Oct 27, 2010
Executives
Art Harmon – Director, IR Bruce Duncan – President and CEO Scott Musil – Acting CFO Chris Schneider – SVP, Operations and Chief Information Officer
Analysts
Ki Bin Kim – Macquarie Steven Frankel – Green Street Advisors Suzanne Kim – Credit Suisse Paul Adornato – BMO Capital Markets Dan Donlan – Janney Capital Markets Ralph Davies – J.P. Morgan Joe Rice – Erie Insurance Ben Mackovjak – Rivanna Capital Mike Muller – J.P.
Morgan
Operator
Good morning. My name is Chris and I will be your conference operator today.
At this time I would like to welcome everyone to the Industrial third quarter results call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
I will now turn the call over to Art Harmon, Director of Investor Relations. Please go ahead, sir.
Art Harmon
Thanks, Chris. Hello, everyone, and welcome to First Industrial's call.
Before we discuss our third quarter 2010 results, let me remind everyone that the speakers on today's call will make various remarks regarding future expectations, plans and prospects for First Industrial, such as those related to our liquidity, management of our debt maturities, portfolio performance, our overall capital deployment, our planned dispositions, our development and joint venture activities, continued compliance with our financial covenants and expected earnings. These remarks constitute forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
First Industrial assumes no obligation to update or supplement these forward-looking statements. Such forward-looking statements involve important factors that could cause actual results to differ materially from those in forward-looking statements, including those risks discussed in First Industrial's 10-K for the year ending December 31st, 2009 filed with the SEC and subsequent report on 10-Q.
Reconciliation from GAAP financial measures to non-GAAP financial measures are provided in our supplemental report available at firstindustrial.com under the Investor Relations tab. Since this call maybe accessed via replay for a period of time, it is important to know that today's call includes time-sensitive information that maybe accurate only as of today's date, October 27, 2010.
Our call will begin with remarks by Bruce Duncan, our President and CEO; to be followed by Scott Musil, our Acting Chief Financial Officer, who will discuss our results, our capital position, and guidance; after which we will be pleased to open it up for your questions. Also in attendance today are Jojo Yap, our Chief Investment Officer; Chris Schneider, Senior Vice President of Operations; and, Bob Walter, Senior Vice President of Capital Markets.
Now I'd like to turn the call over to Bruce.
Bruce Duncan
Thanks, Art. And thank you all very much for joining us on our call today.
As you saw on our press release last night, we have some good news to report. With respect to our portfolio, our team continues to do a very good job of leasing as we improved occupancy again this quarter by 150 basis points to 83.6%.
And as you saw on our announcement on Monday, we are also pleased to announce that we were successful in amending the terms of our credit facility. We view this amendment as a game changing event for our company in terms of our long-term strategy, including our execution plan for the next two years.
The amended line gives us covenant relief such that we now have cushion on all covenant ratios and also removes economic gains and losses from the calculation of the fixed charge covenant. Scott will walk you through the specifics on the amendment.
We thank our bank group for their support and cooperation in reaching this agreement, which we believes benefits all of our stakeholders by setting the stage for further de-leveraging in our ability to refine our portfolio. So as we were working towards this line agreement, we've also been hard at work over the past several quarters at reexamining our portfolio.
We performed a bottom-up review of every asset, which is truly a concerted effort involving our regional teams with their local markets and property level expertise, our dispositions group and our senior management team. Through this process, we've determined a pool of assets that we view as non-strategic to our portfolio.
With the covenants no longer a governor of which assets we can sell, we're going to reshape our portfolio by selectively disposing of these assets while generating funds to further reduce our debt. Related to this non-strategic pool, we took an impairment charge totaling approximately $164 million this quarter, which reflects the change in our asset management strategy and expected holdings period for these assets.
The total book value of this pool is now approximately $414 million. Scott will talk more about the composition of the impairments in his remarks.
Let me characterize the properties in this pool for you, and why we view them as non-strategic relative to our long term strategy. Vacant buildings and lands that are primarily suited to user-buyers continues to be a focus.
This is really a continuation of what we've been doing over the past several quarters, where we have had some very good execution in terms of pricing and portfolio impact. Also, a number of targeted markets – properties are in locations where we have limited holdings and lack economies of scale; or our assets in tertiary markets, which were, for the most part, acquired in portfolio acquisitions over the years.
Additionally, although First Industrial has historically been an investor in a range of properties in the industrial supply chain, our concentration has been in both – in the regional distribution centers and light industrial. We would like to move that concentration higher over time through this process and in the future when we begin to invest again.
So within this pool, we are targeting the sale of buildings that are not optimal for high throughput distribution and light industrial users, but should serve as good homes for a range of user-buyers. Also in this category are some assets in certain markets.
Let me be very clear, given our flexibility with these asset sales, we are seeking appropriate pricing and value. That is we are not engaging in a fire sale.
This is a deliberate, thoughtful process. From this pool of non-strategic assets, we are targeting $250 million to $ 300 million in sales by September 2012.
Capital generated from these asset sales will first and foremost go toward de-leveraging. That is our clear priority.
Once the de-leveraging is complete, we will look primarily to increase our capital allocation in coastal market with prospects for above average rental rate growth and select into opportunities in supply constrained sub-markets in key distribution hubs. Over the next few years, these planned assets – these planned sales – sales proceeds, combined with our capacity to access the secured debt market as well as equity, depending on market conditions, gives us a clear capital plan for our debt maturities and de-leveraging.
Scott will walk you through the roadmap for sources and users through 2012, shortly. Now, let me talk about the leasing market.
We increased our occupancy 150 basis points, our second consecutive quarterly increase. This is ahead of our guidance as our team did a great job of bringing home leases to the tune of 5.3 million square feet of a total leasing across all of our markets.
As a point of comparison for our occupancy gain in the quarter, the overall national industrial market improved a modest 10 basis points according to CB Richard Ellis econometric advisers, although a positive number for the industry is a welcome sign to us and I'm sure to our industry peers. As we look towards leasing in the fourth quarter and beyond, our markets remain competitive.
We are seeing good leasing activity though. Tenant concessions are beginning to lessen.
And in our conversations with tenants, more are contemplating expansions compared to what we were hearing earlier in the year. New construction is virtually non-existent.
And the current market rates and with the availability of existing assets, there is little motivation for new development except for select builders with requirements. Again, while the overall demand picture is picking up, pricing remains tough and our rental rates were in line with our expectations at mid-double-digit percentage decline.
On the whole, we expect rental rates on new and expiring leases to show mid-double-digit declines again in the fourth quarter. Regarding our leasing strategy, we continue to aim to keep lease term shorter in order to preserve the value in long-term NOI growth potential of our assets.
Leases commencing year-to -date have average terms of 4.3 years, compared to our overall portfolio average of six years. If you include short-terms leases, the average term for the quarter was 3.6 years.
Las time, we also spoke to you about the higher rental rate step-ups we have been successful in structuring into our leases signed this year. Updating you on those numbers, our average annual rent step-up in leases with bumps commencing in 2010 is now 6.7%.
Our typical range has been 2.5% to 3% per annum. So these increases are well to offset a portion of the expected rent roll-down in the next several quarters.
Looking at the leasing traffic in our region, New Jersey, Houston, Baltimore, Washington, St. Louis and Indianapolis are all showing good activity.
Atlanta, Florida and Dallas remain highly competitive but we've had some leasing wins in each of these markets. Regarding occupancy for the remainder of the year, with our performance in the third quarter outpacing our expectations, we expect the fourth quarter to be roughly in line to slightly ahead of our third quarter figure.
We will provide guidance for full year 2011 on our fourth quarter call. Moving on to the investment markets, the activity in the industrial sales market continues to ramp up with some highly publicized portfolio sales by a few of our peers.
Demand is being driven by the need for yield, and investors expecting industrial to benefit from recovery even if it is a slow-paced one. This stronger sales market should benefit us as we execute our portfolio management strategy.
Users continue to be an important market for our properties. During the quarter, we completed $9 million of sales on balance sheet, all to users.
We sold four vacant assets located in Detroit, Cleveland, Minneapolis and Philadelphia. These sales serve as a preview for the type of execution we will be looking to achieve with our non-strategic assets.
It's a particle intensive process but we have a good track record here and the team and infrastructure in place to be successful in achieving our goals. For another indicator of the sales market, we sold a leased asset in Southern California as part of the wind down of certain joint ventures during the quarter for $27 million and $153 per square foot.
Interest is very high with this asset receiving numerous serious bids. So we are encouraged by what we are seeing in the sales market as far as to what it means to our sales plans, and by implication, what it means to the value of our income-producing property.
Now I'd like to address the dividends. As a REIT, we know that our investors look forward to the day that we reinstate our dividends.
Management and the Board will continue to review it on a quarterly basis but there is still work to be done de-leveraging and increasing our occupancy. I remind you that our dividend policies to distribute the minimum amount required to maintain our REIT status.
If required to pay a common dividend in 2010, we may elect to satisfy this obligation by distributing the combination of stock and cash. Taxable income levels are, in part, dependent upon the level and nature of our sales.
Regarding our preferred dividends, with our relaxed covenant and our amended credit facility, we have increased cushion such that we would expect to continue paying our preferred dividend as we have been doing. As a matter of course, we review our position quarterly and dividends are approved by the Board.
So before turning it over to Scott, let me just say our team has been focused on leasing as the long-term driver of value of our company. We will apply that same focus towards executing our portfolio management strategy as we seek to sell non-strategic assets for de-leveraging and reshaping our portfolio.
Valuation in the industrial real estate markets continue to improve. As we execute our strategy and continue to demonstrate the value of our platform and portfolio, we will enhance our value for our shareholders.
So with that, Scott?
Scott Musil
Thanks, Bruce. First, let me walk you through our results for the quarter, which contained a number of one-time items.
For the quarter, funds from operations were a loss of $1.96 per share compared to income of $0.57 per share in the year ago quarter. FFO results were impacted by a few one-time items during the quarter.
Non-cash impairment charges of $2.39 per share related to the non-strategic pool of assets we planned to sell that Bruce described, which I will walk you through in detail in a moment. JV FFO was $10.7 million or $0.16 per share, primarily reflecting the economics of the wind down of certain of our joint ventures.
Included in this figure was approximately $1.3 million or $0.02 per share related a sales transaction that occurred after the sale of our joint ventures closed, for which we were entitled to certain economics. We have not factored this into our prior FFO guidance.
Excluding one-time charges such as impairment charges, gains and losses from debt repurchases, income tax benefits, and the gain related to the sales of certain of our joint ventures, funds from operations were $0.29 per share compared to $0.34 per share in the year ago quarter. EPS for the quarter was a loss of $2.44 per share versus a loss of $0.04 per share in the year ago quarter.
Let me quickly walk you through the non-cash impairment charge, which is made up of two pieces. First, at September 30th, management had approved for sale two parcels of land.
Since these land parcels were held for sales for accounting purposes, we compared the sales price less cost of sales to the book value to determine if an impairment charge was warranted. Since the fair value less cost to sell for these two land parcels was less than book value, we recorded an impairment charge of $1.5 million.
Second, since the amendment of our line of credit now allows us to sell properties at economic losses, we are marketing for sale a group of non-strategic assets that is comprised of 195 properties totaling 16.4 million square feet and 694 gross acres of land. Since the approval to sell these properties occurred in the fourth quarter, at September 30th, these properties aren't considered held for sale but rather held for use for accounting purposes.
Under held for use accounting, we compared the undiscounted cash flows of these properties to the projected hold period to the carrying value of these assets. This is done on a property-by-property basis.
Since our line of credit covenants are no longer restrictions on our ability to sell these properties, the whole period of these assets has been reduced. Based on this exercise, the majority of the assets within this pool didn't meet the impairment test which required us to write these assets down to fair value, which resulted in an impairment charge of approximately $162.4 million.
In the fourth quarter, these properties will be considered held for sale for accounting purposes, and we will be required to book impairment charges of approximately $11 million related to the anticipated sales cost. Lastly, we will also book approximately another $3 million of an impairment charge in the fourth quarter related to property that passed the impairment test under held for use accounting but didn't pass under held for sale accounting.
Moving on to the portfolio, our occupancy for our in-service portfolio is 83.6%, up 150 basis points since the last quarter. In the third quarter, we commenced 5.3 million square feet of leases on our balance sheet.
Of these, 1.5 million square feet were new, 2.2 billion were renewals, and 1.6 million were short term. So far in the fourth quarter, we have commenced another 2 billion square feet.
For the quarter, tenant retention was 69.8% and our weighted average for the first nine months was 67%. Same store NOI at a cash basis was -1.3% excluding termination fees.
Same store again was better than expected due to higher than expected occupancy. Termination fees were $1.1 million, which was slightly higher than recent quarters.
Rental rates were down 15.3% cash on cash, reflective of the competitive leasing market. On a GAPP basis, rental rates were down 11.2%.
Leasing costs were $2.04 per square foot for the quarter in line with our expectations. We expect fourth quarter leasing cost to be roughly $2.20 per square foot.
Moving on to our capital market activities and capital positions, as Bruce discussed on balance sheet, in 4Q we sold four vacant assets to users amounting to 256,000 square feet for sales proceeds of $9.1 million. On the secured financing side, we closed one transaction in the third quarter totaling $41.2 million with the light company, backed by 11 buildings with a ten year maturity at a coupon rate of 5.55%.
Subsequent to the end of the quarter, we closed one transaction for $9.8 million with the local bank secured by two properties with a five-year maturity at a 5% interest rate. Due to the line of credit amendment, we paid down $100 million on October 22nd, and in the third quarter, we also completed the repurchase of $16 million of our notes due April 2012.
Let me briefly walk you through our planned sources and uses for 2012. First the uses, as Bruce described, we have $147 million of the 2011 converts, $62 million of the 2012 notes, and $34 million of mortgage maturities for 2012, plus we are planning to make another $100 million pay-down on our credit facility.
These uses total $343 million. As we look at the arrows in our capital quiver, we have discussed our plan to sell $250 million to $300 million of assets from the pool of non-strategic assets from now through September of 2012.
In addition, we are targeting another $100 billion in secured financing by June 2011. Total sources approximate $375 million, which exceeds the $343 million of use as I just discussed.
We also will likely consider additional equity depending upon market conditions as part of our de-leveraging process. Recall that we had our ATM program in place for 9.5 million shares.
Note that we did not issue shares under this program in the third quarter. Any excess proceeds will predominantly go towards retiring other debts.
So you could see that we have a clear plan and path to take care of our maturities through 2012. Quickly summarizing our capital structure and position, our weighted average maturity at 7.4 years, we have $15 million of maturing debt and regularly schedule principal payments for the remainder of 2010 with $13 billion related to a mortgage maturity in December.
Our cash position is approximately $32 million. Now, let me cover for you briefly our line amendment.
The capacity is now $400 million following our $100 million pay-down. The facility is comprised of a $200 million term loan and $200 million revolver.
Interest rate on term loan is LIBOR plus 325 basis points note facility fee. The interest rate on the revolving facility has been increased from LIBOR plus 100 basis points to LIBOR plus 275 basis points and our credit rating plus the 50 basis points facility fee.
The maturity date remains September 2012. The amended credit agreement contains relaxed covenants.
The fixed charge coverage ratio limit was reduced from1.5 times to 1.2 times through maturity. Additionally, the value of unencumbered assets ratio was also revived with the limit reduced from 1.6 times to 1.3 times for initial period ending September 30, 2011, after which it reverts back to 1.6 times through the maturity date.
And as Bruce highlighted, economic gains and losses on asset sales are no longer included in EBITDA and the calculation of the fixed charge coverage ratio. You can find the covenant metrics for our unsecured notes in our line of credit and our supplemental on page 20.
As we have discussed on prior calls, the two covenants, we were very close for the fixed charge coverage ratio and the ratio of value of unencumbered assets to outstanding consolidated senior unsecured debt under our line of credit. On September 30th, our fixed charge coverage ratio was 1.53 times, compared to 1.2 times for the covenant.
And our value of unencumbered asset ratio was 1.57 times, compared to the covenant of 1.3 times. Regarding 2010 guidance, as noted in our press release, our FFO per share guidance range is now a loss of $1.65 to $1.70, compared to our prior guidance $0.90 to $1.00 per share due to the following, a $2.67 impairment charge we are recognizing in 3Q and 4Q related to the non-strategic portfolio properties we are marketing for sale; an additional $0.02 per share of restructuring charges we will recognize in 4Q related to the sublease of office space in our corporate office; a $0.04 per share reduction in G&A due to two items, approximately $0.02 per share related to permanent expense savings, the other $0.02 per share related to a cost allocation between G&A and operating property expenses reflected in NOI, the net FFO impact is the second adjustment is zero; a $0.05 per share decrease in NOI; $0.02 per share related to the cost allocation I just discussed, this has no impact on cash pay rents; the majority of the other $0.03 per share relates to a decrease in straight line rent due to reserves on some of our tenants; a $0.02 per share increase in JV FFO as discussed earlier.
Excluding the fourth quarter impairment charge, we see FFO at $0.20 to $0.25 per share in the fourth quarter. Our guidance does not reflect the impact of any further debt buybacks nor the impact of further asset sales and REIT compliant gains that may occur in the remaining quarter of 2010.
The guidance also did not reflect any potential additional equity issuance. I will reiterate some of the key components of our guidance for 2010, which is found in our press release as well.
For the year, we expect average in-service occupancy to be 82% to 83%, an increase in the bottom end of the range. Our forecast for same store NOI for the year is projected to be negative 3% to negative 4%, an increase in the mid-point and a tightening of the range due to the positive variances in the third quarter versus our prior guidance.
JV FFO is expected to be $15 million to $16 million. I would note that on a go-forward basis, our only ongoing venture is our 2003 net lease joint venture from which we earned roughly $300,000 per quarter of JV FFO.
We may receive some additional economics related to our former FirstCal joint ventures in the coming quarters, but those are not reflected in our guidance. G&A guidance is reduced to a range of $28 million to $29 million versus our prior range of $30 million to $32 million.
With that, let me turn it back over to Bruce.
Bruce Duncan
Thanks, Scott. Before we open up to questions, I just want to spend a few moments talking about the opportunity we have at First Industrial.
And the opportunity we offer to investors in light of our line of credit amendment. As we have stated in the past, we acknowledged that our leverage is too high and that we need to reduce our debt to EBITDA to 6.5 times to 7.5 times more than we stand today at around 9 times.
We are committed to the de-leveraging. And we have laid out our path for you on the capital side, which include sales of non-strategic assets and possibly equity depending on market conditions.
And we also plan to help our leverage ratio by increasing the EBITDA in the denominator by growing occupancy. Even with our occupancy increase this quarter, the 83.6%, we still have much room to drive increased cash flow from our portfolio.
Every 1% increase in occupancy increases our cash flow by about $4 million, so we have great internal growth potential embedded in our portfolio. In looking at that for many relative valuation metrics, we look cheap relative to our peers.
At $6.50 a share, we traded around 7.2 times our run rate FFO. On a price per pound basis, we traded just under $38 per square foot, substantially less than our peers, and more importantly well below replacement costs and below resale comparables, which is just appropriate in today's markets.
In addition to our earnings power, we have a very valuable platform and a talented team that has done a fantastic job of executing our back to basics plan of portfolio, capital, and expense management. Our path ahead is now even more clear.
We look forward to keeping you apprised of our progress as we enhance value for our shareholders. We'd now be happy to take your questions.
As a courtesy to our other callers, we ask that you limit your questions to one plus a follow-up in order to give other participants a chance to get their questions answered. Of course, you're welcome to get back into the queue.
And so now, operator, can we please open it up for questions?
Operator
(Operator instructions) Your first question comes from the line of Ki Bin Kim with Macquarie.
Ki Bin Kim – Macquarie
Thanks. Congratulations on getting your credit facility amended.
In regards to your – the 195 properties that you identified for dispositions, I just want to clarify your comments. You said your target – you're targeting $250 million to $300 million for sale by 2012.
Is that the total 195 or is that – what percent of that 195?
Bruce Duncan
It's just a dollar amount, Ki Bin. We're saying that of that pool – $400 and some million, we're saying we're going to sell $250 million to $300 million by September of 2012 because we didn't want to say we're going to sell all because we want to make sure we have flexibility to be able to maximize value.
Ki Bin Kim – Macquarie
Okay. And as a follow-up, given that some amount have been moving in the right direction, some occupancy, and the credit amendments – your credit covenants are relaxed and you have tons of assets that you want to sell, how does that make you think about your need to raise equity especially at these prices?
Bruce Duncan
Well again, we view our equity as very dear to us in the sense that you noticed we have not raised any equity in the last quarter with our ATM. We have an ATM in place.
We view it as another arrow in our quiver. If you look at it, we think with the plan we've outlined, we can take care of our maturities, including an additional $100 million planned pay-down with our aligned – within the lines and maturities in September 2012, either that puts duty on our sales plan of these non-strategic assets as well as using some secured debt.
So we have the ability to raise equity, but we'll look at that depending on the market price.
Ki Bin Kim – Macquarie
And so, is it safe to say at today's prices, it's probably highly unlikely that that would happen?
Bruce Duncan
I would say just keep looking in terms of what we've done. It would not be an issue on equities at these prices, so I would not anticipate it.
Ki Bin Kim – Macquarie
Okay. Thank you.
Bruce Duncan
It's important to us in terms of the value of what we see in our business that equity is here.
Ki Bin Kim – Macquarie
All right. Thank you.
Bruce Duncan
Thank you.
Operator
Your next question comes from the line of Steven Frankel with Green Street Advisors.
Steven Frankel – Green Street Advisors
Good morning, and thank you. And it's my key then, congratulations on the covenant renegotiation.
I have a couple of different questions for you regarding some of the assets you're selling. I just want to try to understand price discovery here.
We saw Blackstone purchased about $1 billion of assets from ProLogis, international portfolio at $40 a foot and an 8% cap rate. What do you think about the pricing on that?
And what do you think that indicates in terms of the pricing that you guys are hoping to achieve on some of your sales?
Bruce Duncan
Steve, I don't know the exact assets that they were selling. What I heard from other people was these rents were the best properties that ProLogis had that they were selling.
And they were non-strategic to them. So I don't know.
In terms of the pricing at $40 a foot and 8% cap rate, it sounds reasonable. But I can't comment because I don't know the exact assets that they're selling.
Steven Frankel – Green Street Advisors
Okay. And with your capital – as a follow-up to that, with your capital roadmap, you guys mentioned another $100 million pay-down.
It sounds like, between now and when the line of credit matures, is this something that the banks have sought out or is this something that you're proactively trying to do to stay compliant with the amended covenants when they revert back to what they were previously at the end of next year?
Bruce Duncan
This is more our view. When 2012 comes around, we want to make sure we're in a position to draw over the line with no issues.
For our example, we think we need to produce that line from where it is now at $400 million to $300 million. But no, this is strictly our own program.
Scott Musil
It's at our discretion, right?
Steven Frankel – Green Street Advisors
Okay. I have a clarification question.
You guys mentioned you want to sell 724 acres of land in the press release. But the land inventory shows 661 total acres.
Is there a definitional difference between that? How does that reconcile?
Scott Musil
Steven Frankel – Green Street Advisors
Great. Thank you.
Scott Musil
You're welcome.
Operator
Your next question comes from the line of Suzanne Kim with Credit Suisse.
Suzanne Kim – Credit Suisse
Hi. I'm just curious as to what – do we have any of the real estate under contract for sale at this point?
Scott Musil
There're two parcels of land that are held for sale. One of those parcels sold already.
And one of them, I do not think is under contract. I think it might be under letter of intent.
Other than that, none of the other assets in the pool are under contract or letters of intent.
Suzanne Kim – Credit Suisse
Okay. Great.
And with the 10-year secured deal that you did at a 5.5% that you did last quarter, where do you think – what was the LTV on that deal and where do you think it would price today?
Bruce Duncan
Why don't you take that?
Scott Musil
Yes. The LTV on that transaction was about 68%.
The debt yield was right around 13%. Given where the yield curve is today, tenure paper is probably trading right around 5%.
So we think it's probably 50 basis points inside of that. I would also note that in that transaction that we closed in the third quarter, we have a fair bit of pre-payment flexibility, which caused a little bit of a premium in spread, but we thought it was very much worth it to give us more flexibility going forward to continue to de-leverage.
Suzanne Kim – Credit Suisse
Great. Thank you so much.
Bruce Duncan
Thank you.
Operator
Your next question comes from the line of Paul Adornato with BMO Capital Markets.
Paul Adornato – BMO Capital Markets
Good morning. If you were to strip out the non-strategic portfolio, what would some of the operating metrics be for your remaining core portfolio?
Specifically, what would occupancy be? What would perhaps same property NOI look like for that remaining portfolio?
Scott Musil
I think if you just follow all through that – if you took out the non-strategic portfolio, you'd probably see a pickup in our occupancy, probably on the lines of 200 basis points to 300 basis points. NOI is around the $30 million number.
Paul Adornato – BMO Capital Markets
Okay. And so, I guess another way to ask that is, what's the occupancy of the non-strategic–?
Bruce Duncan
It's in the mid-70s.
Paul Adornato – BMO Capital Markets
Mid-70s? Okay.
Thank you.
Operator
Your next question comes from the line of Dan Donlan with Janney Capital Markets.
Dan Donlan – Janney Capital Markets
Good morning. As a follow-up to what Paul was saying, did you say that the total portfolio that you're looking to sell generates about $30 million of NOI?
Scott Musil
Yes.
Dan Donlan – Janney Capital Markets
Okay. And we're just curious, as you do a study of assets, is there going to be further reductions, you think, in G&A that you'll be able to realize?
Bruce Duncan
I think in terms of the platform, we think the platform is very valuable. We'll talk about in terms of – we'll give you our budget for 2011 in the next quarter when we do the guidance for the year.
But my guess is our run rate G&A today is probably – I mean for next year, will be in the ballpark of $25 million, $26 million. That's probably the figure.
But don't hold me to it. We'll give you firm number in the next quarter.
Dan Donlan – Janney Capital Markets
Sure, understood. And I guess as a follow-up, are any of these assets that you're looking to sell or any of them already encumbered?
Bruce Duncan
No.
Dan Donlan – Janney Capital Markets
Okay. Thank you.
Operator
(Operator instructions) Your next question comes from the line of Mike Muller with J.P. Morgan.
Ralph Davies – J.P. Morgan
Hi. Good morning.
It's Ralph Davies with Mike. I have a question in regards to your G&A.
You talked about $0.02 of permanent savings. But if I look at your guidance for the year, the $28 million, $29 million, I'm coming out with the fourth quarter G&A run rate that looks like your 2Q.
And I was just wondering if you might be able to walk through that?
Scott Musil
Sure. If you look at our second quarter, our G&A was $4.9 million.
And you're probably around high 6%, 7% for the fourth quarter based upon our midpoint guidance. There're some timing items involved between the differences between the third quarter and fourth quarter.
The other thing, as Bruce mentioned, if you want to get a good run rate for what we think 2011 is going to be, and again don't hold us to it because we're still firming up the budget, we think it's going to be a range of $25 million to $26 million for 2011.
Ralph Davies – J.P. Morgan
Okay, got it. And then, I know you talked about $30 million of NOI of the aggregate portfolio.
But in terms of the mix for next year, that $250 million to $300 million, do you have a sense for how much of that is (inaudible) versus income-generating property?
Bruce Duncan
I think it can be a function of what the market – what we see the in the market and what we get in terms of – we give you a color on that every quarter as we show you what we're able to sell.
Ralph Davies – J.P. Morgan
Thank you.
Bruce Duncan
Thank you.
Operator
Your next question comes from the line of Joe Rice with Erie Insurance.
Joe Rice – Erie Insurance
Yes. Good morning.
I just have a brief question. During the call, you had made a comment regarding the preferred dividends and you had highlighted the covenants that you were able to change, which was great.
But you said that that also then increased the cushion to continue paying the preferred dividends. And I guess I just want to zero in on what you meant by increased cushion and what we should look to going forward, how to measure and look at that cushion as far as the preferred being continually to be paid.
Scott Musil
Yes. If you look at page 20 on the supplemental digits once through the covenant calculations, and the main covenant that's impacted by the payment of the preferred stock is our fixed charge coverage ratio and our unsecured line of credit.
And just to give you a reference point where we stood at September 30th, we were at 1.53 times. And the current covenant at this point in time under the amended line is 1.2 times.
So we feel that that cushion is enough to enable us to keep hanging on the preferred. But as we mentioned, that's something that the Board has to approve every quarter.
Joe Rice – Erie Insurance
So is it safe to assume that as long as you exceed that 1.2 times that you'll look at that positively or is there some cushion over the 1.2 times or–?
Bruce Duncan
I think what Scott is saying is we got a lot of cushion. We anticipate paying the dividend.
But as a matter – of course, it's the Board that makes that determination every quarter in terms of – and approves the dividends. My depth is that will be good.
We should expect they're being paid.
Scott Musil
Thanks, Joe.
Operator
(Operator Instructions) Your next question is a follow-up from the line of Ki Bin Kim with Macquarie.
Ki Bin Kim – Macquarie
Yes, just a quick follow-up on – so if you look at the 195 properties and your 150 basis points increase in occupancy, what percent of that increase in occupancy was related to the non-strategic assets?
Bruce Duncan
What percentage of the–?
Ki Bin Kim – Macquarie
The increase in occupancy that you–
Bruce Duncan
The 1.5% that we just did?
Ki Bin Kim – Macquarie
Yes, the 1.5% occupancy increase, what percent of that was related to non-strategic assets versus your core?
Chris Schneider
Ki, this is Chris. For the quarter, we sold the four properties.
And all four properties were sold or – sold as vacant properties. That impact was about 35 basis points.
Ki Bin Kim – Macquarie
No, I mean, I guess – you might have misheard my question. So your portfolio increased occupancy by 150 basis points this quarter.
So if you had to split that up between your core and 195 properties that you're putting up for sale, how does that increase in occupancy divide up between the two poles?
Chris Schneider
You're asking what is the occupancy change on the 195–
Bruce Duncan
I don't think we have that question for you, Ki – the answer, but we will get that and get back to you.
Ki Bin Kim – Macquarie
Okay. And can you give any commentary on what markets are those properties bought in?
Bruce Duncan
It's all over.
Ki Bin Kim – Macquarie
Okay. All right.
Thank you.
Bruce Duncan
Thank you.
Operator
(Operator Instructions) Your next question comes from the line of Ben Mackovjak with Rivanna Capital.
Ben Mackovjak – Rivanna Capital
Hi, guys. Nice quarter.
Thanks for taking my call. For the 195 properties, can you share with us the book value for those after the impairment charge?
Scott Musil
Yes. As we said in our remarks, the book value after that is about $412 million.
Ben Mackovjak – Rivanna Capital
Okay. And then, looking at the debt maturities for 2012, it's $583 million in the supplemental.
Is that just $483 million now, we just take $100 million off that?
Scott Musil
You should because that was effective as of September 30th. But if you pro-form the $100 million pay-down, yes, you should take out the $100 million off of that.
Ben Mackovjak – Rivanna Capital
Okay. And then, the $83 million is that preferred?
Scott Musil
The $83 million is the $62 million of our 2012 notes coming due in April of '12. And we've got some principal payment there of about $78 million in that year.
And then, the remaining is just mortgage maturities that we have.
Ben Mackovjak – Rivanna Capital
Okay. Good.
Thanks a lot.
Operator
Your next question is a follow-up from the line of Mike Muller with J.P. Morgan.
Mike Muller – J.P. Morgan
Hi, guys. Just a question in regards to the occupancy uptick, I was wondering if that happened or was weighted more towards the end of the period.
And I ask that just because I would think that that occupancy uplift would overshadow the negative spreads you're seeing. But in just looking at your top line revenue number, it looks like it went down sequentially.
I'm just wondering if maybe you might be able to walk through that a little bit.
Scott Musil
Sure. On the sequential increase, we've said 150 basis points on it.
Average occupancy from the second quarter to third quarter was about 110-basis point increase. So yes, so the increase was more in the third quarter.
And then also, from NOI, the other part was we had an increase in bad debt from the second quarter to third quarter. So that's the summary.
Mike Muller – J.P. Morgan
Okay. But I mean, that wouldn't see – that wouldn't feed into your revenue number.
Scott Musil
Correct. It's coming from a sequential NOI from second quarter to third quarter.
Bruce Duncan
But no, your point is a good one. The occupancy was back end loaded later in the quarter.
Mike Muller – J.P. Morgan
Okay. Thanks.
Operator
Your next question is a follow-up from the line of Steven Frankel with Green Street Advisors.
Steven Frankel – Green Street Advisors
I did one of sequentially from 2Q to 3Q, and all through that – more expenses, you're now going in the property line item as opposed to G&A. But your same store looks like was entirely driven by expense reductions at about 2.7% in the quarter versus the year ago period.
If I took the G&A stuff out of there, what that probably means is your expenses even went down more, but you're saying bad debt also went up in the period. Can you just help me understand how your same store number is down only 1.3% given that bad debt picture?
Scott Musil
Well bad debt, on a same store basis, even though bad debt went up in the third quarter, relative to a year ago, the bad debt actually dropped about $600,000, $700,000 when you compare the Q a year ago.
Steven Frankel – Green Street Advisors
What about the other expenses? I mean, if I took the G&A part and I assume that it wasn't in there, that looks like your expenses must have gone down even more than 2.7%.
Scott Musil
Yes. We had some other overall expenses, expect to bill state taxes that went down in the current quarter.
Steven Frankel – Green Street Advisors
Is that because property – sold properties that had higher tax phases or I'm not sure what has marked down your real estate tax.
Scott Musil
It's just an ongoing – as far as the tax valuation process, it's an ongoing process. And property values that were actually holding that are going down.
So directly related to that, our real estate taxes are going down from a year ago.
Steven Frankel – Green Street Advisors
Okay. Thank you.
Bruce Duncan
Thanks.
Operator
At this time, there are no further questions. I'll now turn the call back over to management for closing remarks.
Bruce Duncan
Great. Thank you.
And thank you all for being on the call. If you have any questions, please call Scott or myself.
We'd be happy to take them. We're pleased with our progress.
We think the line of credit amendment is a big deal for us. It allows us to focus on our plan of de-leveraging and want to be hitting it hard.
We look forward to seeing you at (inaudible) in November. And again, thank you for your support.
Operator
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.