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Ramco-Gershenson Properties Trust (NYSE:RPT)

Q4 2009 Earnings Call Transcript

February 17, 2010 9:00 am ET

Executives

Dawn Hendershot – Director, IR and Corporate Communications

Dennis Gershenson – President, Trustee and CEO

Jim Smith – Interim CFO

Michael Sullivan – SVP, Asset Management

Analysts

Michael Mueller – J.P. Morgan

Todd Thomas – KeyBanc Capital Markets

Jordan Sadler – KeyBanc Capital Markets

Rich Moore – RBC Capital Markets

David Fick – Stifel Nicolaus

Nate Isbee – Stifel Nicolaus

Operator

Greetings and welcome to the Ramco-Gershenson Properties Trust fourth quarter 2009 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Dawn Hendershot, Director of Investor Relations for Ramco-Gershenson Properties Trust. Thank you. Ms. Hendershot, you may begin.

Dawn Hendershot

Good morning and thank you for joining us for Ramco-Gershenson Properties Trust fourth quarter conference call. I am hopeful that everyone received their 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 assumptions, it can give no assurance that its expectation 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 replays 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 Jim Smith, Interim Chief Financial Officer, both of whom will be presenting prepared remarks this afternoon – or this morning.

Also with us Thomas Litzler, Executive Vice President of Development; Michael Sullivan, Senior Vice President of Asset Management; and Catherine Clark, Senior Vice President of Acquisitions.

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

Dennis Gershenson

Thank you, Dawn. Good morning and welcome. I don't plan to take up your time today giving you my perspective on the distressed state of our economy and its impact on retailing for last year. You've heard this reoccurring theme from my peers and I echo their sentiments. Suffice it to say we are all glad to have 2009 behind us. I will say, however, that even in a very turbulent economy, our portfolio of shopping centers weathered the storm relatively well.

It was in the second half of 2009 that the company reassessed its priorities and committed to refocus our energy to accomplish three goals. First, to significantly strengthen our balance sheet; second, to concentrate on portfolio fundamentals including the completion of our current pipeline of value-add redevelopments; and third, to demonstrate to you through measurable metrics that we will produce a consistent, sustainable level of earnings growth going forward.

To date, we've made progress toward achieving these goals. Although I realize that the actions we've taken over the last six months are just initial steps, it is our plan to bend our efforts in 2010 towards further improvement of all of our metrics. In the third quarter of 2009, we began addressing our balance sheet risk by selling assets and raising equity. In the fourth quarter, we extended our line of credit.

Also during the fourth quarter, we reduced our general and administrative expenses by cutting payroll by approximately $1 million before capitalization to bring our staffing needs in line with our 2010 business plan. We also announced that over the next several years, we will improve our debt-to-EBITDA ratio to between 6 times and 7 times. Our goal for 2010 is to reduce debt-to-EBITDA to a low 7 times number.

In order to move towards this objective, our 2010 business plan includes the sale of a number of assets. The range of our 2010 guidance, which we will discuss on this call, will be somewhat wider than in the past to accommodate the potential dilution that would result from our deleveraging activities.

A critical component of our future success resides in the quality of our shopping center portfolio, our ability to attract and retain credit tenants, and our actions to drive above-average NOI growth through increased occupancy, improved rental rates, and additional, but well-timed value-add redevelopments.

During 2009, in a very challenging leasing environment, we retained over 70% of our expiring leases, which approximate our historical average and was consistent with our goal of keeping our centers leased and occupied in order to promote their long-term health. Rent spreads for lease renewals in 2009 increased by an average of 3.6% for non-anchor tenants. This figure is below our historical average, but still positive.

In 2010, we have set a goal of achieving a retention rate of at least 75% of expiring leases. As for new leases, like our peers, we are seeing a renewed interest by national retailers in opening stores in the best positioned centers. This is not to say, however, that rental rate negotiations have swung back in favor of the landlord. Instead, we expect that tenants will use the current difficult economic climate as leverage for more favorable rental structures.

Occupancy at the end of 2009 stood slightly above 90% and was affected not only by the Linens and Circuit City bankruptcies, but also by smaller retail tenant failures. Although we are experiencing an uptick in new lease signings in the first quarter of this year, we are projecting that our 2010 occupancy rate will approximate our 2009 year-end number.

The significant influencing factor for our 2010 occupancy projections is the departure of Wal-Mart at our Village Lakes center in the Tampa, Florida area as they have moved from a smaller store into their larger format and the bankruptcy of the Old Time Pottery chain, which will cause us to lose their tenancy at our Promenade shopping center in the Atlantic area.

Anticipating these losses, we have identified and begun discussions with two national prospects for the Wal-Mart space and one national fashion discount retailer to fill a portion of the Old Time Pottery premises. It is our plan therefore that in 2010, we will make sufficient progress in opening new stores to add a minimum makeup for this deficiency of approximately 199,000 square feet.

Just a quick word, if I may, concerning the progress we are making on filling our Linens and Circuit City boxes. And you will recall that the bankruptcies of these two retailers created 11 vacancies in our total portfolio including joint ventures. Of the 11 vacancies created by the bankruptcies, two have lease guarantees by CBS and four have leases signed with national credit tenants. We have three locations under active lease negotiations with major mid-box users and we are aggressively marketing the last two spaces.

Although our signed leases and active negotiations are at rental rates which are less than those which were previously been paid, we are leasing these vacancies to major retail draws including TJ Maxx, Best Buy, Ross Dress For Less, and Golfsmith.

At this point, I would like to update you on our value-add redevelopments. At the end of 2009, we had eight projects underway, four on balance sheet and four in joint ventures. I am pleased to report that all of our redevelopments are planned to be completed and should come online during 2010. Ramco-Gershenson's share of the new rentals generated on a full-year basis for 2011 will exceed $3.4 million. This number does not take into account the income we will generate as we lease the smaller vacancies immediately adjacent to our new anchors.

As part of our continuous review of both our core portfolio and future growth opportunities, which includes potential developments, we concluded in December that now is not the time to spend additional energy and financial resources on the Northpointe site in Jackson, Michigan. Thus, we chose to write off our pre-development investigation costs for this opportunity.

I would now like to turn this call over to Jim Smith, who will provide some details for our numbers and speak to our 2010 guidance. After that, I will give you some color on the guidance and update you on the CFO search.

Jim Smith

Thank you, Dennis and thank you for the opportunity to serve as your Interim CFO for the past three months. Good morning, everyone. As Dennis noted, 2009 and the fourth quarter in particular has been a period of focus on strengthening our balance sheet, at the same time as being diligent in management of our core portfolio. The successes in the fourth quarter will be continued with strong actions in 2010 as we have noted in our press release.

First for our historic results. Our fourth quarter FFO was $9.8 million compared to $7.5 million in the fourth quarter of 2008. Several significant and unique charges are incorporated in the quarterly results. In the fourth quarter of 2009, we recorded a $1.2 million write-off of the Northpointe development in Jackson, Michigan that Dennis just mentioned. We also took a $1.2 million charge for restructuring expenses, primarily related to the resignation of the previous CFO and other personnel changes; and a $380,000 charge for the strategic alternative review, which was recently completed.

In the fourth quarter of 2008, charges of $5.6 million were reported to record impairment in the value of one of our shopping centers to its market value and to record the abandonment of pre-development sites.

Some other changes of note quarter-to-quarter between 2008 and 2009 included a $1.8 million decrease in interest expense due to a reduction in debt between 2008 and 2009 of about $110 million, primarily as a result of our recent equity offering and asset sales during 2009.

The reduction in headcount that Dennis mentioned and a year-end tax adjustment had a positive impact on G&A of $1.1 million in the quarter. Further, property level income declined by $1.7 million due to the September 2009 sale of two Wal-Mart stores at Northwest Crossing and Taylor Square, the tenant closings at Linens 'n Things and Circuit City, in both our 100% owned and our unconsolidated joint ventures, the rent relief program cost increased over 2008, and TIF revenue for a Jacksonville shopping center which declined compared to 2008 because bond repayments commenced in 2009.

Looking at the 12-month period ended December 31st, FFO decreased by 4.3% to $45.3 million. The cause of the small decline was similar to the fourth quarter impacts including the write-off of Northpointe development, a total of $1.6 million charged for restructuring and severance expenses and an additional $1.6 million for the full-year impact of the strategic alternative review and proxy contest costs.

Other expenses for the 12-month period were impacted by an interest expense declining by $5.4 million over the same period last year, due to factors such as the equity issue; the contribution of the Plaza Delray to a joint venture in August of 2008; proceeds from the Wal-Mart sales and lower interest rates, averaging about 2.3% on the unsecured line of credit for most of 2009.

A G&A decrease for the year of $1.7 million includes reductions in staffing and fringe benefits, reductions in professional fees, and a positive tax – positive year-end tax adjustment. Other operating expenses also decreased by $897,000 due to lower bad debt experience over the same period last year.

Property level income declined in 2009 due to contributing the assets of Plaza Delray, the sale of Wal-Mart anchors, the closings of Linens 'n Things and the small decline in same-center NOI.

Looking at long-term debt, since our last call, we have successfully closed on a new $217 million secured credit facility with $67 million of term loan – of this term loan portion amortizing over the next two years. The facility also contains a three-year $150 million secured revolving credit facility, which can be expanded by an accordion feature up to an additional $50 million. As part of the complete refinancing process, the acquired credit facility limit was reduced from $40 million to $20 million.

For the year, the total debt at year-end was $552 million compared to $662 million in 2008 at an average rate of 6% with an average term remaining of 5.2 years. Of that total, 83% of our debt was fixed. With the equity offering and other balance sheet deleveraging activities, we were able to reduce our debt-to-EBITDA ratio from 8.6% – or 8.6 times to 7.7 times. With this, we are making significant strides to meeting the debt-to-EBITDA objectives of 6 times to 7 times. Availability at year-end under our revolving credit facility was $58 million and the fixed charge coverage for the year was 1.98 times.

Finally, moving to our plans for 2010. The primary objectives of our company in 2010 will be achieving a significant reduction in leverage of our balance sheet. In 2010, we will reduce our debt-to-EBITDA ratio from the current 7.7 to the range of 7.0 to 7.2 times as we move towards our strategic objective of 6 times to 7 times.

The deleveraging process will be accomplished through three factors. First, a continuation of our specific and detailed portfolio review to identify and market properties that can be moved – that can move the deleveraging process forward. Also, completion of the current redevelopment activities, which will positively impact EBITDA by $3.4 million annually, starting later in 2010. Further, other possible actions that will help us reach our goals we will be taking during 2010 as this process unfolds and opportunities arrive.

Because of the potentially dilutive effect of the deleveraging process, we anticipate FFO for 2010 to range from between $1.12 and $1.24 per diluted share. In addition to these capital transactions that I've mentioned, the FFO will be impacted operationally. We will experience increased interest costs on the new secured revolving credit facility of about $1.2 million. There will be a focused – there will be a forecasted decline in same-center NOI of between 2% and 3%, much of that being from the tenant bankruptcies at Old Time Pottery at Promenade and the move of Wal-Mart at Village Lakes.

Also impacting the FFO guidance and same-center NOI, we have set aside a significant reserve for unanticipated vacancies in small tenant stations. The assets sold in 2009, being the Wal-Mart, will also reduce our FFO in 2010. And finally, rent relief will continue through 2010, although it is not expected to grow and it will start to reverse in 2011.

With that, I will turn it back over to Dennis.

Dennis Gershenson

Thanks, Jim. Although we are cautiously optimistic that 2010 will be a transition year with improving consumer confidence showing up in the second half of 2010, we feel that the year will still be a difficult period for shopping center owners. That remains our goal, however, to use these 12 months to substantially improve our balance sheet and to fortify our core portfolio, including the completion of our value-add redevelopments.

The deleveraging process that attends our balance sheet improvement will cause some dilution. Thus, we have provided guidance for FFO in a range somewhat lower than the marketplace may have anticipated. We believe that this range is conservative and that our effort in improving our shopping center operating metrics will play a role in offsetting the effects of the deleveraging process. Ultimately, we are confident that our goal of building a stronger balance sheet will provide a solid foundation to grow shareholder value.

When we began our search for a new Chief Financial Officer, my criteria included finding someone with experience in our industry and a solid capital markets background. This individual needed to be a strategic thinker with whom I could partner to positively impact the company's growth, success, and profitability, one who could help me take our company to the next level.

I am confident that I have found this person and I am pleased to announce that Mr. Gregory Andrews will join Ramco-Gershenson as its new CFO. We didn’t include the announcement of Greg's hire in the earnings press release because we were ironing out last-minute details well into yesterday and thus, we didn't want to risk jumping the gun. Greg is well respected in the investment community and will bring many years of real estate experience to our company. We look forward to having him as part of our team.

At this time, we would like to welcome your questions. Rob?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). One moment please while we poll for questions. Thank you. Our first question is from the line of Michael Mueller with J.P. Morgan. Please go ahead with your question, sir.

Michael Mueller – J.P. Morgan

Yes, hi, good morning. A few questions here. First of all, I think in your supplemental you talk about GAAP leasing spreads. Can you talk about what the renewal spreads were on a cash basis for the quarter, for the year, and then also how you expect those to trend in 2010?

Jim Smith

Yes, Mike. For the fourth quarter, we have looked at the cash renewal leasing spreads and for the fourth quarter itself, we were at minus 1.7% in total, that's anchors and non-anchors, to – related to the numbers that Dennis has mentioned in his statement where our renewals for non-anchors has averaged 3.6%. The cash basis version of that is 3.2%. So a small decline of 0.4% over the GAAP related version.

Michael Mueller – J.P. Morgan

Okay. And what about when you look out to 2010, what's the expectation?

Jim Smith

Looking to 2010, we are looking at about a 4% decrease on the non-anchor side for renewal – for renewals.

Michael Mueller – J.P. Morgan

Okay. Switching gears a little bit, can you talk a little bit about the occupancy trend in Q4, what drove the sequential decline, and give us a little more color on the timing of I guess the movement that you talked about in the comments with Wal-Mart and Old Time Pottery in 2010?

Dennis Gershenson

Sure. The – in the second and third quarter, we use the opportunity when we have vacancies of any size, mid-boxes, et cetera to lease to temporary tenants, which would include people who can occupy up to 20,000, 30,000, 40,000 square feet. This would include users who rent from us during the 4th of July period, Halloween, and Christmas. However, they are gone by the end of the year.

Thus, the 100-basis point change really has to do with these temporary tenancies. We are considering breaking this number out going forward so that you can see that, but it is not due to a drop and was not an unanticipated loss in occupancy from our tenancies.

Michael Mueller – J.P. Morgan

Okay. And what about the timing of – in 2010 of Wal-Mart and –?

Dennis Gershenson

Well, again, we are not projecting that we will bring the prospective Wal-Mart tenants or the users in the Old Time Pottery space online. The pickup that we will have is basically with the mid-boxes who are in the queue now for the redevelopments, because we do not count those until we have turned the premises over. So there is a number of Ross Dress For Less leases, et cetera that we are under construction with that will account for some significant growth.

We also are executing in the first quarter of approximately 100,000 square feet; they have already been identified and are – are either already executed or we are finalizing leases for this quarter that will all open in 2010. So we expect the pickup to occur not in those two spaces, but in the rest of our portfolio.

Michael Mueller – J.P. Morgan

Got it. And then last question, can you talk about G&A in the quarter? I know you mentioned restructuring kind of partially drove down the G&A in fourth quarter, but talk a little bit more about the G&A run rate as we move into 2010.

Jim Smith

Yes, the G&A run rate that we are expecting is our G&A will run right around $15 million annually at this point. That takes into account the changes that we have mentioned on the call. The – in the past quarter, as we have mentioned, we had some positive impacts on G&A because of the tax adjustments and those won't repeat, but we are looking at about a $15 million run rate on G&A.

Michael Mueller – J.P. Morgan

Okay. And last question, I’ll hop off the call. Going back, the Wal-Mart – just want to clarify, the Wal-Mart and Old Time Pottery leases, are they out of the occupancy number right now or they will be coming out of the occupancy number going forward?

Dennis Gershenson

They will be out of the occupancy number in Q1.

Michael Mueller – J.P. Morgan

In Q1? Okay, that was – okay, great. Thank you.

Operator

Our next question is from the line of Todd Thomas with KeyBanc Capital Markets. Please go ahead with your question.

Todd Thomas – KeyBanc Capital Markets

Hi, good morning. I'm on the line with Jordan Sadler as well. Back to the leasing, Dennis, you highlighted that you've seen a pickup in leasing momentum so far in the first quarter, but then you've allotted for some increased vacancy throughout 2010 for some of the small shop tenants. Can you just clarify or reconcile those views a little bit?

Dennis Gershenson

Well, as I said, we believe that leasing velocity will indeed pick up in 2010. However, based upon the uncertainty of the economy, even though we would like to think that those tenants who survived 2009 and had at least a modest, if not a reasonable Christmas and those tenants we worked with who were the beneficiaries of some rent concessions are those retailers that we believe are the survivors and have good business plans going forward.

But there is always the potential for the unexpected. And thus, we've set aside approximately $1 million in our numbers for unanticipated vacancies. Those are – that – now, that could be something like if some of the video operators don't make it or some of the other categories or small tenants that we have in our portfolio. We are preparing to be reporting better news than disappointing news if indeed the marketplace, it does not treat kindly a certain number of retailers.

Todd Thomas – KeyBanc Capital Markets

Okay. So that $1 million, that is in 2010 guidance?

Dennis Gershenson

Yes.

Todd Thomas – KeyBanc Capital Markets

Okay. Moving over to some of the deleveraging plans, can you provide some details or color on the dispositions that you are sort of thinking about for 2010? Are they operating assets or are they part of the – I guess, the question about parcels that you've identified and talked about in the past?

Dennis Gershenson

I think what we will be doing in 2010, number one, on an annual basis, we review obviously the operations of all of our shopping centers. So the potential for sale falls into two categories. One, as we have talked about in the past, we have not an insignificant number of net leases, either anchor net leases and those would be land leases or outlots that we could sell.

The other group of assets would either be those shopping centers that are good quality assets, but really have no upside as far as significant growth is concerned because they are well stabilized, we don't have room to expand the asset necessarily, and our conclusion is that we've gone about as far as we can go with them.

There is also the potential for taking a good hard look at what we might qualify as the bottom 10% of our portfolio and just analyzing whether or not putting in the effort and the capital to make those even better assets justifies that work and the capital expenditure or are we better off selling them in the state that they are in. So I think that – hopefully that answers your question. There is a broader spectrum of opportunities that we are looking at, so it does not come from just one category.

Todd Thomas – KeyBanc Capital Markets

Okay, that's helpful. Are you out in the market right now with any of these or this is – everything is still under review?

Dennis Gershenson

We are still under review, but understand that especially with the net leases we've demonstrated last year that these are very desirable products and thus sales in the second half of the year will not be problematic. It will also give these first six months for the marketplace to begin to experience hopefully more sales because there has been a dearth of sales of shopping centers up to this point and we like to hopefully have a market a little more frothy so that cap rates we can be talking about in the second half of the year have indeed been established for quality assets.

Todd Thomas – KeyBanc Capital Markets

Okay, great. And then one last one and then I'll jump off. I was just wondering, recoveries from tenants on the overall P&L is actually lower than the recoveries in the same-store P&L. And I was just wondering if you could talk about what is driving that difference and does that sort of – it sort of implies that recoveries in the non-same store were actually negative?

Jim Smith

Yes. The main difference between the two is just – is ramping up the recoveries in some of the centers that are not in same store where we don't have the complete mix of tenants, particularly the non-anchor tenants. We don't have as much of an ability to gain the recovery – maximize the recoveries.

Dennis Gershenson

Are you talking about the total portfolio versus same center?

Todd Thomas – KeyBanc Capital Markets

Yes. Yes, the actual dollar amount is lower for the overall portfolio. So it actually declined. And I'm looking, it's like $7.9 million for – in the overall P&L and then it's slightly over $8 million I think on the same store, yes.

Jim Smith

You know something? We will have to get back to you on that.

Todd Thomas – KeyBanc Capital Markets

Okay, sure.

Jordan Sadler – KeyBanc Capital Markets

It's Jordan Sadler here. Just one other question. Just coming back to the reserve that's – you have $1 million embedded in the 2010 guidance. One, I'm curious if that is the – one of the drivers of the range – of the size of range of guidance, so are you – from zero to $1 million at the high end versus low end? And second, what was the amount of reserves and/or charges realized related to tenants in 2009?

Dennis Gershenson

Well –

Jordan Sadler – KeyBanc Capital Markets

Or the reserve balance at 2009.

Dennis Gershenson

Yes. Certainly, the $1 million obviously has an impact on the range, although that is only one of the factors, but probably a greater contributing factor would be the type of assets that we would be selling, the cap rates, and the range of cap rates that we believe that we could get for those assets in part determine the range.

Obviously, if we can get more aggressive cap rates, then we would be in the higher end of the range, but because we have acknowledged that we are committed to getting debt-to-EBITDA down this year, we established the range as we did. I – but there are indeed a number of factors that influence that. Historically, we have set aside a number very similar to the $1 million and obviously we went through that in 2009, specifically because of the number of small tenants that became problematic last year.

Jordan Sadler – KeyBanc Capital Markets

So what was the reserve balance at year-end?

Dennis Gershenson

We had used all of the reserve in 2009.

Jordan Sadler – KeyBanc Capital Markets

Okay, so there is nothing left [ph]. Okay.

Jim Smith

We don't maintain a balance, we do in our budgets carrying forward build in a reserve for those vacancies.

Dennis Gershenson

And at the end of each quarter, we will look at that number and if we – let's – I mean, just for argument sake, if we said we are reserving $250,000 per quarter and we believe that things are in relatively good shape, then at the end of the first quarter, we would probably reduce that $1 million to $750,000 and then pick that up in our numbers.

Jordan Sadler – KeyBanc Capital Markets

Okay, thank you.

Operator

Our next question is from the line of Rich Moore with RBC Capital Markets. Please go ahead with your question.

Rich Moore – RBC Capital Markets

Hi, good morning, guys. Dennis, maybe you said this, I don't remember, but when does Greg actually start as CFO?

Dennis Gershenson

We have indicated that Greg will begin as CFO no later than March 31st. He is obviously taking care of getting his personal things in order in Florida and then there will be a period where he ramps up on his knowledge base here being in the office fulltime no later than March 31st.

Rich Moore – RBC Capital Markets

And he will be moving to Detroit?

Dennis Gershenson

He will be.

Rich Moore – RBC Capital Markets

And you are going to get him some snowshoes, are you?

Dennis Gershenson

His lovely wife Karen is very excited. The kids, as a matter of fact, love winter sports. So I think the entire family is very enthusiastic about having winter.

Rich Moore – RBC Capital Markets

But we share your enthusiasm here in Cleveland. I'm curious about G&A, then Jim. Is – is the first quarter low and below the – what would be the run rate to get to the $15 million and then we – and we boost that in the second quarter?

Jim Smith

The first – just a second – the first quarter – no, I think we are – we have made the changes that we had been talking about with the reduction in headcount. Those changes are in place. So we are at a kind of flat rate going forward. And the interest, which is the other major piece – I'm sorry, not the interest. Just want to check here. Yes, the tax impacts and all of that will not affect us. So we are really at the run rate that we will be experiencing starting in the first quarter.

Rich Moore – RBC Capital Markets

Okay. So $3.5 million to $4 million a quarter would be a good run rate?

Jim Smith

That's correct, yes.

Rich Moore – RBC Capital Markets

Okay, right. And then refresh my memory on the TIF down at River City. I thought you guys received an overage as part of that TIF going forward till it burned off I think over a maximum 20-years, Dennis. And so I thought it would be a little bit higher, but I noticed that it's down versus last year. Maybe I'm just not remembering exactly how this works.

Dennis Gershenson

No, Jim attempted to cover that. What happened is that during the first three years of the bonds, a reserve was built up because until you knew what the exact assessments were going to be, you couldn’t really know whether or not there would be an excess or a deficiency in the taxes collected in order to make the payment.

Once the bonds had to – become self supporting, then what happened was that there indeed is a surplus on an annual basis going forward and our share of that surplus will be around $300,000 a year minimum. It will increase as years go on as number one, taxes go up and other users who are subject to the bond come online. But what happened in '08 was that the excess of what was built up in the fund over and above what would be a reasonable reserve going forward was distributed to the city and ourselves and that's why you see the higher number last year or the year before.

Rich Moore – RBC Capital Markets

Okay, yes, good. I got you. And I think you go to $12 million is the max, was it?

Dennis Gershenson

Yes. I think it is, yes.

Rich Moore – RBC Capital Markets

Okay. And then I have a few line item questions, which were a bit confusing. You have a line called other operating expenses and that was down fairly substantially. Is there anything special in there? I mean, I'm guessing – I'm thinking more in line – does this bounce back up or what was that?

Jim Smith

The main reason for that was during 2009 compared to 2008, we have experienced lower bad debt expense and partially as a result of conservatively estimating our bad debt reserves and partially better experience during 2009. We would expect that to continue relatively close to the 2009 levels carrying forward.

Rich Moore – RBC Capital Markets

Okay.

Jim Smith

And our other operating expenses are costs such as the costs in the centers and the regional office that we have in Florida. And those costs as well should continue at pretty close to the same levels as we've experienced in 2009.

Rich Moore – RBC Capital Markets

Okay. And then – and a similar kind of question, Jim, on fees and management income, you have a line item called other as well, which was a negative, much more so than we would have thought. I mean, why is that one negative and happens there?

Jim Smith

Yes. That was actually a reclassification adjustment that we had to make in the last quarter to get the year to zero. What it is was it was minor fees related to some of our operating costs – some of our operating expenses and we've reclassified those out of revenue down into operating expenses and G&A costs. And they are, again, continuing that way, but they are minor fees that we've just reclassified now.

Rich Moore – RBC Capital Markets

Okay. So going forward, they are not there?

Jim Smith

So going forward, there is no negative, but no positive as well on that other income line.

Rich Moore – RBC Capital Markets

Okay, great. And then Dennis, I'm a little curious on the rent concession side of things. I mean, what exactly are you thinking of rent concessions, because the other guys, the other shopping center guys, I'm not hearing much talk about a continuation of rent concessions? And I mean, do you mean mid-term type concessions or just rent roll downs as – negative leasing spreads when the leases come up for renewal?

Dennis Gershenson

Well, I'm not entirely sure that I understand the question, but the concession –

Rich Moore – RBC Capital Markets

Well, the – yes, the idea of concessions. I mean, I usually think of concessions as you have a mid-term request by a tenant who asks, "Can I have a recession – can I have a concession in the middle of my lease"?

Dennis Gershenson

Yes. Well, Okay. I didn’t mean to imply that it is our expectation that in 2010 we will have more requests for rent concessions – and I'm going to let Michael Sullivan amplify my comments here in a second. The – so I'm not sure what I said specifically that potentially lead you to that conclusion. I do believe that rent spreads in 2010 were new leases and lease renewals will still be somewhat more challenging, although we expect to sign new leases at very reasonable rental rates.

2010 – the rent concessions that we gave in 2009 in many cases went for a two-year period and we expect that by 2011 that the rent concession number of around $500,000 will drop in half and then by 2012, will drop by even more than half again.

Mike, do you have anything to add to that?

Michael Sullivan

No, that's actually accurate in terms of the impact to rent. But concession program includes three components, payment plans, deferment arrangements, and then upright rent relief. The impact to rent portfolio-wide for the first two, payments plans and deferments equaled really the scope of the rent relief. We are seeing requests for upright rent relief go down to a trickle, quite frankly.

So what tenants are saying and what Jim has confirmed in terms of what's in place for '09 and '10 approximate each other and then we see that impact drop in half in 2011 and for '10, we see that trend continuing in terms of the requests for concessions in general and relief in particular dropping dramatically.

Rich Moore – RBC Capital Markets

Okay, I got you. Good. Thank you, that helps. Then, also in the joint venture portfolio, it seemed that their rents were just softer and across the board. And that's a pretty big portfolio. I mean, is there any – anything in particular going on in there? It's not included in same store, right?

Dennis Gershenson

It is not.

Rich Moore – RBC Capital Markets

Yes, right. And it seems that we saw some same-store softness. I mean, maybe I'm missing something.

Dennis Gershenson

Well, you – when you look at the Linens and the Circuit City, the number of vacancies that were created there were predominantly in our joint venture portfolio, which obviously has indeed impacted our ability to lease these smaller tenant spaces.

We are pleased though, in those portfolios and even for a space that wasn't a Linens space that we have two Ross Dress For Less stores presently under construction and we are making significant progress on leasing at the mid-boxes because when I talked about the three leases that are actually under negotiation now, I believe all three of those are in the off-balance sheet ventures. So I think that as we complete those and bring those mid-boxes on, we are going to see a leasing pickup in our off-balance sheet ventures, but I think it has suffered disproportionately because of those vacancies.

Jim Smith

And I'll add there that page 28 of the supplement does give us the same-center joint venture properties. And just to echo what Dennis just said, the same center is down by 2.6% compared to our owned properties of 2.2%. So slightly worse, mainly because of the Circuit City and Linens 'n Things significance.

Rich Moore – RBC Capital Markets

Very good. Thank you, guys.

Operator

Thank you. (Operator Instructions). Our next question is from the line of David Fick with Stifel Nicolaus. Please go ahead with your question, sir.

David Fick – Stifel Nicolaus

Good morning. First of all, congratulations to both you and Greg on retaining him and convincing him to move to Detroit.

Dennis Gershenson

David, you ought to come up and visit sometime.

David Fick – Stifel Nicolaus

I have been there a few times. The – but you are still focused elsewhere now that we want to see your new stuff. Can you break down – of the 800 [ph] and roughly $4 million of assets, investment and real estate assets on your balance sheet, book value, how much of that is land and construction in progress transitional type assets?

Jim Smith

We have on page nine of the supplement a breakdown of land and construction in progress.

David Fick – Stifel Nicolaus

I'm sorry, I was looking at just the balance sheet breakdown. And what are those numbers?

Jim Smith

So our investment in land is $142 million, buildings and improvements of $820 million – this is cost and then construction in progress of $34 million.

David Fick – Stifel Nicolaus

Okay.

Jim Smith

That leading to a total cost of $995 million. Do we have the breakdown of the depreciation by asset class? I don't have the breakdown of the accumulated depreciation, but obviously most of that –

David Fick – Stifel Nicolaus

There wouldn't be any in your construction –

Jim Smith

– is on the build – it's – in fact, they are all on land and buildings, yes – or on the buildings, I mean.

David Fick – Stifel Nicolaus

Okay. So you feel at this point that you've taken the reserves that are going to be required and that the net plan to construction in progress is all realizable today?

Jim Smith

Yes, yes. We definitely – we've done impairment testing on any of our assets that would potentially indicate any difficulties and there are no problems at all.

David Fick – Stifel Nicolaus

Okay. Other than the impairment, the one that you did take.

Jim Smith

Yes.

David Fick – Stifel Nicolaus

Yes. Okay. Dennis, a big picture question. I see in your commentary – hear your commentary, I see what you've written and I would anticipate that in you Annual Report, you are continuing to focus in the MD&A on the balance sheet delevering that you've accomplished and the success you've had in getting through the last year or two years.

I'm wondering, as you look forward, you are sort of rebuilding the company from here in terms of staffing. What is your outlook in terms of how to get back to more of a growth profile? There is a lot of new REITs being created, some blind pools specifically in your space, you've gone from zero to tending to be as big as you are in one year. Is there a way for you start deploying your platform from where you sit today? Do you think these other guys are smoking dope in terms of getting out there and buying assets this quarter and next quarter?

You've indicated just a few minutes ago that you are hoping to see transaction volume – I think we are actually starting to see it from at least that cohort at pretty attractive pricing. So I know it's a complicated and big question, but do you have any response?

Dennis Gershenson

Well, I would say several things, David. First, getting the balance sheet in shape will indeed put us in a position to be active in growing the company beyond the core portfolio. And please remember, in a very, very competitive environment between let's say 2003 or '04 and 2007 when everybody was out there trying to buy things that weren't nailed down, we purchased over $1 billion worth of assets in our off-balance sheet joint ventures, primarily by doing it one or two assets at a time. And we are thrilled with the fact that many of those assets that were supposedly stable were adding value too.

So we have demonstrated that we can do that even with a lot of potential competition. As far as selling our assets and looking for future opportunities, there is so much money out there chasing deals that I think that the very stable deal, the attractive A and B plus centers, are going to go for cap rates that will be surprisingly low compared to what everybody is talking about just because when an asset is going to be out there that folks would like, I think there will be a lot of people in the queue looking to deploy their capital to buy them.

We have historically been selective. We obviously have a very good relationship with not an insignificant number of financial institutions that Cathy Clark is working with as are so many of our peers, in saying that we would like to work with the bank, we would like to work with the borrower, because in many of these situations, obviously the borrower is going to find themselves way over-levered and their real problem is not the quality of the asset, but where do they get the capital to make up the gap.

So as we work through getting the balance sheet in order through most of 2010, we will continue to look at the marketplace, to look at assets and to position ourselves to be ready to move when the time is perfect.

David Fick – Stifel Nicolaus

Okay. To just summarize that, the guys who are telling everybody they are going to buy A quality stuff at a 9-cap are smoking dope?

Dennis Gershenson

Well, I wouldn't say they are smoking dope, but I'd say this. We are not going to sell our A quality assets that are 9-cap, and I would think that the vast majority of potential sellers would feel exactly the same.

David Fick – Stifel Nicolaus

Great. Thank you.

Operator

Our next question is from the line of Nate Isbee from Stifel Nicolaus. Please go ahead with your question.

Nate Isbee – Stifel Nicolaus

Hi, good morning.

Dennis Gershenson

Hi, Nate.

Nate Isbee – Stifel Nicolaus

Just to clarify, in the release and you've said before that the 2009 official policy – dividend policy was to pay the dividend basically equal to your taxable income. As we head into '10, are you sticking to that policy or are you comfortable with the $0.65 current dividend level regardless of where your taxable income might be in?

Dennis Gershenson

Well, two things. One is that our tax people have indeed done a basic estimate of where they believe we will be by the end of 2010. As we've said in the past, it obviously is a Board decision and we have a Board meeting in early March. And I have a reasonable level of confidence that we were certainly well within the ballpark at our current dividend rate. I know that – we cut our dividend last year to get to a number that approximated taxable income and although the Board could always change its mind, this seems to be the direction they were heading in is that they are more likely than not going to maintain that policy.

Nate Isbee – Stifel Nicolaus

Okay. And so – I mean, if for some reason, your taxable income for whatever reason, there is some accounting stuff that you could do to get it down, you are saying that you think that the Board policy at this point would be to closer track where the taxable income is rather than maintain?

Dennis Gershenson

Well, again, our estimate for taxable income for 2010 does approximate 2009. And we are not into gimmickry, so we expect it to be the same.

Nate Isbee – Stifel Nicolaus

Okay, all right. And I'm sorry if I missed this before, what does your guidance include just in terms of growth – amount of sales in 2010?

Dennis Gershenson

We haven't given that number. It will be, as I've said, within a range that will allow us to achieve our debt-to-EBITDA ratios.

Nate Isbee – Stifel Nicolaus

Okay, thank you.

Operator

Thank you. Our next question is a follow-up from the line of Michael Mueller with J.P. Morgan. Please go ahead with your question.

Michael Mueller – J.P. Morgan

Yes, my question was last question about what's embedded in guidance with dispositions. Can you just give us a rough range in terms of – to the zero to $100 million in the – somewhere in that neighborhood?

Dennis Gershenson

Absolutely. It's more than zero, Michael, and less than $100 million.

Michael Mueller – J.P. Morgan

Okay.

Dennis Gershenson

But it – again, a lot depends upon cap rates. If we are putting out net – if we are strictly focused on net leases, I think that the marketplace has moved from the 8.4 that we sold at last year, especially if you are talking about outlots, much closer to 8 and maybe even breaking into the 7. So you could sell less assets with a lower cap rate and therefore to really talk about that it might be $50 million or $55 million or $60 million or $45 million really becomes problematic. I think as we move further into this year, we will get a lot more clarity on that.

Michael Mueller – J.P. Morgan

Okay. But you do have dispositions embedded in guidance?

Dennis Gershenson

Absolutely.

Michael Mueller – J.P. Morgan

Okay. Okay, thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Dennis Gershenson

Thank you all for listening. We are excited about our new hires and we expect Greg to be on the call at the end of the first quarter and we look forward to you participating as well. Thank you again. Have a good day.

Operator

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

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Source: Ramco-Gershenson Properties Trust Q4 2009 Earnings Call Transcript
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