it will close before December 9. Once that closes, we will commence tearing down the existing structure and doing the foundation work. So I'm hopeful that it will start before New Year's. We're going to create the biggest mess in Times Square in history. It's going to be a mess there but...

Mitchell B. Germain - JMP Securities LLC, Research Division

Perfect timing for the New Year's.

Michael L. Ashner

Winthrop [ph] did a great job. They got the permits to -- in a timely basis so that we didn't have to defer the demolition work until after New Year's. So that was pretty good of them. They did a good job there.

Mitchell B. Germain - JMP Securities LLC, Research Division

Great. And last question, Michael. I know that you referenced on other calls and in our meetings together, deal sheet that you get. I think it's once a week. And I know that the last time we spoke, you had mentioned obviously a volatile interest rate environment has created an increased number of opportunities. We've seen a bit of a stabilization now. I'm curious if you're still seeing an uptick in deal activity, kind of on a relative basis versus where you were beginning of the year or last year's levels.

Michael L. Ashner

I think it's flattened out a little bit. Once again, the market has accommodated itself to the new 2.6%, 10-year treasury. But look, I mean, the tapering is going to happen, interest rates are going to move again, and while -- and this is my own opinion, the whole world knew that we weren't going to sit at 1.6%, 10-year treasury. And when it happened, the world still reacted very harshly towards that both from a real estate standpoint and from a stock market standpoint. So I anticipate that -- my own view is that when it moves again, the world will react just as aggressively. So I think patience is what's necessary right now.

Operator

And our next question comes from the line of Noah Wollowick with Scopus.

Noah Wollowick

I was curious about the 4 individual assets that you just picked up in terms of if you had specific purchase prices for each of them as well as capitalization rates?

Michael L. Ashner

The blended capitalization rate is around 4.8%, 5%, around there. We do, but it was sort of a negotiated -- it was somewhat negotiated because the government was -- is an owner of ST [ph] and they had certain threshold prices they had to receive for each one. So our internal allocation doesn't quite agree with the contracting allocation. My own view, my sentiment was at time, and money from our standpoint is fungible, that I think we valued San Pedro at $16 million. I think we valued Highgrove at $80 million. I believe we valued Phoenix at $40 million and the balance of the purchase price of $246 million was allocated for our purposes, but not for contract purposes, to Mosaic.

Noah Wollowick

And do you see the ability to increase the 4.8% to 5% going forward?

Michael L. Ashner

I think so. I think that the rate [ph] -- the yield will grow, like any yield would grow on best-in-class, multi-family assets. I think the rents will improve, the expenses will increase initially. The rental increases that we project for next year will be offset somewhat because we're anticipating an increase to real estate taxes because there's now a new price for the real estate tax assessors. So I don't think we'll see a full benefit to increases in NOI before 2015. At that point, we should start to see real increases to NOI. But I think the real key is if you know anything about these assets and their markets, you look at the base that we're in -- we're way under replacement cost. So these are best-in-class. Two of these buildings have valet parking. All 4 have underground parking. We joked internally that -- or I have, that if I lived in Stamford and my wife threw me out, one of us would end up in that building. It's a classy bit [ph]. Such a great building. So all 4 of them are best-in-class buildings.

Noah Wollowick

Sure. And it sounds like at some point in the future, you expect a conversion at a gain.

Michael L. Ashner

Our investment thesis is exactly that. That if we held them as multi-family, we would get a market rate REIT investment return on best-in-class multi-family. If we can convert one or more of them, then our IRRs jump significantly.

Operator

[Operator Instructions] Our next question comes from the line of Charles Fischer with Ellis Partners.

Charles Fischer

My first question is one for housekeeping. Did you guys include the $25.5 million deposit on luxury rental in the NAV analysis? Because it doesn't look like it's included.

Carolyn Tiffany

Yes, it was included. It's -- if you go and look at...

Charles Fischer

I just added the column up and it didn't look like it was included.

Carolyn Tiffany

Let me -- it should be included. Let me get back to you on that.

Michael L. Ashner

I think you had measures up [ph] in cash.

Carolyn Tiffany

I will confirm that, Charlie.

Charles Fischer

Okay. That will be -- because that's $0.71 of NAV and that would be more consistent with what I would have thought, because you issued $30 million worth of stock, approximately it's a $4 discount to NAV which is $12 million. And it doesn't make sense that your NAV would've gone down by over $30 million. It should have gone down by about $12 million, which would have been closer to $15 million and not the $15 million and change from last quarter.

Carolyn Tiffany

It should be included, but I will check it. I know it's on the schedule.

Charles Fischer

Let me ask you if I could. Great job on the refinancing of One South State Street. Can you talk about your strategy over the next couple of years in that property?

Michael L. Ashner

Well, first, the great job is John Alba, deserves the accolades for that. As usual, I just say yes, no. He did the work on that and that was not an easy deal to get done. I believe we're probably going to end up holding that until the tax benefit -- what you call it, the tax credit period end. I think it's 4 years. Because then it's an easier way to sell, it's a cleaner sale than if we try to just sell our interest in it. I mean, if you step back, we get 15% on -- roughly 15% on the Mezzanine position. We'll start getting distribution to the equity. It's not likely that we can find a better place in the near term to put that money and the discount that we would incur because of the structure right now, it doesn't make much sense. But look, if someone wants to buy it. We'll sell it, if the price is right.

Charles Fischer

I'm happy to own it. I just wanted -- just curious if there was -- that was helpful, Michael. Can you talk a little about 450 West 14th? It's a pretty big asset, it's almost $1 a share and we don't hear much about it.

Michael L. Ashner

Well, I mean, there's not much to say. The building is fully leased, the office portion is fully leased, we haven't leased the retail yet. I think the only thing we're thinking about is I want to get my -- the retail portion of it leased. And separately, we're thinking about putting longer-term debt on the property. Our debt comes due to what? 2015, '16. It's the kind of asset that's easy to refinance. We should do it right now while interest rates are still low. So that's how we're thinking about it.

Charles Fischer

If I heard correctly, the run -- you picked up about $1.7 million in cash flow from Vintage this quarter which would give us a run rate of about $6.8 million a year. Is that in the ballpark of how you think about this asset?

Carolyn Tiffany

That's actually a little bit high. The timing of -- it's not a straight line receipt. Generally, we get between $5.6 million and $6 million a year, that's sort of the run rate number there.

Charles Fischer

Okay. And so your NAV value in addition to any residual is about an 8.5% or 9% cash flow yield on the $65 million?

Carolyn Tiffany

That's right.

Charles Fischer

Okay, great. Can you tell us a little bit about your strategy with One East Erie, which is another big asset?

Michael L. Ashner

As soon -- a loan -- that property has a locked out loan, to what -- Jay [ph], what is that? 2015 or something like that? Eight seconds after the loan, we can repay -- we can -- the loan can be paid off, that property will be sold. It's great real estate. It's got retail, it's got fully leased office, it's class A-, it's bite-size, it's got parking. The moment we can get out of the -- what year?

John Andrew Garilli

September [ph] of '15.

Michael L. Ashner

'15? So I would be shocked if we owned it in October of '15.

Charles Fischer

Michael, does your $28 million value kind reflect the current value or sort of what it's worth after the refinance?

Michael L. Ashner

Of what?

Charles Fischer

[indiscernible] sale. You have a $28 million in net value, $48 million value on the asset minus the debt. The debt value...

Michael L. Ashner

I mean, [indiscernible] what we think it's worth. I mean, it's what we think it's currently worth based on cap rates or actually it was for probably -- I would probably say we're on the conservative side based on recent trading activity in Chicago for comparable real estate.

Charles Fischer

Anything you want 1816 [ph] Market in Philadelphia?

Michael L. Ashner

Well, we signed some new leases. So occupancy is now starting to improve. It's working out as expected. I mean, we have a -- we are a Class A- provider with great location. I mean, we're right on top of the subway station, we're across from City Hall, we have good floor plates and we have the ability to provide space less expensively than our competitors. And I suspect that we will be -- unless something happens to disrupt the leasing market in Philadelphia, I think we should be at 90% by the end of 2014 or heads will roll. I mean, there you are.

Charles Fischer

This is a minor housekeeping. On the England property, I was trying to reconcile the NAV from the second quarter to the third quarter. It looks like your assumptions are the same in your NAV analysis but your NAV actually went up by about $5 million on that asset.

Carolyn Tiffany

Yes, what that relates to is last quarter, we knew that we had $5 million to spend on the lease commencement between TIs and leasing commissions that was either spent or is included in accrued expenses at the end of September. So that's what that relates to.

Charles Fischer

So there was $5 million in TI LCs [ph] kind of stuff?

Carolyn Tiffany

Exactly. TIs and LC [ph] which hadn't been included at the end of the second quarter but had been by the end of the third.

Charles Fischer

Great. Can you just talk for a second about the REIT rules regarding dispositions? Is it 5 assets a year that you can do?

Carolyn Tiffany

It's 7 sales. If you sell them to the same purchaser, that's considered 1 and it is on both loan assets and property assets and it's also if we sell a piece of a venture. So it's pretty broad, but it's 7 sales as sort of the safe harbor. Once you go beyond the 7 years -- I mean, the 7 sales, then it becomes a test of you can't sell more than 10% of your tax basis as of the beginning of the year. So, we went over the 7 sales this year so we're limited, so we're now at that 10% test.

Charles Fischer

So Carolyn, when you sell 16% of the luxury residential portfolio at New Valley, is that 1 of the 7 or not?

Carolyn Tiffany

That actually counts towards the sale -- it would count towards the sale but we structured it -- we put a portion of the acquisition into the TRS [ph] so that if we wanted to sell a piece of the venture after closing, we could do so without any tax implications.

Charles Fischer

Good. If I could just ask 1 or 2 more questions real quick. As part of the analysis on the luxury residential portfolio, I know the preference is to go condo. If we go residential, when you ran your analysis, could you share with us maybe what your terminal cap rates were?

John Andrew Garilli

About 5% [indiscernible].

Charles Fischer

That's fair. And the last question is more of a philosophical one. I know a lot of us were disappointed about the dilutive secondary offering. Did the offering, or the shareholder response change your views on the secondary, what you might do in the future, another secondary?

Michael L. Ashner

Carolyn, do you want to start with that because I know you want to temper my views on that. So I'll follow your lead.

Carolyn Tiffany

We've said before that at a point in time when we need to issue capital, we would look at all of the options available to us at that time and make our decision based on the options available. And that's what we did this time. And we were reluctant, we kept it small and believe it was the best decision to make for the long-term value of shareholders. So I guess I would say that we are always reluctant to issue shares that are below what we believe the NAV to be. But our analysis is really what -- if we issue those shares, will we be able to mitigate that dilution long term? So I guess we're not running...

Michael L. Ashner

I would add that factually, all of our traditional sources of capital to avoid selling common stock, for one reason or another, were foreclosed to us. The preferred equity, the senior secured preferred equity markets were either closed or we just were -- or were restricted. Our line of credit, because of the ST [ph] transaction at that point, was closed to us. I don't like, generally, selling any position in something that we are acquiring until after we've acquired it. You always come out worse if you do so. Blah, blah, blah. There just was no other way to source capital so that we could stay in the game through year end. And the sourcing of this capital was sort of a 2-for-1 because it reopened the line of credit. Every dollar that we sold for common stock, we could open our line of credit for $1. So it was the -- without making apologies, because I agree with Carolyn wholeheartedly that we believed ultimately that we would invest it accretively, that nevertheless, it was the best solution to a difficult problem.

Charles Fischer

One more, if I could sneak in. On 701, you envisioned some sort of press release -- if you're going to break ground soon on...

Michael L. Ashner

Yes, there'll be the whole -- in the words of my father, there'll be the whole megillah. I mean, everything [indiscernible] ground breaking, I'm told and every kind of thing in the world, and yes, there will be all of those things.

Charles Fischer

And Michael, have you guys found your retail partner yet or that's to come?

Michael L. Ashner

Our retail partner or retail tenant?

Charles Fischer

Sorry, tenant. I'm sorry.

Michael L. Ashner

No. We won't start really full court press in leasing until we break ground because to some extent, the tenant will dictate the design of that building. We expect it to be a world-class tenant who is going -- as a tenant that wants that building, wants it not simply -- or probably not at all based on the sales volume they'll get but because of the presence in Times Square and the publicity they can get from having a store there. So I believe, to a large extent, the tenant will drive interior design of the space, so it's sort of a little bit of a chicken and an egg.

Charles Fischer

So do you need the retail lease in place before you break ground or you can break ground for the hotel and you leave the base in kind of...

Michael L. Ashner

No, we do not.

Operator

[Operator Instructions] And our next question comes from the line of Brett Reiss with Janney Montgomery Scott.

Brett Reiss

The new mayor with some of this populist rhetoric, I assume since you're going full speed ahead on Times Square, you've determined that, that's not something to be concerned about, or is it something you think about?

Michael L. Ashner

Do I think about that? I think that the new mayor will embrace the project. I think -- I know that he's aware of the project. It certainly is a job generator for New York City. It doesn't impair or impact negatively any of the issues he's concerned about. So we look forward to the mayor favorably supporting the project. But only time will tell. I'm not a politician. I have no crystal ball.

Operator

And it seems we have no further questions at this time. I'd like to turn the call back over to Mr. Ashner for closing comments.

Michael L. Ashner

Well, again, we appreciate you joining us today for today's call which had a record number of questions and we appreciate that. If you would like to receive additional information about us, please contact Beverly Bergman at our offices or you can find additional information about us on our website. Carolyn and I will be attending the NAREIT Conference in San Francisco on November 13 and 14. We look forward to seeing some of you there. If anyone would like to meet with us, who is not presently scheduled to do so, we'll be out there. Please contact the ever gracious, Beverly Bergman. With that, we thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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