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Q2 2007 American Financial Realty Trust Earnings Conference Call - Final
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| Copyright: | CCBN, Inc. and FDCH e-Media, Inc. | | Source: | FD (FAIR DISCLOSURE) WIRE | | Wordcount: | 8407 |
OPERATOR: Good morning ladies and gentlemen. Thank you for standing
by. Welcome to the American Financial Realty Trust second quarter
conference call. During todays presentation all parties will be in an
listen only mode. Following the presentation the conference will be
open for questions. [OPERATOR INSTRUCTIONS]. This conference is being
recorded today, August 3rd, 2007. I would now like to turn the
conference over to Muriel Lange, Director of Investor Relations,
please go ahead ma'am.
MURIEL LANGE, DIRECTOR OF INVESTOR RELATIONS, AMERICAN FINANCIAL
REALTY TRUST: Thanks Joshua Good morning and welcome to the American
Financial Realty Trust second quarter 2007 conference call. This
conference call will be webcast. In compliance with regulation FD at
this time, management would like me to inform you that certain
statements made during this conference call, which are not historical
may constitute forward-looking statements within the meaning of the
private securities act of 1995. Although American Financial believes
the expectations reflected in any forward-looking statements are
based on reasonable assumptions, it could give no assurance
expectations will be obtained. Factors and risks that could cause
actual results to differ materially from those expressed or implied
by the forward-looking statements are detailed in the 10K and from
time to time in other company fillings with the SEC. The company does
not undertake a duty to update any forward looking statements. With
us on the call today is our Chairman of the Board Lewis S. Ranieri
and from the company, our Co-President, Glenn Blumenthal, Chief
Operating Officer, Ed Matey, general council and Dave Nettina, Chief
Financial Officer and Chief Real Estate Officer. The American
Financial guidance policy states that earnings guidance will be given
once a year during the fourth quarter with respect to the next
completing calendar year. Earnings guidance is held to be affective
at the date given and will not be updated until the company
publically announces updated guidance. Now I'll turn the call to Lou.
LEWIS RANIERI, CHAIRMAN OF THE BOARD, AMERICAN FINANCIAL REALTY
TRUST: Thank you Muriel. Thank you everyone for attending our second
quarter 2007 earnings conference call. Joining me today is our
executive management team Glenn Blumenthal, Ed Matey and Dave
Nettina. As you all know our CEO, my friend Hal Pote died suddenly on
June 26. We are saddened by his loss. Those his tenure was short Hal
made a remarkable impact on our company and you our investors. Upon
hearing the news our board immediately created an interim office of
the president and appointed Gladden, Ed, and Dave to share Hal's
executive responsibilities until further notice. Additionally we
formed a two-member subcommittee of the board to meet with management
and serve as their sounding board as needed and keep me and the rest
of the board appraised of our on going progress. The board has
retained an executive search firm to find Hal's replacement. We've
formed a search committee comprised of myself and two other board
member to work with this firm. While we endeavor to bring this search
to an expedious conclusion we are confident in the talents of our
management team to continue there work in repositioning and growing
our company and executing Hal's plan. Which I am sure he has gone
over with you all individually and collectively a number of times.
Moving on to today's agenda I will turn the meeting over to
management to present the highlights of the quarter. David?
DAVID NETTINA, EXECUTIVE VICE PRESIDENT AND CFO, AMERICAN FINANCIAL
REALTY TRUST: Thank you, Lou. Good morning everybody. Our comments
today will focus principally on the accomplishments during the
quarter. Needless to say, the quick execution of our initial
financing and property sales efforts in our repositioning plan look
even better today in hindsight given the condition of both the debt
and equity markets. Suffices to say though we have developed a
building pipeline of acquition opportunities which Glenn will
discuss, we're mindful of the state of both the finance and equity
markets and will temper our decisions, regarding the repurchase of
shares with those conditions in mind. That said, as you saw in our
earnings release issued this morning, our key operating results were
in line with our expectations. This quarter continued to reflect
continuing progress in achieving our strategic goals regarding AFFO
dividend coverage, reducing overall balance sheet leverage and
reduction of overhead symbolized by year over year target quarter
results. In addition, results of the quarter reflecting successful
completion of the sale of our second largest asset. Only the remnants
of non-core dispositions remain in completing the objectives we set
out 12 months ago. As we wrap those efforts up, we're making solid
progress in our transition from a repositioning business focus to an
ongoing focus on three key business themes. Regarding our second
quarter results, let me highlight where the team has made particular
progress in meeting those objectives. First drive profitability from
our core real estate portfolio. By first reducing [inaudible] in our
properties thus improving net rents and reducing AFR's burden on
unrecovered expenses. A good example of that this quarter was
achieving a 30% reduction in our overall real property insurance
program which will not only reduce costs for our tenants, but will
add to us, about a penny of AFFO annually in reduced expense
non-recovery. Secondly, by leasing up vacancies which Glenn will
address shortly. And third by reducing our own cost of doing business
which is highlighted in our year over year improvement and MG&A
costs. The second focus is new business. First by continue to develop
a building pipeline, second to close the pipeline of opportunity and
third to mind the relationships we have. Thirdly, rationalize capital
structure to better manage transaction yields in capital costs while
managing our overall leverage levels. This quarter we achieved a 63%
debt to net book ratio well inside the mid range of 60% to 65%
target. Secondly, we are actively working with advisors to identify
joint venture opportunities for both existing assets as well as
future pipeline. The plan we outlined last quarter is well underway.
At this point, let me hand things off to Glenn to discuss our leasing
disposition and acquisition activity.
GLENN BLUMENTHA, SENIOR VICE PRESIDENT, AMERICAN FINANCIAL REALTY
TRUST: Thanks, David. Picking up on what David has stated. We
continue to drive the profitability in those properties that we have
elected to retain. On the leasing front, we had a very productive
quarter. Key highlights for the quarter were elimination of two of
our top 10 vacancies located in Blairmill, outside Philadelphia and
North Wake Field Drive in Newark, Delaware. These vacancies comprise
over 200,000 square feet. In the BBD2 portfolio and were vacant as a
result of the Bank of America early lease termination rights executed
in Q1, 07. Blairmill is 97,000 square foot office building we
substainly leased the property to Nutri-Systems for $14.75 per square
foot, an improvement of $2.30 per square foot over Bank of America
prior rent. North Wakefield Drive is 115,000 square foot office
building and we leased the entire property to Comcast on a triple net
basis for a ten year lease term at the same initial rent of $6.80 per
square foot as Bank of America was paying. The Comcast lease includes
annual rent escalations which did not exist in the Bank of America
lease. In total we signed approximately 337,000 square feet of leases
across all portfolios. The average blended rent achieved in these
leases was $13.59 per square foot. During the period, we leased 11
retail branch comprising over 32,000 square feet. At an average
starting net rent of $26.67 per square foot. The other leases
comprising 314,000 square foot,achieved an average gross rent of
$16.45 per square foot. At Harborside, we start to see the market
turning our way. We are pleased with the work JLL is doing at the
site. Presently we have over 49,000 square feet out for lease signing
with the starting rent at $27 per square foot and we expect to see
rent commencement on those transactions in Q1 of 2008. We also have
another 45,000 square feet in different stages of negotiations and
hope to have more news on those deals at our next call. We made
important headway in developing our pipeline of new business
opportunities. Over the last eight months we have worked very hard to
educate Sandler O'Neil and there various customers to create
off-market sale lease back opportunities. We believe those efforts
will start to come to fruition over the next few quarters. As for the
acquisitions during the current period, we closed our first Sandler
O'Neill transaction with Heritage Oaks a Community Bank located in
northern California. This boar branch portfolio is fully occupied and
contains approximately 38,400 square feet and had a purchase price of
$13 million. The average yield on this acquisition is 7.96% including
2.5% annual escalations and rent. We continue to purchase vacant bank
branches from our existing relationships. During the quarter we
purchased 24 branches, two land parcels and assumed one lease hold
interest and presently have 79 vacant bank branches in our inventory.
We continue to see good activity on these locations with leasing and
selling, an estimated nine properties per month. Over the next six
months, we expect to purchase another 50 vacant bank branches from
our existing relationships. Expanding on our Sandler joint marketing
relationship, we're negotiating with over 20 mid-sized Community
Banks throughout the country. These transactions range in size of $20
million to $100 million and a target initial yield of between 7.25 to
7.5 with annual rent escalations. We executed both non-core and off
strategy dispositions during the quarter. In total, we closed 18
property sales comprising of $1.09 million square feet which had an
average occupancy of 84%. Excluding Fireman's Fund, which was 100%
occupied, the remaining assets were 54% occupied and aggregate sales
value of $19.6 million. In addition, 66 properties are currently
under contract to sale in future periods with total contract price
expected to exceed $120 million. With that, I'll hand it back to Dave
for the financial highlights.
DAVID NETTINA: Thanks, Glenn. As you saw in this morning's release,
we reported second quarter AFFO results of $23 million or $0.18 cents
a share, a penny ahead of last quarter and a penny closer to full
dividend coverage. As you recall when we announced the repo, plan we
used the benchmark for performance improvement metrics as the second
quarter 06. So the question is, is the plan having its desired
effects? Versus the second quarter of a year ago, this quarter's
results reflect the reduction of cash MG&A. We achieved about a
$2.1 million reduction MG&A quarter-over-quarter however that
includes a lagging $600,000 repositioning cost. Really about $2.7
million if you assume it's about $2.5 million, we achieved about a
$10 million year-over-year reduction well above our initial targets
and we continue to seek additional savings. We can take that one off
the list. We also reduced leverage and as I said earlier, we're in
the mid-point of the range of 63%. If we fast forward to
dispositions, we'd be at 60%. We've clearly met that objective.
Dividend coverage this quarter was about 92% compared to 61% a year
ago. So we're moving quickly in the direction of covering our
dividend on an operating cash flow basis. Liquidity measures improved
also with interest coverage and fixed charge coverage ratios this
quarter of 1.96 and 1.44 compared to a year ago with 172 and 124.
These statistics demonstrate the plan is working and the inspected
results are being reflected in our operating performance. As we've
now turned our attention toward operating the business. Compared to
the first quarter of this year, the penny improvement came from
higher fee income, lower cycle CapEx and a benefit from share
repurchases offset in part by some unanticipated R&M costs in the
regents portfolio and lower recovery as a result of give backspace
between the two years. Ratio of reimbursement revenue to operating
expenses in the aggregate was approximately 64% before discontinued
operations and 67% afterward, reflecting the benefit of selling a
number of the non-core assets. In the fourth quarter, we converted 24
Wachovia locations to a triple net lease form to reduce
administration and working capital costs. This largely accounts for
the drop in nominal reimbursement revenue which you can see on the
comparable financial statements. We provided additional income
statements that eliminate the Wachovia reimbursement. You can see the
stable income expense. When analyzing the recovery rate of the
adjustment, there's about a 300 basis point downward trend
year-over-year and that's principally related to the two major leases
we talked about last quarter that had expense resets and the variants
I talked about a moment ago with Regents. We expect the reimbursement
ratio to about 65%. With respect to the balance sheet, we've reduced
debt and improved liquidity. We reduced mortgage debt by $186 million
related to the mortgage of Fireman's Fund sale that was, the debt was
accepted by our, assumed by our buyer, a reduction of revolving
credit facilities of $90 million, principally the funds for that
coming from the sale of Fireman's Fund and leading to a reduction of
floating rate debt to about 3.5%. Liquidity improved, currently about
$157 million of unused collateralized availability. $240 million on
acquisition facility. Cash was $75 million on the balance sheet,
about half of which is operating cash. Balance of which is in locked
box accounts. Additionally we have cash and securities related to
debt, escrows and lender reserves of $155 million of which we'll meet
future obligations. Liquidity overall is improved. It will further
improve by net proceeds from the dispositions we discussed about $100
million of net cash along with another $150 million or so reduced
debt. The quarter's results compared to a year ago demonstrate we
achieve our repositioning objectives. We move forward toward our
overall business game plan. As I said at the outset, we're now
focused on key business themes with particular focus on restructuring
the Dana lease and the development of alternative capital sources to
meet our ability to continue to grow the business. Before we break
for Q&A, let me department for a minute from customary practice.
Normally we do not typically make forward-looking statements during
these calls or disclosures that will reflect subsequent quarters. We
are not intending to change this practice, but we want to inform you
that our trustees reviewed Hal's contributions to the company and his
particular contribution of successful implementation of the
repositioning plan. Our board looked at available precedence across a
wide range of industry types to determine the appropriate level of
compensation paid to deceased CEOs for prior services rendered. In
the course of this analysis, we determined in many company CEO's and
other executive officer contracts provide for full acceleration
investing granted restricted stock awards on death. As some of you
may be aware, a proxy disclosed that Hale's employment contract with
the company afforded him no such protection in the event of death.
This was, given our history when he became the CEO in August, Hale
insisted his contract be stripped of certain automatic entitlements
leaving the determination of whether and how he would be compensated
of various circumstances would be the discretion of the board. In
consideration of Hal's many contributions to the company and
appropriate industry practice and in order to demonstrate our
commitment to fairness and to all business dealings, our board has
elected to award to Hal's estate a one-time payment of $5 million.
This payment will be made later in the month and reflected in the
company's third quarter operating results. With that, let me open the
line to your questions for both, Lou, Glenn, and myself.
OPERATOR: Thank you. Ladies and gentlemen, we will now begin the
question-and-answer session. [OPERATOR INSTRUCTIONS]. Our first
question is from the line of Lou Taylor with Deutsche Bank, please go
ahead.
LOU TAYLOR, ANALYST, DEUTSCHE BANK: The properties that you've got on
the market for sale, just maybe describe them a little bit, whether
they're kind of mature assets or whether they're high CapEx assets
and then, expected use of proceeds.
DAVID NETTINA: Uh Lou, basically the assets that remain are the true
non-core, lower occupancy and requiring higher capital expenditures
in order to reposition them. We have about 192 assets in held for
sale. We've got about 53 of which are under contract, about 26 which
are in form going out for signature and about 100 to go. We would
expect to close about $88 million or so in the third quarter in front
of us. We've already closed about $10 million, so call it $100
million in the third quarter and the balance then, probably, there'll
be some additional volume in the third quarter and the balance we'd
look for toward the end of the year.
GLENN BLUMENTHA: You're looking at a portfolio that's about 56%
occupied.
LOU TAYLOR: Okay, and then--
GLENN BLUMENTHA: Barely covering NOI.
LOU TAYLOR: So in terms of existing debt, how do you expect the
proceeds to be allocated?
DAVID NETTINA: You should assume the proceeds are going to go toward
debt paid down in the portfolios the assets come from, relative to
whatever the allocated loan amount would be net proceeds from those
sales, pending acquisition activity, funds being fundable, but
generally those net proceeds being applied to further reduction of
short-term borrowings.
LOU TAYLOR: Okay, and second question pertains to JV discussions you
guys have been holding for the last couple months. Can you give a
sense for where they stand in terms of size or likelihood between now
and the end of the year?
DAVID NETTINA: Right now, it'd be premature to talk to them in terms
of the specifics of how they'd be structured. What I'd say instead is
looking at identifying essentially two types of ventures or at least
two types of investor profile. One would be for the, you know the
long-term income stream, flatter income growth assets on our balance
sheet and the second would be more open ended fund relative to the
triple net business sourcing with Sandler.
LOU TAYLOR: Okay, thank you.
OPERATOR: Our next question is from the line of James Feldman with
UBS.
JAMES FELDMAN, ANALYST, UBS: Thank you very much. You guys addressed
the departure of Chief Accounting Officer. Can you talk about where
he went and if there's anything surrounding that?
DAVID NETTINA: There's really nothing surrounding it. Brian has
worked for us for quite awhile. Very good guy, good friend of mine.
We wish him well. He's going to be the CFO of a new mortgage read. We
have always had kind of a bench strength structure in the finance
group. Chris has been with us about a year. He's done marvelous
things in streamlining the entire process and when he came aboard, he
was kind of always groomed to be the next Chief Accounting Officer.
He's slid into that role smoothly.
JAMES FELDMAN: Okay, and then, can you talk about what the current
credit environment and even the equity markets have done to your
business plan in general? If we were having this conversation three
months ago, how would things look differently in terms of your game
plan?
DAVID NETTINA: I don't know that it affects the game plan, per se,
certainly retrospectively, the success we had in selling major assets
we sold would have been materially affected, at least in the short
run. I think the way we're looking at credit markets right now as
they are obviously somewhat unpredictable. There's a significant
reaction to different issues in the market and we're going to have to
wait and see how things sort out over the next 30 to 60 days. We've
seen in pools of assets that we've been financing that where
conditions allowed for 10 year IO financing and leverage level
between 75% and 80% that it looks a lot more like 70%, 75 % maybe a
couple years of IO and going back to amortizing type of loan
structure. Spreads obviously have widened. There's no way of telling
you what the fixed spread is going to be. Right now it's somewhat
open ended, but I would say the two pools, one pool we did in the
second quarter went from what was originally maybe 110 basis points
spread to about 130 basis points spread. We have a second pool that
we're in the process of taking to market. We'll see how that looks
and we may hold on that until things sort out. As it relates to
pricing, we clearly look at what the underlying debt and cash flow
would be from a perspective investment that we would make and we
quoted accordingly.
GLENN BLUMENTHA: On the disposition side, we do see some push back,
but thats from the we see assets. These assets are not credit driven.
They're more investor driven, so you know, it's more equity to be put
into these assets on a purchase.
JAMES FELDMAN: Okay and finally, what were the leasing spreads in the
quarter? I didn't see it in the supplemental. Break it up by branch
versus office?
GLENN BLUMENTHA: On the branch side, as far as, it's in the
supplemental, we talk about, at least the retail at $26 a square
foot.
JAMES FELDMAN: I guess versus the expiring?
GLENN BLUMENTHA: On the branch side--
DAVID NETTINA: We don't have any expiring.
JAMES FELDMAN: So it's vacant anyway?
GLENN BLUMENTHA: Yes. On the office you're looking at , the major
terminations that expired was 150,000 square feet in Miami, top 10 of
our vacancy this quarter. We terminated a lease that was in place,
basically the charter school that went bankrupt. We've turned around
and are selling that property. Other space would be 45,000 square
feet of Bank of America at a net number of $6.80 a square foot in
JAMES FELDMAN: Okay, and then do you think you will renew the share
buy back plan?
DAVID NETTINA: Well the board has authorized $100 million program. We
executed $25 million in the first quarter. As I said in my earlier
comments, we're certainly looking at the market and looking at what
our investment profile's going to be. That would certainly be a part
of it we'll talk about with our board.
JAMES FELDMAN: Okay thank you.
OPERATOR: Our next question is from Aaron Adlickson with Stifel
Nicolaus.
AARON ADLICKSON, ANALYST, STIFEL NICOLAUS: Thank you for taking my
questions. With the debt equity markets, do you think you're still on
track to complete the dispositions that you previously outlined?
DAVID NETTINA: Yes we are. On the non-core assets, many of these are
being purchased to be repositioned so the typical acquirer, it's
certainly not going to be dependent on the permanent debt market.
They're not, they won't be in a condition to be permanently financed
as they won't be repositioned. All the principle sales are done and
there really hasn't been much reaction as it relates to the market.
There's a certain amount of price reaction but it comes mostly from
due diligence activity.
AARON ADLICKSON: Not seeing a lot of trading on what's already out
there?
DAVID NETTINA: Not from a credit standpoint.
AARON ADLICKSON: From any standpoint?
DAVID NETTINA: Normal due diligence.
AARON ADLICKSON: Okay.
MURIEL LANGE: That's nothing to do with the current market.
AARON ADLICKSON: Okay.
DAVID NETTINA: Assets that are 50% occupied.
AARON ADLICKSON: Right. Okay. And then I missed your buy back
strategy, how much were you thinking about doing in the third and
fourth quarters this year?
DAVID NETTINA: We've not expressed, we haven't expressed what we're
going to do with that.
AARON ADLICKSON: Okay, but we have $100 million program right now,
right?
GLENN BLUMENTHA: We have authorization for $100, we've done $25 to
date.
AARON ADLICKSON: Right, so you can't really project forward or uh--
LEWIS RANIERI: It'll be, it's one of the topics we will discuss with
our board, but we've not yet set a target.
AARON ADLICKSON: Okay. No problem. And how about the current status
of the $450 million convertible notes?
GLENN BLUMENTHA: There's no change in status on that.
AARON ADLICKSON: No change on the converts. Okay, no updates or
anything?
DAVID NETTINA: No.
AARON ADLICKSON: Okay and what about dispositions for the third and
fourth quarter? I think you mentioned--
DAVID NETTINA: We would expect--
AARON ADLICKSON: Earlier.
DAVID NETTINA: We have about $88 million that is yet to be closed,
$10 million already closed. We have at least $100 million that will
be closed in the third quarter. Likely that number goes up. We have a
number of properties in discussion, and the balance I think you'll
see completed by the end of the year.
AARON ADLICKSON: Oh, balance, okay, being what?
DAVID NETTINA: There's $234 million currently in the health for sale.
AARON ADLICKSON: Oh okay, so approximately another $100 in the fourth
quarter, maybe more.
DAVID NETTINA: Right.
GLENN BLUMENTHA: That's on target on what we projected. Predominantly
those assets are BBD2 and Wachovia locked out for the second half of
the year.
AARON ADLICKSON: Okay, great, well thank you very much.
DAVID NETTINA: You're welcome, thank you.
OPERATOR: Our next question is from the line of Doug Christopher with
Crowell, Weeden. Please go ahead.
DOUG CHRISTOPHER, ANALYST, CROWELL, WEEDEN: Thank you very much. Last
call and prior calls you mentioned, you talked about what inning
you're in with regard to the turn around which began last August.
Could you first just kind of characterize that now?
DAVID NETTINA: As the commentary was intended to demonstrate, we set
five point out last year dealt with the sale of assets, we will hit a
total mark around a billion six or so, all of which, but about 200 is
sold and of that 200, 127 is under contract. So that, that component
is complete. Proceeds from sale of those assets has been principally
directed toward the reduction of debt. Our goal is to have an overall
debt balance between 60% and 65% of net book. We deliberately didn't
peg it because that can always be a moving target we wanted something
you could see and measure. This quarter we're at 63%. If we were to
fast forward and get all the dispositions done, we'd be at 60%. That
measures achieved. We have an objective of reducing our operating
costs, you know expressed as MG&A, $6 to $8 million we cut
MG&A by $10 million. If you go back to 2005 and look at MG&A
in 2005, we'd be at a $12.5 million expense cut. That's normalizing
the equity cap as if Hal were still with us. I'm not double dipping.
There's a true cut of at least $10 million and probably more
significant than that, as we streamlined operations, closed London
office, closed New York office, the actual costs would have been
higher than that so the reduction are really more significant.
DOUG CHRISTOPHER: Absolutely.
DAVID NETTINA: That's off the list. That brings us to the coverage of
the dividend. Which we said we would do in the later half of the year
on AFFO basis we reported $0.18 cents this quarter. I will tell you
we're coming out of this quarter on a run rate of $0.18 cents as
well. We've had a number of expense initiatives, unfortunately they
take a while to show up as do cash rents commence and leasing. I
would expect all that good news results in objectives when looking at
the third quarter. That may not be withstanding the $5 million charge
I told you about. We can look past that. I would say we will likely
be achieving that objective. And the fifth objective was to clarify
the message, make sure we told you about what we were going to do and
continue to help you benchmark our performance and I think we've been
doing that.
DOUG CHRISTOPHER: Absolutely.
DAVID NETTINA: I would say it's done.
DOUG CHRISTOPHER: Thank you. Could you characterize the current state
of the company versus it public history right now.
DAVID NETTINA: Current state--
DOUG CHRISTOPHER: Do you have general terms?
DAVID NETTINA: I'm going to ask you to help me with that question.
DOUG CHRISTOPHER: Sure, absolutely. You came public four years ago,
just wondering how you would look at the company in terms of its
focus, the properties, occupancy, do you have the supplemental?
DAVID NETTINA: Let's talk about that, maybe without it being
necessarily statistical.
DOUG CHRISTOPHER: Yes.
DAVID NETTINA: I think a lot of this has to do with a lot of the
opportunity to refocus our people and our operations over the last
year, but the things that I think we have probably brought clarity
to, uh and make it much easier to execute the business on is going
back to our roots, our principle focus is along three principle
business lines, one is acquisition of vacant bank branches, one is
triple net fully occupied bank sale lease back structure, which we've
been mining over the last six months and the other is as opportunity
presents itself to be able to do structured transactions across
multiple office property or branch in office property types the banks
have and give them a certain amount of flexibility and structure.
Internally, we have been, we have all our folks very much focused on
core operating activities. Expense reduction initiatives, renewed
leasing focus, brought to bear an asset management approach that's
finding multiple opportunities and improving the overall portfolio
performance and we've brought both organizational structure that
integrates folks together to work on these portfolios to maximize the
result. As well as it's kind of a global picture of how to operate
the real estate basis. I think relative too where the last couple
years have been, we transitioned back to the core operating focus of
the business. Got a lot of noise out and as a result of repositioning
plan are able to get them focused on day-to-day business and
enhancing value.
DOUG CHRISTOPHER: Thank you very much.
OPERATOR: Our next question is from the line of Mitch Germaine with
Bank of America. Please go ahead.
MITCH GERMAINE, ANALYST, BANK OF AMERICA: Good morning.
DAVID NETTINA: Morning.
MITCH GERMAINE: Glen just an update on Harborside, I want to work
through my math. I believe 120 remained.
GLENN BLUMENTHA: Right.
MITCH GERMAINE: Looks like 49, 45 under negotiations potentially.
GLENN BLUMENTHA: Correct and 16,000 square feet on the first floor
that we're still trying to work our way around.
MITCH GERMAINE: Okay, and that's office space or is that --?
GLENN BLUMENTHA: First floor was originally the cafeteria set. We're
trying to find the right placements for that and it is, yes, retail
configurations.
MITCH GERMAINE: Okay, got you. And should we expect anymore
impairments on the assets for health or sale?
DAVID NETTINA: I think the only ones you're seeing now are
principally those adjustments that are taking place at the end of,
let's say due diligence cycle. The number is probably a little
higher, certainly higher than maybe we would otherwise experience and
one of the principle reasons is that the assets that we have in the
held for sale account include needs to be done in order to separate
out the bank space from what will then become third party space.
That's under the lease term, but unfortunately the time we identified
these properties for sale, did not know what the configurations would
be. So much of what you saw this quarter is really just catching up
with what we did not know.
MITCH GERMAINE: Okay.
DAVID NETTINA: I think as it relates to actual price of the assets
sold in the second quarter, actually closed the, I think it was about
a million six or a million nine of related price adjustment and of
the assest that went to contract this quarter was about another
million and a half to million nine as well. So the number's getting
closer. I will tell you we are anticipating that embedded in this
portfolio yet to be sold, there's $35 million of economic gains. When
we get it done, it's kind of a self-managing portfolio.
MITCH GERMAINE: So not a reflection of market, of the market but more
of a reflection of your best guess versus what happened.
DAVID NETTINA: Our estimate was exactly that, our estimate. Buyer
goes in, if there's something in particular they've got on their hot
button it becomes negotiating item.
MITCH GERMAINE: Okay, and just remind me Dave with regards to the
purchase of the depreciated bank branches, I'm sorry, the vacant bank
branches, do you begin depreciating them right away?
DAVID NETTINA: Yes.
MITCH GERMAINE: So any games go right to FFO?
DAVID NETTINA: Let's be clear, the vacant bank branches you're going
to lease them -- --
MITCH GERMAINE: Or sell them.
DAVID NETTINA: Or sell them.
MITCH GERMAINE: Do you book that gain?
DAVID NETTINA: Like this other asset.
MITCH GERMAINE: Last question: On the $8.1 million debt gain or how
much of that or was any of that included in FFO?
DAVID NETTINA: No. The only gains that we have an FFO as we defined
the metric our economic gains that result from the sale of non-core
assets, well of the disposition assets and only, the only part that
is used is to offset the selling costs of those assets or the costs
related to those assets and their impairments. Other than that if
there's access gain, economic gain its added FAD from a dividend
coverage stand point and we agreed early on that the sale of
Fireman's Fund and the sale of State Street were so material that we
would not count access economic gains as dividend coverage. We do not
include those and we did not include Fireman's Fund excess gain in
this FAD coverage this quarter.
MITCH GERMAINE: Great, thank you.
OPERATOR: Our next question is from Ken Avalous with Raymond James.
Please go ahead.
KEN AVALOUS, ANALYST, RAYMOND JAMES: Hey guys. You guys have done a
nice job sort of the last year. Picking off the low hanging fruit.
The company much easier much more transparent for us to understand.
Can you talk about leasing, from a gross perspective, not so hot.
Nationwide office markets are improving and the second thing, can you
tell me what you bought shares for already, year-to-date, the average
price?
GLENN BLUMENTHA: Okay, let's take the business plan first. You're
right. I wouldn't characterize the last 12 months as easy low hanging
fruit, but maybe in your mind it is. Going forward, the things we're
focused on, you know, Hal and I are pretty straight forward of what
we needed to switch our gears toward. We began to do that, you know,
probably the middle of the quarter, this quarter as we had other
stuff behind us. The principle focus as Glenn talked about, he can
amplify it in a moment is taking care of Harborside. We had direct
focus on that back in January. Built out a lot of the raw space, get
a leg up, we encountered a couple delays. But nonetheless we're
getting the work done. Transitioned one space to the contractor to
finish out because they're going to lease the space. That worked out
pretty good. Second focus, we talked about where we are with the
bonds, but one of the issues we want to deal with first is where we
end up with joint venture investment program because capital source
from that is going to be used in different pockets, some to retire
some of the debt so we can be foolish to rollover $450 million and
find out you need $300. We left that one in the middle knowing it is
midterm objective and deal with it in due course. The longer term
objective and how to best rationalize the structure is Dana
portfolio. We have a number of different scenarios we're looking at
that address what the bank may want, what works for us, what will
create value and as we have something that is more concrete to talk
about, we'll bring that to you. Let's take those three issues and put
them on the side. They're overarching, longer term, little more
involvement. At the core operating level, we had about 2.3 million
square feet of vacancy. 300,000 square feet is in branches we talk
about branch business, you know, at each of these calls fairly
clearly. A couple of million square feet in office a 1.1 million of
which is in the top 10 vacants. We can go down the list and as you
saw this quarter we got rid of 200,000 square feet from the get go.
We have in process at Harborside nearly 100,000 feet that will take
that off the list as well.
DAVID NETTINA: Not only Harborside, but in Chicago. You can go down
the list of the top 10 vacancies, that's what we concentrate on.
That's half of the vacancy in the remaining part of the portfolio.
There's always constant quarter-over-quarter you know, taking off of
the vacant bank branches. We do about nine, like I said about nine a
month selling those or leasing them up. Understanding that the sales
standpoint do not improve the operating efficiencies or numbers in
the same store numbers, but do get that off of our books.
GLENN BLUMENTHA: Now in addition to that, along with that leasing
effort, we've got our folks organized on asset management model and
their focus is looking at and operating portfolios and building on a
total P&L basis. As an example, it takes a while for these
programs to kick in, on the property management side, we've probably
got about $5.2 million of worth of extension dollars. We took another
$3 million out of insurance bills going forward. We have a number of
programs at that level in order to create an improvement in overall
net rents. You have people focused on operating expense, you know
threshold in terms of properties, leasing people focused on
absorption of space and maximizing income. That's kind of where we're
at at this point in terms of the transition from repositioning to a
focus on core operations.
KEN AVALOUS: Thanks, and I guess, would you follow-up and maybe would
you venture, sort of give us a target or goal, ideal same store NOI
type growth number upon stabilization that you're targeting?
GLENN BLUMENTHA: I don't know, I'm going to give this to you as
stabilized number, what we talked about last quarter is what I think
this year should be, this is should be about a 4% or so internal
growth rate on same store that's going to look like 2% in part
because of those two large leases in the beginning of the year that
had a rent reset. Now I've got to refactor that a little bit by the
numbers we got out of the regents portfolio this quarter. I'm going
to tell you, that's what I said last quarter and that's what our
objective is. More importantly, I think we'll devote more of our
discussion in the third quarter with this. Glenn and I are talking
about now is having a little bit more formal or focused attack plan
of where the vacant spaces are and how we're looking at certain
portfolios. That's a little news to come but we're focused on it.
KEN AVALOUS: What did you buy your shares at year-to-date?
DAVID NETTINA: I think weighted average $1044.
KEN AVALOUS: Thank you, appreciate it
OPERATOR: (OPERATOR INSTRUCTIONS) Our next question is a follow-up
question from the line of James Feldman with UBS. Please go ahead.
JAMES FELDMAN: Just a quick follow-up, can you just address the
demand side that you're seeing from the retail banks? Are you seeing
any kind of pull back at all? Or does it look exactly like it did six
months ago?
MURIEL LANGE: No, I would tell you if anything, the demand, the
demand has increased over the last 30 to 45 days. The more the market
acts the way you're seeing it, the more it is going to increase.
JAMES FELDMAN: Can you explain that?
DAVID NETTINA: Because it, as we've spoken before, the bank's got to
look at, looking at the balance sheet and looking at it in context of
the capital markets.
JAMES FELDMAN: Right.
DAVID NETTINA: From a real estate perspective than they do their own
portfolio. The third part is where I'm going to get my capital from
if I'm a banker. Especially in the Community Bank segment, I can use
my assets on the balance sheet, sell them probably have embedded gain
and control occupancy costs long-term. At the operating expense
level, at the income level and given the multiple in terms of how
many times you can turn the capital, it's a better source of funds
for them and a lower cost than it's going to be in today's trust
preferred market.
GLENN BLUMENTHA: Or issuing equity. If you look at small cap banks,
the Sandler O'Neill program is targeted for as an example, you've
got, you know, numbers that you see their stocks go down anywhere
from 20% to, in some cases 50%. That makes the sale lease back as a
source of capital much more powerful.
DAVID NETTINA: Jamie, but, in working with them on a daily basis,
that I do, I will tell you they do not move quickly. It's not
something that they decide today they're going to do and tomorrow
it's executed. That's partly because it's a strategic move.
GLENN BLUMENTHA: Correct.
DAVID NETTINA: The banks we're talking to, when we do a transaction
with them, we're likely taking 100% of the real estate. The decision
making process is going to be a little bit more refined than do I
release the next site.
JAMES FELDMAN: And in terms of demand for retail branches themselves.
DAVID NETTINA: Nine to ten per month. Whether it's leases being sold.
We see activity still strong. I'll tell you in the past it's been one
of the community environment, we're seeing the large, you know the
Bank of Americas or the Regions and those type of large institutions
coming up back and leasing those branches.
JAMES FELDMAN: All right, thank you very much.
OPERATOR: Our next question comes from the line of Kevin Ralph with
Stark.
KEVIN RALPH, ANALYST, STARK: Can you summarize for me what
acquisitions you've got in the pipeline for the second half of the
year? Thanks.
DAVID NETTINA: Right now we're talking to, through Sandler about 20
institutions, Community Banks throughout the country that range
between $20 and $100 million. duediligence stuff I see happening more
in the fourth quarter than I do in the third. From the size of the
transactions, it just that's them longer to materialize.
GLENN BLUMENTHA: And there are a few large transactions, but
obviously that's going to be affected by what's going on in the
market and when this market stabilized.
KEVIN RALPH: Okay. Let me just, hypothetically, if there was a deal,
a single large lease back transaction in the market, that was say
$250 million, would you guys pursue that?
GLENN BLUMENTHA: Yes, we would go take a look at it, analyze it as it
pertains to our balance sheet, capital needs, et cetera. We would
also go out, this is what Dave was talking about in finding that
joint venture partner in order to manage with us on an ongoing basis.
MURIEL LANGE: Our conversations with these potential joint venture
partners are ongoing and frankly, as you know, there's no lack of
liquidity in the system. People tend to like to buy after the flood.
Rather than in front of the flood because they, you know, have a
better sense that they know what value looks like. So I don't think
in that, in that context those conversations are going to be hurt by
what's going on now. And assuming this stabilized someplace.
GLENN BLUMENTHA: And the bigger the volume, the more attractiveness
to the transaction.
KEVIN RALPH: Okay, thank you.
GLENN BLUMENTHA: You're welcome.
OPERATOR: Our next question comes from the line of Michael Levi with
Quatro, please go ahead.
MICHAEL LEVY, ANALYST, QUATRO: I'm not 100% familiar with what's
going on with the specific lease backs. I was wonder what type of
risks you have with a small bank type failing and you being stuck
with an empty property?
DAVID NETTINA: That's a very good question. Let's take it from a
couple different perspectives. Kind of take it a little bit from my
olden days of Citibank. The leases that we're doing are principally
going to be branch leases. Those branches are going to be the, we
look at the deposit balances whenever we go into one of these sale
lease backs in order to assess what we think the risks are. To the
extent one of these banks fail and making the assumptions they'd have
an out of market merger, then you would end up with all of those
generally being taken into the new uh, the surviving entity or the
takeover entity because you know, that's the line of communication
between the bank and the customer. So at that level, you generally,
we don't believe there is significant risk. Now more importantly, the
question is, well when you go into these transactions, what do you do
to review the process? And uh, we spend a lot of time looking at what
the reports are on them. We look at their call reports, we look at
their portfolio, we look at their non-performance in order to be able
to assess whether we think the reason we're being talked to or to
make a transaction is for something other than what we think it is.
We do a fair amount of risk assessment up front. We have tenants in a
principally regulated psychiatry and who generally, as a result in
the event they do fail to perform, usually end up with a more you
know, senior bank entity or competitor taking over their
responsibilities.
MICHAEL LEVY: Do you, okay, thank you, that pretty much answers my
question. Do you have any specific tenants whose, you could say stock
prices have declined to the point where there's talk that, that the
bank's seem to fail?
DAVID NETTINA: Well let's answer it differently. The question is do
we have leases out to finance companies or mortgage companies, the
answer is no.
MICHAEL LEVY: Okay.
DAVID NETTINA: Our relationships are purely with banks.
GLENN BLUMENTHA: Remember, stock price doesn't really mean anything
to a bank. Stock price, you know the regulators don't put a bank out
of business based on stock price. It's the capital account.
DAVID NETTINA: Moral a little bit.
MICHAEL LEVY: Thank you very much.
DAVID NETTINA: You're welcome. If there is, we'll take one more
question.
OPERATOR: Our final question comes from Richard Sloan from H & R
realty
RICHARD SLOAN, ANALYST, H & R REALTY: Thank you fellas. If you bought
back $25 million roughly at $10.40 price, at $8.30 it seems you'd be
more aggressive in buy backs. Is that factoring into your
consideration?
DAVID NETTINA: We factor the purchase of stock, reduction of debt and
investment in future acquisitions uh as part of our capital
allocation process. It needs to be in concert with the rest of our
business plan.
GLENN BLUMENTHA: We can do math.
RICHARD SLOAN: I hope so. Thanks fellas.
DAVID NETTINA: Take care. With that, if there aren't any other
questions, we appreciate you being here today and look forward to
giving our next report next quarter
OPERATOR: Ladies and gentlemen this concludes the American Financial
Realty Trust second quarter conference call. If you'd like to listen
to a replay dial 303-590-3000. The passcode is 11093495#. You may now
disconnect.
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