Acadia Realty Trust (AKR) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Acadia Realty Trust second quarter conference call. At this time all participants are in listen-only mode. My name is Brian and I will be your coordinator today. If you require assistance press star zero and a operator will be happy to assist you. If you wish to ask a question press star one on your telephone. This conference is recorded. I now turn you over to your host of today's call Jon Grisham with Acadia Realty Trust.

Thank you and good afternoon everyone. Thank you for joining us for Acadia Realty Trust second quarter 2003 conference call. You should have received a call of press release. Contact Lizbawm man (914)288-8134. In addition our press release and financial reporting supplement currently available at website at www.acadiarealty.com we are also hosting a web cast ever today's call as well as replay of the call on our website. Certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning ever the Private Securities Litigation Reform Act of 1995. Although Acadia believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations can be obtained. Factors which results that cause you the to differ materially from our expectations are detailed in from time to time in our filing with SEC. Statements made as of the date of the call . Listeners and replay should understand that the package of time by itself will diminish the quality of this statement. Also the con cents of the call are the property of the Company and replay or transmission of the call may be done only with the consent of Acadia Realty Trust. Joining me are Ken Bernstein and Mike Nelsen Chief Financial Officer. Following the discussion there will be an opportunity for all participants to ask questions. At this time I turn the call over to Ken Bernstein.

Thank you John. I am here with Mike Nelsen our CFO. We are quite pleased with our second quarter results, our SFO growth, balance sheet strength and portfolio performance which are all strong indicators that our key initiatives are on track. As we stated in the past three key areas that we focused on for our business are created in the past are strong portfolio opportunity balance sheet and growth program. With respect to portfolio with a combination of aggressive disposition and aggressive redevelopment we created a solid portfolio as evidenced in second quarter portfolio results but as importance of the performance of our stabilized assets. We will walk you through progress year-to-date in current redevelopment pipeline which provide additional strong incremental earnings growth over the next quarters. With respect to balance sheet as Mike will discuss all of key ratios remain strong both on absolute and relative basis. And this provided us with ability to deliver high quality earnings with a safe dividend. Finally with respect to our external growth program I will update you on the program which this year will contribute approximately 10% external earnings growth to our platform. With these three components in mind, Mike will now walk you through second quarter results and the status of our balance sheet. Mike?

Thank you Ken. Good afternoon. First I would like to review our earnings for the quarter and the six months ended June 30th 2003. FFO for the quarter and six months ended June 03 as compared to the quarter in six months ended June 02 are as follows For the three months June 03 we generated $6.8 million FFO or 23 cents a share. With the same quarter a year ago we generated $6.4 million of FF0 or 22 cents a share. However in 2002 discontinued operations contributed two cents a share of FFO. So on a comparable continuing operation basis 2003's 23 cents a share compares with 2002's 20 cents a share or a 15% increase. For the six months ended June 30th, 03, Company generated $14.5 million in FFO or 50 cents a share compared with $18.6 million in 2002 of FFO or 62 cents a share,. Again adjusting for the discontinued businesses in 2002 of eight cents a share, on a continuing basis, 2003 compared with 2004 by 50 cents in 203 and 54 cents in 202. I said two, 04 I apologize. Included in both were effects of lease termination fees and merchant redevelopment. Which in 2003 amount to do six cents a share as compared to 2002 of 17 cents a share. Therefore on a recurring basis, comparable basis, 2003 provided 44 cents a share of FFO and 2002, 37 cents, 18.9 increase. Moving on to AFFO to second quarter six months ended June 2003 we generated $6 million AFFO or 21 cents a share for the three months and $12.8 million or 44 cents a share for the six months. During the second quarter of 2003, which was the first full quarter of operating results for the joint ventures current portfolio, the joint venture contributed three cents of incremental FFO which was in line with our project projections.

On a same store basis NOI for second quarter of 2003 amounted to $9.9 million as compared to $10.2 million of the year ago quarter, a decrease of 3%. Second quarter 2003 was adversely affected by the closing of our Ames stores which happened in the fourth quarter of 2002. After adjusting for the effect of the Ames closing same store NOI for the 2003 quarter increased 1.6% over the prior year. For the six months ended June of 03, same store NOI declined 5.8% from the prior year. This decline can be attributed substantially to the Ames closings as well as increased operating costs which resulted from the harsh winter season. As Ken will discuss later on, we have made important progress in retenting the Ames space which will recover these declines. We believe the Company's results for the second quarter of 2003 represents stable and recurring operations. While we view the initial signs of an economic recovery with a certain amount ofcaution, we believe we are in a position from where we can successfully navigate into the future. As we get into later in this discussion, we have reduced our exposure to interest rate fluctuations such that 100 basis point increase in LIBOR equates to only approximately 1.5 cents of FFO per full year. While we are not able to predict where interest rates are going, we are building 150 basis point increase in interest rates into our estimate of the second half of 2003 or approximately a penny a share. In addition, while we see signs of a recovery, both in our portfolio and in the general economy, we continue to be cautious about the velocity of an economic improvement during the remainder of 2003. Therefore, we are also providing for a possible credit or other losses in our estimates of between two and three cents. As a result of our strong performance in the second quarter as well as expectations for the second half of 2003, which are offset somewhat by the interest rate environment and the general economic conditions, we are increasing our FFO guidance from originally 88 to 92 cents a share, to 92 to 95 cents a share for the year 2003.

Now I would like to turn to our balance sheet. During the second quarter we successfully refinanced our Greenwich, Connecticut property with $16 million, ten year, 5.19% fixed rate mortgage which replaced 1.45 over LIBOR variable rate loan. As a result of this financing, of refinancing, excuse me, on a consolidated basis with our joint venture, Acadia's portfolio dent is 82% fixed rate. Based on LIBOR Acadia's all in weighted average interest rate on portfolio debt is 6%. We believe Acadia's debt structure is well-positioned to hedge against the current rising interest rate environment. Again as I previously mentioned based on the level of the Company's variable rate debt every 100 basis point increased in interest rate only impacts Acadia by approximately 1.5 pennies. Acadia has continued to maintain significant balance sheet strength. As of June 30th 2003 Acadia has working capital of $30 million which includes cash of $34.2 million as well as $45 million of availability under existing credit facilities. At June 30th, 2003, our debt to market capital ratio was 43% which compares to 49% at year end 2002. FFO payout ratio at year end 2003 was 61% while six months ended June 30th 2003 same ratio was 67%. We have maintained AFFO pay-out ratio for the same period of 69% and 65% respectively and a fad pay out ratio of 85% and 80% respectively. We continue to believe that a strong balance sheet will keep us in good position from which we will be able to grow when the appropriate situations present themselves. Kenneth will now continue the discussion.

I am going to discuss the status of our portfolio, both the stabilized portfolio and redevelopment. Then I discuss our acquisition program and other matters. With respect to our portfolio performance, both our stabilized portfolio and our redevelopment our performance was strong in the second quarter. With respect to occupancy our second quarter occupancy increased 27 basis points sequentially over the first quarter 2003 from 87.4% to 87.7%. Separate of the recaptured Ames which occurred in the fourth quarter of 2003 and which account for approximately 4.7% of our occupancy, our year-over-year occupancy was otherwise up 110 basis points over second quarter 2002, with respect to leasing activity, in the second quarter we executed new and renewal leases totaling 98,000 square feet at average increase in rents of 12.5%. With respect to anchor expirations there are no anchors rolling in 2003. In 2004 we have four anchors total totaling $106,000 square feet rolling and in addition to that we have three K-Mart leases totaling over $600,000 square feet which are also rolling with options. We’ll discuss the K-Mart maturities in connection with our Anchor tenant exposure, which I’ll turn to now. In terms of anchor tenant exposures within our portfolio, we like to call our anchor recycling program, having profitably redeveloped our Caldor’s, Bradley’s into wal marts Home Depots and Shaw supermarkets. In the second quarter we continue to create further progress on the next round of these recycling. So looking forward here are the key exposures and opportunities within our portfolio. First K-Mart, as you all know K-Mart emerged from bankruptcy in the second quarter. They affirmed all of our leases. Specifically we have five wholly-owned and one joint venture location. Five wholly-owned locations have average based rents of $3.60 and sales averaging $173 a foot resulting in an average occupancy cost of 3.3%. Our joint venture location occupancy costs is at 3%. With respect to the three K-Mart leases that are maturing in 2004, they had average base rents of $2.30 with sales slightly higher than over all average. Those sales are at a $183 a foot. Strong occupancy cost ratio of 2.4%. So while the long-term outlook for K-Mart remains uncertain, we believe that these three locations remain part of K-Mart's core strategy. That being said, the K-Mart situation is certainly fluid and we will keep you posted as our dialog with K-Mart progresses. With respect to other anchor exposures in our portfolio, there are two supermarket anchor that filed chapter 11, pen traffic and eagle market. With respect to pen traffic we have one wholly-owned one joint venture location, joint venture in Grandville shopping center in Columbus Ohio. Those two locations provide us with exposure of approximately two cents per year of FFO. With respect to eagle markets we have one location in the suburb of Chicago, Naperville, Illinois (inaudible) is about 1.5 cents.

Of 3 of these stores are correctly sized to the marketplace. They have been recently very redeveloped and we believe they are profitable or will be sold or part of a corporate restructuring but as always there are short term risk associated with these bankruptcies we are going to watch and keep you posted. Finally with respect to Ames we captured four Ames anchor centers. This year we are in incurring in our numbers approximately six cents of FFO dilution from those four boxes and as we stated in the past we anticipate recovering this six cents by 2005. We now have redevelopment or re-anchoring plans be finalized for 2 of the 4 locations and I will update you with respect to these four projects in our redevelopment discussion, which I will turn to now. In terms of redevelopment over the past few years we completed half a dozen exciting and profitable redevelopment that have contributed to our current earnings results. Now on an incremental and going forward basis, our 2003 and 2004 earnings growth should be driven a at least in part by our recently completed Burlington Vermont redevelopment as well as first two of our four Ames redevelopment. Over all we expect these three redevelopment to contribute approximately 4.5 cents of incremental internal FFO to our earnings next year. The following are the key drivers With respect to our Gateway shopping center redevelopment in Burlington Vermont as you recall we de-malled and re-anchored this project with a 72,000 square foot Shaw supermarket. Shaws has opened and began paying rent in the beginning of the second quarter. This property is now 83% occupied with approx 16,000 square feet of satellite space remaining to be leased up and we expect that to be leased or the next few quarters. Once the balance of this satellite space is leased it is expected that this redevelopment will contribute in 2004 an additional one cent of incremental FFO above the current 2.5 cents of be annualized earnings that are now in our second quarter numbers for a total of three.5 cents of annualized FFO contribution. With respect to our Ames re-anchoring, as I said we recaptured four Ames leases. We now have redevelopment plans in place for two of them. With respect to the first one, Plaza 422 in Lebanon Pennsylvania that is going to be an Ames to Home Depot redevelopment. We are expanding a former 83,000 square foot Ames into a 102,000 square feet Home Depot. We are increasing the base rent from a $1.56 to $4.00 a square foot. We expect that box to open during the first quarter of 2004. That redevelopment will contribute approximately two cents of FFO starting in the second first quarter of 2004. The second is our new loud deny shopping center in Albany New York. The 77,000 square foot Ames box, we have finalized the of that space with adept store at 15% increase to the base rent. That re-anchoring will add 1.5 cents in the first quarter of 2004. Thus the two Ames redevelopment should generate about 3.5 cents of incremental FFO starting some point in the first quarter of 2004. With respect to the last two Ames leases, green ridge and east end shopping centers we anticipate sub dividing these stores and leasing them up and they should begin earning two to three cents in 2005. So Mike walked you through the break do you know of our 23 cents for the second quarter and our guidance for this year. And while there will always be additional positive and negative drivers with respect to our earnings in 2004, the incremental returns from these two Ames redevelopment, which is 3.5 cents, combined with the one cent of additional incremental FFO from our Burlington Vermont redevelopment should contribute approximately 4.5 cents or just under 5% to our 2004 earnings performance.

I would like to now turn to external growth platform. Along with a strong internal growth this year in the first quarter and in the first half of this year, we completed two important portfolio acquisitions as part of our acquisition joint venture program. The two portfolios are Wilmington Delaware portfolio and our Kroger (inaudible) and we discussed in detail in first quarter conference call so I won't get into detail with them but a few key points. The acquisitions meet goal for 2003 and they are expected to add between eight and ten cents of FFO for the year. Our earnings guidance assumes no additional acquisitions for 2003. Quickly looking at our joint venture acquisition portfolio on consolidated basis, it consists of approximately 2 million square feet, separate of the Wilmington lease up phase. It is 99% occupied. Three quarters of the total rents are from our top ten tenants, all national solid tenants including Kroger safe way, Loews, giant eagle, Target and bed bath beyond. Our total joint ventured debt is 95% fixed at weighted average weight of 6.25% with staggered maturities. Our going in cap rate is providing us with a unleveled yield in access of 10% and a leverage deal that we anticipate to be in the mid-teens. The performance for the portfolio right now remains consistent with our forecast. These acquisitions are relatively recent so there is not specific news to report. With respect to acquisitions going forward, we remain opportunistic and disciplined. As we see future opportunities we are going to aggressively pursue them but at this point there is not anything concrete and specific that we would like to announce. We are now two-thirds the way invested in our first fund and have approximately $100 million of buying power left in that fund. Based on the strong performance of fund one to date it is more likely than not that a fund two would follow upon the completion of fund one.

I would like to turn to corporate governance initiatives. In June the boards of trustee's restructured its governing process and established the legion ever trustee Leewal lins sci to serve in that role. The board has adopted new and important corporate governance initiatives outlined in releases and we will be happy to answer questions about them.

In conclusion we are pleased with our results in the second quarter and year-to-date as evidenced by our earnings growth, core occupancy gains, redevelopment pipeline, our portfolio is performing well. While it remains uncertain as to the strength or the do you remember ability from this current economic recovery from our perspective we are pleased with our prospect of current growth driven by our current pipeline and driven by current growth with capability for highly accretive external growth. This combined earnings profile along with strong balance sheet, solid portfolio keeps us excited about the future of Acadia and our shareholder. So, with that I would like to open this call to questions.

Ladies and gentlemen at this time if you have a question or a comment please key star one in your touch-tone phone. Again for questions or comments please key star one from your touch-tone phone. Questions will be taken in the order they were received.

And your first question comes from David Ronco RBC. Please proceed.

High good morning guys, David Ronco. You spent time walking through the different contributions you expect from 2004 in terms of FFO share contributions or per share basis. I was be wondering if you add all those things up, I guess if you add those various pieces together what type of range do you come out at. You are right we haven't given guidance for 2004. But I guess if you add those various pieces together, what type of range do you come out at ?

What we said and what Mike went through was that the 23 cents of earnings this quarter, our solid core earnings and I walked through some of the pluses and minuses as did Mike as terms of potential increases and potential fall off et cetera but counter balancing that there are the contract same store NOI growth. So, you will have to be the Judge of how much growth is in that 23 cents. On top of that we walked through an incremental penny David that came from Burlington Vermont, 3.5 cents that comes from the two Ames projects and we did not discuss any specific items as relates to external growth 2004. We think it's early for that. I am being slightly evasive active but those are the key pieces, depending on what your view of interest rates are, et cetera, will kind of drive that.

Excellent. That is a good starting spot. Second question is slight pick up from occupancy from quarter to quarter, was that relate to do anchor lease up or inline space.

Just inline space. The portfolio, we assumed flat occupancy this year just because of the over all economy and concerns. Both occupancy pick up and stronger collections, i.e., our tenants are performing better than we kind of cautiously reserved for, is what is driving the NOI growth separate of the Ames fall off.

Excellent. Thanks a lot.

Thank you.

Next question from Ross Nussbaum from Smith Barney. Go ahead

High, Ken, question on the acquisition environment, what are you guys seeing in terms of your pipeline for the next six to 12 months.

Highly stabilized, well-marketed properties. Are trading at 8% yields or less and that doesn't get us real excited. But there are a host of opportunities out there that require our skill set, not to say that we are the only ones with the skill set, but redevelopment, restructuring, tax advantage transactions and/or transactions that have hair on it, that we see enough of those type of opportunities for a company of our size, we can, as we pointed out in the past, every hundred million dollars of acquisitions can drive our earnings close to 5%. We see enough of those that we think that there will continue to be opportunities. As interest rates go up, some margin buyers may kind of move to the side lines. So the pipeline is mixed I guess

Is it fair to say your earnings guidance for the year includes no acquisitions

2003 includes no additional acquisitions. What we walked through in 2004 we have not discussed our acquisition activity. Again I believe there will be opportunities but I think it's premature to start talking about them.

Thank you. Good quarter.

Thanks.

Next question from Paul Adornato from Mercury partners

Good afternoon. You mentioned that over the last couple of years you have redeveloped and/or disposed of large portion of your assets. Looking at the current portfolio how many more redevelopment projects would you say exist in what you own currently?

Well, certainly the four Ames, Paul, you know, two of which now have been finalized. So those will come online 04. Then my guess is there is about half a dozen assets out there that, depending on what our various anger tenants do, present interesting opportunities. Redefinition of redevelopment some of them are defensive meaning you do what you have to break even but if you have a opportunity to do something you need the stars to align so over the next one to three years I expect a half a between of those to come to fruition.

What about the lumpiness of those projects? Do you think they will all come together or will they be spaced? Will you have the ability to space them evenly?

I wish I could tell you that we did but our experience has been, if you look at our most profitable one, for instance we bought back a Caldor that is paying two dollars a rent and put in a Wal-Mart paying seven. So to some extent it's that we are in the lemon aid business and when a Caldor goes out of business we figure out how to make a profit from it. We don't figure out when they are going to out of business. It can be lumpy. It has been somewhat in the past as are earnings release growth, as joint venture continue to kick in more and more earnings I think that it will be less lumpy. Most significant lumpiness of our earnings in the past came from aggressive non core disposition program. We are kind of through that phase of positive event delusion, is a call it, where it did suppress our earnings. We will not get any of that level of delusion from our asset sales.

Finally more of a big picture question, just relatively short time I've been following the Company there has been I think a real maturation of the Company in terms of corporate governance adding to the executive team, et cetera. What kind of Company to do you envision in two or three years? Do you think the pieces are basically in place or do you think we might see another kind of major transformation of one sort or another?

That is a little big picture. Here is what I think: Our model works, Paul. We are relatively small, and that prevent us in being attractive to every single mutual fund out there but we have a good solid model. If you look at our earnings growth profile, our ability to create value the model works. So part of me says if it's not broke don't fix it. So, with that said I think it's possible over the next few years and maybe sooner maybe later I don't have anything to announce right now, that there could be something exciting that would increase our over all scope. But we will look at all of those very cautiously and it really needs to make sense to our shareholders because as I said, right now, the model works. I am very pleased with our earnings growth, thrilled with our balance sheet and we are sitting with a lot of external growth powder, both in terms of our joint venture, equity, program as well as a strong balance sheet and cash on hand.

Great. Thanks very much.

Thank you.

Again, ladies and gentlemen, any questions please key star one from your touch-tone phone. Next question comes from Mike Mueller of J.P. Morgan.

You are clearly through the bulk of disposition activity but if you step back and look at the portfolio today, what portion of it would you say are candidates to be called at some point, whether it's this year next year, are we talking 5%, 10%? What is the scope of what you could envision ultimately being sold?

First of all taking a step back and looking at it, we disposed of 60% of original centers Trust portfolio. And that was the area that create it said kind of most significant concern. Now from a going forward perspective there are still anywhere from one to five assets that we may look to opportunistically depose of because they are not in the high barrier interest markets that we would like to be in and there is also a residential portfolio. From a percentage basis I think we are talking about in terms of net asset value, 5 to 10% at most. And I don't think we've -- we haven't looked at it from kind of an over all delusion basis but as we said as long as we think there is good redeployment we don't see a lot of dispigs from that process.

Okay. Thanks.

Gentlemen at this time no more questions in the queue. I would like to turn back over to Ken Bernstein for closing remarks.

I appreciate everyone listening and I hope everyone has a pleasant August and we look forward to speaking with you soon.

Ladies and gentlemen this concludes this conference. You may now disconnect your line and have a good day.