Ramco-Gershenson Properties Trust Q2 2008 Earnings Call Transcript

| About: Ramco Gershenson (RPT)

Ramco-Gershenson Properties Trust (NYSE:RPT)

Q2 2008 Earnings Call

July 30, 2008 11:00 am ET

Executives

Dawn Hendershot - Director of Investor Relations

Dennis Earl Gershenson – Chairman, President, Chief Executive Officer

Richard J. Smith – Chief Financial Officer

Thomas W. Litzler - Executive Vice President of Development

Michael J. Sullivan - Senior Vice President of Asset Management

Analysts

Nathan Isbee - Stifel Nicholaus & Company, Inc.

Philip Martin - Cantor Fitzgerald

Richard Moore - RBC Capital Markets

Inaudible Analyst – Carter Capital Management

Operator

Welcome to the Ramco-Gershenson Properties Trust second quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce you to your host, Dawn Hendershot, Director of Investor Relations for Ramco-Gershenson Properties Trust.

Dawn Hendershot

I hope that everyone has received our press release and supplemental financial package which are available on our website at www.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 expectations will be obtained.

Factors and risks that can 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 everyone to know that the information and statements made during the call are made as of the date of this call.

Everyone should understand that the passage of time 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, Richard Smith, Chief Financial Officer, Thomas Litzler, Executive Vice President of Development, and Michael Sullivan, Senior Vice President of Asset Management.

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

Dennis Earl Gershenson

First, it’s always a pleasure to be able to announce that we have met or exceeded First Call estimates.

More importantly, however, it is my mission this morning to reinforce the fact that we are comfortable with the trade areas of our shopping centers which are primarily in in-fill locations with above-average population and income statistics. To demonstrate that we are confident of the ability, stability, and future growth prospects of our core assets as seen in our leasing and operating statistics that we are proud of the success we are achieving in our announced redevelopments and that we are optimistic about the progress we’re making with our new developments.

My confidence in Ramco’s management team to move ahead with our 2008 business plan is not a denial of at best an unsettled economy which has resulted in a challenging leasing environment and a debt and equity market that limits our choices to raise capital. However, we have been in this business long enough to know that these times will pass and the companies with quality assets and excellent sites are well-positioned to weather this period.

Let me briefly give you an update on the progress we have made on our redevelopment and development pipelines. During the first quarter of 2008, we have 11 shopping centers with significant value-add potential under redevelopment. As of the end of the second quarter, we are increasing that number to 13 centers.

Understand that in each of these assets, we have either signed a lease with a new identified anchor or we are finalizing lease negotiations with the key retailer. During the second quarter, we signed four anchor leases which include Beall’s Department Store in 62,000 square feet at River Town Square in Deerfield Beach, Florida; Hobby Lobby in 50,000 square feet at the Clinton Valley Shopping Center in Sterling Heights, Michigan; Burlington Coat in 71,000 square feet at our West Alice Center in Milwaukee, Wisconsin; and Plum Markets in 37,000 square feet at the Old Orchard Center in West Bloomfield, Michigan.

Plus in the last 90 days, we have leased over 220,000 square feet of new anchor space for our existing centers. This number when added to the two anchor leases signed in the first quarter of 2008 brings our total new anchor tenancies for our redevelopment projects to 295,000 square feet. These retailers will come online throughout 2009 as we complete our redevelopments. The sheer number of value-add redevelopments underway will be a significant catalyst for FFO growth for 2009 and 2010. If we take the new income generated from just these six anchor-tenant transactions and subtract there from, the rentals paid by tenants who previously occupied space demolished to make way for our new anchors, we will achieve a net minimum rent increase of $1,200,000.

In addition to these superior results, we expect that the 13 value-add redevelopments presently underway will produce an overall average return of 13% on cost net of all prior rents for displaced tenants. Further, it’s interesting to note that not only do these redevelopments and the anchors we have attracted validate the desirability of our trade areas and our shopping center locations specifically, but in these times of lower retail sales expectations when smaller format retailers are having difficulty maintaining their occupancy, we’re demolishing 62,900 square feet of small space to make way for larger destination-oriented formats. In essence, we’re taking potentially more volatile smaller tenant space and replacing it with stable, credit-worthy users while not sacrificing income but instead achieving a superior return on costs.

One of the best examples of this transition is in our River Town Center in Deerfield Beach, Florida. We are replacing an Office Depot and 19,225 square feet of ancillary retail space with the 62,000 square foot Beall’s Department Store. We will also benefit from the relocation of several of the more desirable retailers who are displaced by the new Beall’s store to existing vacancies in the center. Even in these more challenging times, our anchor lease accomplishments in the first six months of 2008, and especially in this second quarter sets the stage for earnings growth over the next 24 months.

The ability to identify opportunities to add value to our existing portfolio over and over again, at times even when the centers are at 100% lease, speaks to who we are. That is, a company with the experience to continually improve the value and market position of its existing centers. The expertise defined additional value in acquired assets that was not recognized or executed by the previous owner and a management team with a track record of achieving double-digit returns on over 50 redevelopments since going public in 1996.

The bulk of our development pipeline consists of four projects. Our North Point site in Jackson, Michigan is in the early stages of the entitlement process which we expect to complete by mid-2009. Presently, we are in discussions with a number of anchors for this project. The land for the Jackson development is under option and the property will not be acquired until we have secured efficient numbers of anchor retailers who will make this project viable.

At our Gateway Commons Development, previously known as Lakeland II in Lakeland, Florida, we have commenced the municipal approval process. We are experiencing significant anchor tenant interest in this new project because it sits adjacent to our 300,000 square foot Shops of Lakeland Center which we redeveloped in 2005. We began assembling land for Gateway Commons because of the retail interest we could not accommodate in our existing Shops of Lakeland Center. At this time, we are negotiating a letter of intent, a LOI, with a 65,000 square foot national retailer selling both hard and soft goods. We have LOIs under negotiation with two 30,000 square foot national soft good retailers. We are working on a LOI with an 80,000 and 90,000 square foot popularly priced department store and we are in negotiating agreements with an office supply superstore and a national pet supply retailer. We are also working with three restaurant users for our outlots. The anchor in this project exceeds our ability to accommodate the retailers who wish to locate here. It will take approximately eight months to complete the entitlement process at which time we expect to have signed the majority if not all of the anchors to leases or purchase agreements.

At our Heartland, Michigan development, we have sold 20.8 acres to Meijer for a 192,000 square foot department superstore which we announced in the first quarter. During the second quarter, we signed a purchase agreement with Menard’s for 16.8 acres to build a 162,000 square foot home improvement superstore. We expect to close on the sale in January of 2009 when the approval process for their building is complete. A letter of intent is out for signature for a 30,000 square foot national hard woods retailer and letters of intent are being negotiated with a 15,000 square foot national specialty retailer and a 30,000 square foot regional sporting goods user. We have a signed purchase agreement with Flagstar Bank for our first outlot and a signed land lease for an adjacent outlot parcel with a Del Taco restaurant. We are negotiating a purchase agreement with a tire operation for another outlot and at our first small tenant retail building which will open in the second quarter 2009, we have signed LOIs for 9,000 square feet of the 12,000 square feet to be built at rental rates between $25 and $30 per square foot.

Our acquired development continues to generate strong interest. We have completed the first phase of the project which includes the construction of a 100,000 square foot office building. At present, the office building is 80% leased. We recently expect to complete the balance of the leasing of this building by year-end. To date, including a proportionate share of our cost basis in the original center, we have spent $18.7 million on the office building. We expect to expend approximately $2.6 million to complete the office leasing and intended improvements. We will allocate to this building an additional $3.7 million for a share of the infrastructure for the balance of the mixed-use project. All of these expenses combined to produce an unlevered return on cost of 8.3%.

Retail interest in the project has gained momentum since we announced the signing of the Regal Cinema lease in the first quarter. It is our intent to proceed with the development in phases. Our plans for the immediate future entail only undertaking some site balancing. We would expect to commence vertical construction on additional elements of this project as the demand across a variety of categories dictates. We continue to believe in this site and its strategic location at a prime interchange for I-95, 35 miles south of Washington, D.C. and 5 miles from the Marine Corps base at Quantico.

Our asset management group has been diligent in its efforts to lease up vacant space while working with a number of our smaller retailers who have experienced sales difficulties yet have demonstrated that they have a viable retail concept and are capable of navigating through these difficult times to calmer waters with a little help from the landlord.

Although our cooperation with these tenants has taken a modest toll on our same-center statistics, they are to be distinguished from those retailers who are too thinly capitalized or promoted a marginal concept that could not survive in an economic downturn. This latter group of tenants has already been terminated or we are in the process of removing them from our assets. They will obviously have an impact on our bad debt numbers for the year. However, as of this date, we believe that the worst of these issues is now behind us. Mr. Michael Sullivan, our Vice President of Asset Management is with us this morning to address any of your questions on receivable trends following our prepared remarks.

Relative to our same-center analysis, please note that our variable cost recovery ratio continues to be very strong. Also, even with an increase in our bad debt expenses, our same-center net operating income is basically flat indicating that we are holding our own in these times.

The leasing statistics for the quarter show a continuation of strong tenant renewals. New minimum rents for tenants under 20,000 square feet that extended their leases at expiration increased by 10% for the quarter and 12% for the first six months. You will note that we opened 21 new retailers in the quarter at an average rental of $15.18. What this number fails to show is that 2 of the 21 spaces are for retail uses that exceed 10,000 square feet which of course commands lower rental rates. Excluding these two uses, the quarter average would be $17.93 or 8.7% above our portfolio average.

Last quarter, I reported on new leases signed during the first three months. This statistic is not the number in our supplement which represents new tenancies that opened during that period. In the second quarter, we signed 17 new leases bringing our first six months total to 37 which compare favorably to 35 new leases signed in the same period 2007. Also, we have 46 new leases and 36 renewals in the pipeline which are presently being negotiated.

Speaking of our leasing activity, I would like to update you on the status of our Linens & Things stores. We have seven Linens locations. Four are part of off-balance sheet joint ventures and three are wholly-owned. We’ve been informed that five stores will close. Of that number, three are off-balance sheet and two are wholly-owned. Although there is a process in bankruptcy where Linens could sell their leases in our centers, we are taking a proactive approach and are marketing six of the seven stores. We have included the six locations in our marketing efforts, in order to be well ahead of the curve. We have received notice that this additional store will be closed as well. We are not working on replacing Linens in their seventh location which is in a wholly-owned center because their sales are significantly above Linens average sales volumes and we fully expect this lease will be informed.

To date, we have solid national retail tenant interest in four of the six locations. The four prospects include two off-balance sheet centers and the two wholly-owned assets.

At this point, I would like to spend a minute on our capital plan. In the fourth quarter of 2007, we discussed with you our desire to place a number of existing shopping centers and pending developments in off-balance sheet joint ventures. During the process of working with a number of interested parties, we discovered that the lack of a vibrant shopping center sales market created confusion as to an appropriate cap rate leading our potential partners to take an overly conservative view of what they should pay for our centers. This coupled with the hesitancy of potential development partners to commit their capital until a significant amount of our retail space was preleased caused us to reevaluate our approach.

Instead of a portfolio joint venture, we opted to pursue a course of action where we would accomplish our ultimate capital raising objectives through a series of one-off transactions. This, we contributed our Mission Bay Shopping Center to our ING joint venture in the first quarter and sold our Highland Square Center in Tennessee in Q2. We will be contributing our Plaza at Delray assets to our Heightman joint venture within the next two weeks. We should be able to secure financing for the first phase office building at our Aquia development before the end of the third quarter. Each of these steps when combined produces gross proceeds of over $171 million. This generates sufficient capital to allow us to pursue and complete our 2008 business plan which is on track to meet this year’s stated financial goals.

Based on what we accomplish in 2008, specifically in the area of asset redevelopment and the progress we are making on our development pipeline, we feel confident that our growth projections through 2009 and 2010 remain on track. In regards to the security of our dividend, I’m pleased to report that at quarter-end, our FFO payout ratio was 75.1% compared to 76.9% in 2007 and our FAD ratio was 78.8% compared to 82.3% in 2007. Thus, we remain confident that we will be able to maintain healthy ratios of FFO and FAD throughout the balance of this year. Given our current stock price of $21.20 which produces a dividend yield of 8.7%, the security of our dividend as well as a compelling business strategy, we believe that Ramco-Gershenson is an outstanding investment opportunity.

I would now like to turn this call over to Rich Smith who will provide details for our financial statements.

Richard J. Smith

For the quarter, our delivered FFO per share was $0.62 which exceeded First Call estimates by $0.01. This represented a 3.3% increase in the $0.60 reported in 2007. On a gross basis, our delivered FFO increased $300,000. We went from $12.9 million in 2007 to $13.2 million in 2008. Some significant changes quarter-to-quarter include reductions in property level income and expenses due to mostly from the effects of contributing assets, lockdowns through joint ventures, and from taking income offline for redevelopment. These reductions were offset by bringing River City back on balance sheet.

The change also included an increase in our fee income resulting from increased development, leasing and management fees. The increase in fees was offset by decreases in acquisition fees.

The increase in our G&A expense was the result of an increase in payroll infringes, the final settlement of an arbitration claim discussed in the year-end conference call, and higher bank fees. For the year, we expect our G&A to between $16.5 million and $17 million.

Our interest expense decreased $1,850,000 over the same period last year. $1,130,000 of the decrease was due to increased borrowings but at a lower average interest rate. $380,000 pertained to an increase in capitalized interest on development and redevelopment projects and a $248,000 decrease in debt service amortization.

For the six months ended June 30, our diluted FFO per share decreased 2.4% or $0.03. We went from $1.26 in 2007 to $1.23 in 2008. On a gross basis, our diluted FFO decreased $800,000. We went from $27.2 million in 2007 to $26.4 million in 2008. For the six months ended, significant changes included reductions in property level income and expenses mostly due from contributing assets to off-balance sheet joint ventures and from taking income offline from redevelopments. Again, these reductions were offset by bringing River City on balance sheet. The changes also included a decrease in our fee income resulting from a reduction in acquisition and development fees offset by increases in leasing and management fees.

The decrease in our other income related mostly to lower interest income and the increase in our other operating expenses related to increases in legal and reserves for bad debt in connection with interest-dated collection issues including Linens & Things.

Our interest expenses decreased $3,090,000 over the same period last year. $1,832,000 of the decrease was due to increased borrowings again at a lower average interest rate. $744,000 related to an increase on capitalized interest on development and redevelopment projects, $363,000 was due to a decrease in loan amortization costs and $116,000 to a reduction in unfavorable amortization of the fair-market value of debt taken off balance sheet.

For the balance of 2008, we have four loans maturing, all of which are manageable. We have secured financing to replace our $43 million mortgage at the Plaza Delray Shopping Center and anticipate closing the loan in early August. The five-year loan will be for $48 million at an interest rate of 6% and our payments for the first year will be interest-only.

We anticipate exercising our right to extend our $150 million revolver under the same terms and conditions before it matures in December. The collateral for our $40 million secure term loan which matures in November includes Northwest Crossing, Taylors Square and Ridgeview Crossing. We anticipate using Ridgeview to support our own secured facilities and are currently in the market for permanent debt for Northwest and Taylors, both of which include leases on previously redeveloped Super Wal-Marts. Lastly, when our $8.5 million construction loan on Beacon Square matures in November, we’ll either use it to support our credit facilities or put permanent debt on the centers.

Our total debt at quarter-end was $691 million at an average rate of 5.5% and an average term remitting of about 4.8 years. 75.4% of our debt was fixed at an average rate of 6% and 24.6% of our debt was floating with an average rate of 3.9%. Availability at quarter-end on our credit facility was $36 million. Our even interest coverage for six months was 2.2x and a fixed charge coverage of approximately 2x.

Our current developments and redevelopments will cover multiple years. These projects along with our planned 2008 acquisitions are projected to cost $533 million. Since we plan on developing the majority of the projects off-balance sheet, our capital acquired after anticipated project level financing is expected to be approximately $98 million. Of the $98 million, we have through the second quarter spent $44 million leaving approximately $54 million to be spent over the next couple of years. For the balance of 2008, we’ve spent our capital requirements to be only $25.1 million.

Our capital needs are expected to be met with the net proceeds generated from the contribution of the Plaza Delray Shopping Center to a joint venture which is expected to generate $22 million of net proceeds and by utilizing our line of credit availability.

In the future, we’re confident that we’ll be able to fund future growth by retaining cash from operations, continuing to sell contributable assets to joint ventures, by refinancing assets, assets that have been expanded or renovated in prior periods, and by drawing other credit facilities.

Lastly, our guidance remains unchanged. We expect our delivered FFO per share to be between $2.47 and $2.53. Will you open up the call for questions, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nathan Isbee - Stifel Nicholaus.

Nathan Isbee - Stifel Nicholaus & Company, Inc.

There seems to be a recurring theme so far in shopping center space that leasing demand is strong while the small shop closures are increasing. If you can give us a little sense of what you see in the second half of the year specifically on the shop closure space and what percentage of your small shop space would you consider being in trouble right now?

Michael J. Sullivan

We really see the closure issue due to the bankruptcies to be tailoring off, particularly in the small shop i.e. locals. There is strong demand for the space especially in Florida where we’re seeing most of our small shops in the pipeline. Fully half of them are in Florida and an increasing percentage of them are for national retailers. We’ve gotten a little bit more aggressive in our collection protocol and we’re basically more selective in our financial approval protocol. So we’re moving forward in making sure that we’re getting a better grade of small shops.

Nathan Isbee - Stifel Nicholaus & Company, Inc.

Dennis, you had mentioned before about trying to help out some of the smaller tenants that are in trouble but you thought it had a better long-term shot of making it. Can you just quantify how much space this is involving, what kind of steps you are taking to assist them?

Dennis Earl Gershenson

The actual number per se, we can probably attempt to get you later, Nate, but what we’re really doing is each tenant that begins to fall behind and we’re attacking that almost immediately following the first 30 days that they’re behind in their rent, we will send some of our asset management people in to take a look at the store, they interact with the merchant and to decide whether or not we can see them as a viable retailer. If we can, then we sit down with them and work with them on #1, a payment plan on the amount of money that they owe us and even the potential of deferring some of their minimum rent to a later time in their lease term. There is no forgiveness of rent as part of our negotiations but just a postponement or an amortization of the amount that they owe us over the balance of the term. We understand if we’re good partners, that goes a long way, not only in promoting a real team between ourselves and our tenants but more importantly if you would just blightfully let these people go, by the time you find a new tenant, negotiate a new lease, pay to put them in and actually get them in and operating, you lose significantly more than working with them.

Nathan Isbee - Stifel Nicholaus & Company, Inc.

About how many tenants is that?

Michael J. Sullivan

Like Dennis said, we can get that information. I don’t have that at my fingertips but we can get that information back to you pretty quickly.

Nathan Isbee - Stifel Nicholaus & Company, Inc.

Can you speak a little bit about the credit for the Menard’s Home Improvement Store signed at Heartland?

Michael J. Sullivan

It’s a privately-held company and it’s a sale. We’re selling them the 16.8 acres.

Nathan Isbee - Stifel Nicholaus & Company, Inc.

Right, I understand that. Just give us a little sense of how big they are and what their profile is relative to Home Depot or Lowe’s.

Michael J. Sullivan

The stores are larger, it’s 162,000 square feet. They’re based more towards the handyman and the professional tradesman versus sophisticated homeowners.

Operator

Your next question comes from Philip Martin - Cantor Fitzgerald.

Philip Martin - Cantor Fitzgerald

Rich, if you can just break down this $171 million of potential proceeds from assets sales and refinancings that Dennis mentioned, can you break that down for us in terms of that $171 million, what approximately would come from Delray versus the Aquia financing?

Dennis Earl Gershenson

Rather than trying to break that number out before we close on the transaction, let me say this, we did raise from the sale of Highland approximately $10 million. We raised from the contribution of Mission Bay approximately $75 million. We expect to raise in financing at the first phase of Aquia approximately $15 million. That’s enough information to allow you to add and subtract.

Philip Martin - Cantor Fitzgerald

In terms of the leases that were renewed in the second quarter, can you break that down in terms of what approximately are the leases in Florida versus Michigan? Was it 50/50 or what was the mix?

Dennis Earl Gershenson

As a matter of fact, on lease renewals, we had approximately 10 leases renewed in Florida and only a couple leases renewed in Michigan. Interestingly enough, it all gets averaged out. In our Florida renewals, it is small tenants. The new rental rates were up over 17% and the Michigan renewal rates were up approximately 12%. The thing you should know about Michigan and the reason Michigan’s number is so very low is that the vast majority of leases in the Michigan centers really came from a philosophy that we instituted way back when we first began developing centers which was we liked all leases to expire January 31. So the preponderance of Michigan leases really expired in the first quarter. That philosophy changed just because of the weight of getting so many leases done in the fourth quarter of a prior year so we began spreading those expirations out over a greater period of time.

Philip Martin - Cantor Fitzgerald

On the remainder of the year, the majority of the leases up for renewal are going to be largely outside of Michigan.

Dennis Earl Gershenson

That’s correct.

Philip Martin - Cantor Fitzgerald

In terms of negotiating leverage with these tenants given the economic environment and the uncertainty that we all hear about everyday, what’s happening in terms of terms? Are tenants that you’re renewing here coming on for shorter terms in terms of number of years? Are you giving any concessions if any? Can you give us some background?

Dennis Earl Gershenson

On renewals, for all intensive purposes, these are always with retailers who continue to do well. Obviously, when we commence the renewal process, we look at their sales volumes and how they’ve been doing. That’s why we’ve been able to achieve reasonable increases because they aren’t going anywhere. There are always those individual tenants who are on the margin that you decide for a variety of reasons you want to keep. The increases may be modest or you may keep them at the same rental rate but if we do that, it’s our decision to lease to them for a shorter period of time. So we might give a tenant who’s struggling some but they believe that they can make it and their lease is up, we may give them a one-year renewal or we may give them a three-year renewal.

If I can follow that up with a general statement, one, we are very pleased and hopefully you all are excited about the number of leases with the big-box users that we have executed in the first two quarters. It’s no mystery however and especially in the development fields that these retailers feel that they have the upper hand. What they’re doing is attempting to negotiate either lower minimum rental rates or maybe an increase in allowance or both.

Philip Martin - Cantor Fitzgerald

From a negotiating leverage point, you still feel more or less in control and you’re not seeing a significant loss of negotiating leverage versus a year ago.

Dennis Earl Gershenson

No, we are not.

Philip Martin - Cantor Fitzgerald

Rich, I know you talked a bit about this in the prepared remarks, in terms of the $129 million of debt maturities through 2009 and that excludes your lines, can you just go through some of those numbers once again in terms of that $129 million, what’s been dealt with?

Richard J. Smith

The Plaza’s been dealt with. We took a $43 million loan and turned it into a $48 million loan. We got roughly 6% for a five-year deal, one year interest-only. You talked about the lines. We also have the $40 million term loan that covers Taylors, Ridgeview and Northwest Crossing. Again, I talked about taking Ridgeview and putting that in the supporting line. We’re out in the marketplace now on the other two for standalone loans on those. We won’t cross them.

Dennis Earl Gershenson

Just so you know both of those centers are anchored by Super Wal-Marts who are our tenants with relatively new leases. Their leases are not five years old.

Richard J. Smith

The other one this year is Beacon Square. It’s a small project, $8.5 million construction loan. We talked about just putting that in our revolver or supporting the revolver. Next year, we have coming due, we have Spring Meadows and West Oaks I, two great projects. We’re probably 50% levered on those assets. The other one is Dean’s which is still under construction. Again, a Meijer’s anchor center is an easy center in my mind to refinance. Not a lot of refinancing to do and I think it’s all very manageable.

Dennis Earl Gershenson

Spring Meadows and West Oaks are both at interest rates well into the 7% category.

Philip Martin - Cantor Fitzgerald

It sound like the risk is very manageable here and you dealt with the majority.

Dennis Earl Gershenson

Again, Philip, all of the assets that Rich mentioned are certainly not, and reasonable people can disagree, I would believe that the leverage on any one of those individual assets is between 45% and 50%.

Philip Martin - Cantor Fitzgerald

That is even kind of a mark-to-market hit, a loose term these days, but 40% to 45%. Lastly, just following up on one of Nate’s questions, I would be interested too in just finding out the number of tenants that are 30 days late versus a year ago just to gauge where your portfolio and tenant base is versus a year ago or two years ago? That would be helpful.

Dennis Earl Gershenson

Michael will follow up with both of you.

Operator

Your next question comes from Rich Moore - RBC Capital Markets.

Richard Moore - RBC Capital Markets

Developments as you pointed out are a tougher side of things. I think everyone is seeing that same sort of dynamic. Dennis, you went through a bunch of tenants that you’re adding, certainly anchor tenants in developments. Are you seeing any fallout on the flip side, because that seems to be where both anchor and small-shops’ fallout is occurring. Are you seeing any of that in these developments?

Dennis Earl Gershenson

I’ll ask Tom to amplify my comments in a minute. We’re not seeing fallout. What’s interesting about both our Heartland development and especially our Lakeland development is we have enough interest from enough retailers that we can’t accommodate them all. As I said in my earlier comments, they are driving tougher deals. The people that we are working with are very familiar. One of the retailers we are working with in Michigan are presently in the metropolitan Detroit area and know very well how well they’re doing here and they find that location attractive and in Florida, we have been working with these retailers for some time because they had wanted to get into our Shops of Lakeland space which we were unable to do. As I said, we have at least two of those retailers that we’re continuing to talk to that we will not be able to accommodate in the development.

Richard Moore - RBC Capital Markets

Even if you lost so many, you’d probably just have enough interest to find a replacement.

Dennis Earl Gershenson

At this juncture, we’re much more focused not on loss but who has the better economics for us. Tom, do you want to add anything?

Thomas W. Litzler

I just want to add to what Dennis has to say, there doesn’t seem to be jumps in some of the categories and there doesn’t seem to be multiple parties interested particularly in Lakeland. The demand is in Heartland as well.

Richard Moore - RBC Capital Markets

Heartland’s costs went up. Is that right, did I get that right when I looked at the supplemental?

Thomas W. Litzler

Rich, this is Tom. Let me clarify that. It’s really a matter more of clarity and timing than anything else and it’s a good segue from your last question to look at creativity here. The Menard’s deal, Menards wanted a deal where we took care of the site work and we took care of the special assessments, it was really a gross deal. So we have made the gross deals with them where we will do their site work, parking lot, competitive pathways, what have you. We are just now getting those costs and when we get those costs inline, we will be able to remove the contingency from the base proforma back into that, so we’ll get a pick-up there. In addition to that, we’re picking up the special assessments at cost for Menard’s. We budgeted for that all in year 1. That will be paid for over 20 years. Our development fees are actually going up because of increased work we’re doing for them. There will be a lift for that once we get the numbers in and clarify the timing.

Richard Moore - RBC Capital Markets

So no growth problems or general construction cost, that’s not part of the problem?

Thomas W. Litzler

Well, it may going up but we budgeted for that and managed for that, we have contingencies.

Dennis Earl Gershenson

Just to amplify Tom’s statement, we now have a firm bid for the site work. That firm bid for the site work is part of the increase that you have seen in the numbers that were published in the supplement. What we did not do, now that we have the site work number in and they’re firm bids; we have not decreased the contingency which we probably should have decreased. The contingency for the site work, the site work alone is $1.5 million. One could argue that we easily could have taken a significant amount out of the site work number and then as Tom had said, we have taken the 20-year payment on the Menard’s special assessment district and treated it as a cost in year 1 and then lastly, what we like to think is modest increases in the site work. The site work is now a fixed number.

Richard Moore - RBC Capital Markets

On outparcel sales, any reason to think those might pick up? It’s early in the development for the various developments that you have but is there any reason to think we might see more outparcel sales over the near-term here?

Dennis Earl Gershenson

Over the near-term, I am not exactly sure we have any outparcel sales because in the developments, you need a lot of the infrastructure and the roadwork in before you’re actually going to close with some of the outlot users. What we are experiencing and what we may talk about in the third quarter is we are achieving some very significant land rents on a number of our outlots and some of which had restaurant users, etc., on them that became somewhat problematic and have left. We will more than double the land rent that they were paying. We’re not building any of their buildings for them. As a matter of fact, I’m a bit surprised about how healthy the land rents are we’re achieving.

Richard Moore - RBC Capital Markets

The two joint ventures we are always talking about, the one joint venture for Aquia and the other joint venture for $160 to $170 million of property, we didn’t hear much about those. Is there anything going on there? You sold the one asset to Heightman.

Dennis Earl Gershenson

Maybe I didn’t clarify it well enough. Rather than the one big joint venture, what we did was we did the ING. We’re doing the Heightman and the financings. Do we have other assets that we would like to contribute to a joint venture? We do. It would be of a much more modest scale because if you remember, it’s something in the vicinity of $240 to $260 million total. Of that total, we are dealing with $171 million as of this date. The most significant difference is in Aquia and in our Lakeland project. In our numbers as far as sources and uses, we’re not, though it may happen sooner, we’re not even counting on getting money in on those two until either the first quarter or the second quarter of 2009. Yet, we have a comfort level based upon our line of credit and the things we still have in the pipeline that there is more than enough money to finish strongly in 2008 and then when we finish 2009 as far as debt availability, it should be significant.

Richard Moore - RBC Capital Markets

So there’s no reason to think we’re going to have a new joint venture partner to do another big slug of assets, is that right?

Dennis Earl Gershenson

Well, we do have a portfolio of assets that we are talking to some people about that weigh in somewhere around $100 million. If we can make an intelligent deal for ourselves, then we’ll move on that. Part of the problem with that is there are not enough shopping centers that are being sold for any of these potential partners to really have a very significant comfort level that’s 6.5%, 6.25%, 6.75%, or even a 7% cap rate that doesn’t make them look a little foolish.

Richard Moore - RBC Capital Markets

That seems to be a recurring thing. Then on Aquia, there were three interested external parties, and then on the last conference call, those three parties, are they still there?

Dennis Earl Gershenson

They are still there. Again, as I had hoped to address in my formal remarks, they want to see more leasing, over and above the first office building, in addition to the movie theater before they’ll be comfortable in committing some very significant dollars into this project. Interestingly enough, as recent as this week, we were down at a conference in the Washington, D.C. area. We have not an insignificant amount of hotel interest. We’ve got interest from a number of health clubs to continue to round out this mix-use idea, in addition to the retail tenants that we are working with. The basic design of the center remains the same but we may have some interesting variations on the theme that should be very financially lucrative for us. Of course, the location absolutely can’t be duplicated.

Richard Moore - RBC Capital Markets

So then we shouldn’t look for one of these partners to step in before first quarter of next year?

Dennis Earl Gershenson

We are actually showing in our sources and uses internally that we wouldn’t have our partner online until the second quarter of ’09. Again, we continue to push and if we get significant enough tenant commitments, then we could move that up.

Operator

Your next question comes from [Inaudible] - Carter Capital Management.

Inaudible Analyst – Carter Capital Management

I had a couple of questions on Aquia. I believe you said you were looking at $8.3 million. Was that an IR number that you gave?

Dennis Earl Gershenson

No, it’s a first-year cash on cash number against cost, and those costs included not only the cost to build the building and completely tenant the building, but also included a proportionate share of original basis in the original shopping center as well as a proportionate share for the infrastructure for the balance of the development, for the office building.

Inaudible Analyst – Carter Capital Management

So when you say first year, do you mean first stabilized year?

Dennis Earl Gershenson

Yes.

Inaudible Analyst – Carter Capital Management

In the supplement, the $8.9 million that I am looking at, was it a return on cost?

Dennis Earl Gershenson

That’s for the overall project.

Inaudible Analyst – Carter Capital Management

Oh, the $8.3 million was specifically for the office building.

Dennis Earl Gershenson

Yes.

Inaudible Analyst – Carter Capital Management

Just looking at the timing and the cash flows on that project, it seems things have got shifted a bit. Do you have any more detail? At this point in the call, you talked about, can you give me a little bit more detail about what you expect to see in the phases? Any more detail would be helpful.

Thomas W. Litzler

This is Tom. As Dennis said in his question and answer just then, it is completely based on demand. We have strong interest from office players and strong interest from the hotels. We also have some multi-family apartment developers that we are talking very seriously to so it’s really going to be a function of being prudent and doing this in a timely fashion where we make the right deals.

Inaudible Analyst – Carter Capital Management

In these SG&A cash flows for 2009, 2010, 2011, how do you determine how to allocate those dollars? Just estimate it by year, can you give us a rough guess?

Richard J. Smith

We can give an educated guess, not a rough guess on how we think it’s going to play out. We expect a good change providing someone stepping up sooner or later on some portion of the projects. That’s cost right?

Inaudible Analyst – Carter Capital Management

Yes, cost.

Richard J. Smith

Right, and the cash flows will follow the costs.

Inaudible Analyst – Carter Capital Management

Obviously, they look like they are pretty detailed, so I assume you must have a base case that you are estimating right now in terms of timing.

Richard J. Smith

A pretty detailed model and cash flow model on the project, but again it is subject to change.

Dennis Earl Gershenson

I think both to give the investor a comfort level and to hopefully help to explain how we’re approaching this project, when we put those original numbers together and we may have modified them slightly, probably in the third or maybe even the fourth quarter, we’ll have a better idea of how we might vary those expenses as far as pushing them forward or moving them back as this various sudden interest matures. We will not go ahead and just start building the shopping center because it also involves other elements. In the hope by the time we put it up, we can find some tenants for you.

Inaudible Analyst – Carter Capital Management

Then in the redevelopment projects, there were a couple, Troy Marketplace and College Point Plaza, I was just wondering what is going on with those two, if there was anything. It looks like they have shifted some of their costs out from maybe 2008-2009, so I was wondering if there was anything?

Dennis Earl Gershenson

In Troy Marketplace, the LA Fitness is open. We have a deal to build an outlot building that we’ll partially free-lease, that we will build next year. That’s that cost. In the case of College Point, it’s subdividing a vacant grocery store which we got three users for which most of those costs will be next year.

Operator

Thank you. There are no further questions at this time.

Dennis Earl Gershenson

As always, we thank you all for your interest. Hopefully, you can see from the information we provided that here as well as what we expect to accomplish both in the third and fourth quarter, we are positioning ourselves for oversize growth in FFO in 2009 and well into 2010. I stand by my comments that I made in earlier quarters that you are going to see some very significant growth from us in earnings as we go forward later this year and into next year. Thank you again for your attention.

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