Acadia Realty Trust (AKR) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Acadia Realty Trust Third Quarter Conference Call. My name is Jean, I'll be your conference coordinator for today.

[operator instructions]

Now I'd like to turn the call over to your host Jon Grisham. May proceed.

Good afternoon everyone. Thank you for joining us for Acadia Realty Trust Third Quarter 2003 Conference Call. By now everyone should have received a copy of yesterday's press release. If you did not, you may contact (inaudible) at 914-288-8134. And we'll provide you a copy immediately. In addition to the press release and our financial reporting supplement are currently available on Acadia's Web site at www.acadiarealty.com. We are also hosting a Web cast of today's call, as well as the replay of the call on our Web site.

At this time I'd like to inform you that certain statements made during this conference call, which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Acadia believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. Factors and results that can cause actual results to differ materially from the expectations are detailed in the press release and from time to time in the company's filings with the SEC. Additionally, we wanted to let people know that the information and statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of this statement. Also, the contents of the call are the property of the company and any replay or transmission of the call may be done only with the consent of the company.

Joining me today are Ken Bernstein, Acadia's President and Chief Executive Officer and Mike Nelsen, Chief Financial Officer. Following their discussion, there will be an opportunity for all participants to ask questions. At this time, I'd like to turn the call over to Ken Bernstein. Ken, please begin.

Thank you John, I'm here with Mike Nelsen. We're pleased with our third quarter results, our FFO growth, balance sheet strength and portfolio performance are all strong indicators that our key initiatives remain on track. As we stated in the past, the three key components to our business strategy are the creation and the maintenance of, first, a solid portfolio with strong internal growth potential through our redevelopment pipeline, second, the maintenance of a strong balance sheet. We now have some of the strongest key financial ratios in our sector, and third, the execution of an opportunistic and disciplined external growth program. So with these three components in mind, Mike and I will now walk you through our third quarter results starting with Mike discussing our earnings and balance sheet. Mike.

Thanks, Ken. Good afternoon. First, I'd like to briefly discuss some recent accounting pronouncements. We're very pleased with the FASB's decision to defer the implementation of the provision of FAS150, which would have required marking the minority interest liability in consolidated finite life joint ventures to market value and reporting the changes in that liability as interest expense. The FASB has said it will reconsider the effects of FAS150 and we are hopeful they will conclude that applying the provisions to re-joint ventures is not useful and therefore not require REITs to adopt its provisions. In addition the FASB has issued Interpretation 46, which provides guidance for the consolidation of variable interest entity investments. The implementation of FIN 46 will have no impact on Acadia.

Acadia's financial results are fully reflected in the press release, which was issued yesterday. Highlights of the company's operating results are: On a comparable basis net income from continuing operations for the quarter ended September 30th, 2003 exceeded the prior year by $460,000, or 23%. And for the nine months, September 30th, 2003, the same comparison resulted in a $2 million or a 39% increase. Recurring FFO from continuing operations for the third quarter of 2003 amounted to 23 cents per share as compared to 20 cents per share for the prior year, an increase of 15 %. While on the same basis, FFO for the nine months ended September 30th, 2003, rose 67 cents per share from -- I'm sorry rose to 67 cents per share from 58 cents per share in 2002, an increase of 15.5%. AFFO for the quarter and nine months ended September 30th, 2003, amounted to 18 cents and 62 cents per share respectively. And FAS at the same period was 14 cents and 49 cents per share.

Same store net operating income after adjusting for the effect of Ames closings the third quarter increased by 4% over the year-ago quarter while for the nine months on a similar basis NOI increased by half a percent over the prior year. The joint venture contributed 2.9 cents of incremental FFO for the quarter, which was in line with our projections.

For the quarter and the nine months ended September 30th, 2003, recurring net income from continuing operations amounted to $2.4 million, or 9 cents per share. And $7.7 million after adjusting for non-recurring income of $635,000, or 28 cents per share respectively. As compared with $2 million, or 8 cents a share, and $5.1 million again after adjusting for $4.9 million of non-recurring income, or 20 cents a share for the same periods in 2002.

For the nine months ended September 30th, 2002, net income from discontinued operations amounted to $2.1 million, or 8 cents a share. For the third quarter of 2003, the company generated FFO of $6.7 million or 23 cents per share as compared with $5.6 million or 21 cents per share for the year-ago quarter. After adjusting for a penny of FFO from discontinued operations in 2002, FFO from continuing operations in 2003 increased by 3 cents or 15% over the prior year. For the nine months ended September 30th, 2003, FFO amounted to $21.3 million, or 73 cents per share as compared to $21.9 million, or 84 cents per share in 2002. The 2002 period included 9 cents per share of discontinued operations, and, as such, FFO from continuing operations in 2003 of 73 cents compares to 75 cents in 2002.

In the current year, we earned 6 cents from one time lease termination fees and merchant development activities, as compared with 17 cents from similar items in 2002. Therefore, recurring FFO for the nine months ended September 30th, 2003 amounted to 67 cents per share as compared to 58 cents per share in 2002, an increase of 15.5%.

On a same store basis, net operating income for the third quarter 2003 amounted to $10.2 million, as compared to $10.3 million for the year-ago quarter, a decrease of 1%. The third quarter of 2003 was adversely affected by the closing of four Ames stores in the fourth quarter of 2002. After adjusting for the effect of the Ames closing, same store NOI for the 2003-quarter increased by 4% over the prior year. For the nine months ended September 30th, same store NOI in 2003 declined by 4.2% from the prior year. After adjusting for the Ames closing, the same store operating net income increased by half a percent over the prior year.

The company's results for the third quarter of 2003 represents stable and recurring operations, and are in line with the results of the second quarter. As such, other than for the possible earnings dilution, which could occur as a result of the negotiations we are in the process of with our lenders, which I will discuss later on. We are confident that we will end the year at the high end of our revised guidance range of 95 cents.

Now turning to our balance sheet. We have continued to maintain significant balance sheet strength as evidenced by the following. One, at September 30th, 2003, Acadia has working capital of $29 million, as well as $45 million of availability under existing credit facilities. Two, at September 30th, 2003, our debt to equity -- I'm sorry, our debt to market capital ratio was 39%, which compares to 49% at year-end 2002. Our FFO pay out ratio for the third quarter of 2003 was 62%, while for the nine months that ended, the ratio was 59%. We maintained an AFFO pay out ratio for the same periods of 80% and 69% respectively, and a FAD pay out ratio of 104% and 87% respectively.

The FAD pay out ratio for the quarter ended 2003 including the capital improvement expenditure of $800,000 for facade work at our Bloom field property. Acadia maintains a fixed charge ratio of 2.9 times and at September 30th debt on a consolidated basis was 82% fixed rate. After giving effect to the recent pay down, debt is now 85% fixed rate. And the all-in weighted average interest rate for the portfolio is under 6%. Acadia has always believed in transparency in its financial reporting. We have included fully consolidated balance sheets and results of operations in our quarterly supplemental financial information posted on our Web site and will continue to report in the most useful way to our shareholders. As we are always striving to improve the company's balance sheet strength, subsequent to December 30th, we have paid off the floating rate debt secured by our Greenridge and Lucerne assets, leaving them unencumbered for which we utilize cash on hand. Based on the current level of floating rate debt after giving effect to the $7.4 million pay off, every 100 basis point increase in interest rate only impacts our interest cost by approximately 1.2 cents.

In addition, we have initiated discussions with our lenders to extend certain maturities in order to continually -- in order to continue to rationally manage debt maturities and interest rate exposure over the next seven to ten years. We are de-levering the portfolio and tightening interest spreads while we may incur short-term earnings dilution in the fourth quarter of this year, we are continuing to negotiate to reduce some above-market interest rates in order to benefit future operating results. We continue to believe that maintaining the strong balance sheet would keep us in a good position to continue to grow when appropriate situations present themselves. Ken will now continue the discussion.

Thank you, Mike. I'm first going to walk you through our portfolio performance, our redevelopment and possible tenant re-anchoring and then discuss our acquisition program.

With respect to portfolio performance, our occupancy in the third quarter increased 10 basis points sequentially over the second quarter to 87.8%. Keep in mind that the current occupancy reflects the effects of our recaptured Ames that occurred in the fourth quarter of last year and that negatively impacts our occupancy by 4.7%. Separate of the effect from Ames, our current occupancy would be 92.5% up 150 basis points on a year-over-year basis. I'll discuss our continued progress with aims in a little while. In terms of leasing activity year-to-date we've executed new and renewal leases totalling 377,000 square feet and an average increase in rents of 10%. In terms of lease expirations, we have no anchors rolling in 2003.

With respect to 2004, we have six anchors all have options to renew. Three of these are K-Mart stores. Two of the K-Marts have already exercised their option. The third K-Mart comes due and they have to exercise their option in the second quarter of next year. All five of our K-Mart locations have rents that are at or below market with strong rents to sales ratios and we believe that these stores will remain part of K-Mart's core strategy. With respect to the other three non-K-Mart expirations we expect two to be renewed and one will not be and we'll recapture that store. We expect to capture a dark Wise Chopper (ph) market at the Lucerne street shopping center in the middle of next year and replace it within 12 months at approximately the same rents. The short-term impact for 2004 may be approximately one half of one penny of dilution.

On the redevelopment front, our redevelopment remain on time and on budget. Here's a quick update. With respect to our Gateway shopping center in Burlington Vermont, as you may recall we de-malled and re-anchored the property bringing in a new 70,000 square foot Shaws supermarket. Shaws opened in the second quarter -- been paying rent following the lease up of the satellite space at that center, which will occur over the next few quarters. This project is expected to contribute approximately an additional one-cent of incremental FFO starting in the first quarter of next year.

With respect to Ames, we are currently underway with the redevelopment and re-anchoring of two of our former Ames locations. First, our New Loudon Center in Latham New York, we're re-anchoring and redeveloping this center with three important leases. First, we signed a lease with Bon Ton department stores for 65,000 square feet of the Ames space at a 15% increase over the Ames base rent. Second, we're recapturing 48,000 square feet from a weaker tenant and we are going to install a new Raymore and Flanagan furniture store, which will open in the third quarter of next year. We're a huge fan of Raymore and Flanagan. We think they'll be a strong addition to this sector. Finally we also anticipate extending the existing marshal at the center and that will bring the occupancy to this property to 100 %. Although these anchoring are creating minor short-term delusions following the opening of these stores, the shopping center will add an additional one-cent of incremental FFO.

Our second Ames redevelopment and Ames to Home Depot redevelopment continues on plan at plaza 422 in Lebanon Pennsylvania. We're expanding a former 83,000 square foot Ames into 102,000 square foot Home Depot, more than doubling the former Ames base rent. Additionally we've recaptured 40,000 square feet of the balance of the center, and we're in the process of releasing that space. Home Depot is on schedule to open in the first quarter of next year, and upon the releasing of the balance of that space during the course of 2004, we'll add approximately 2 cents of incremental FFO.

With respect to our other two Ames locations, which are Greenridge and East end, as we said in our last call, we anticipate sub dividing these stores and re-tenanting them over the next 12 to 18 months and we're in negotiations with tenants as we speak.

In terms of future re anchoring and tenant exposures, in the last call we discussed two tenants that were on our watch list. Eagle supermarkets and Pen traffic supermarkets. Eagle was a tenant of ours in our hops and west plaza in Nevada Illinois. As we discussed in the last call this property was anchored by Eagle supermarkets, which was in Chapter 11. They recently chose to liquidate. As we stated in the last call, given the strength of the location and the low rents, we felt this location had limited downside, in fact, the lease was purchased and the shopping center will be re anchored with a 51,000 square foot Vobax market and there's will be no interruption of rents to us. Vobax is a strong regional specialty market. We believe the tenant will increase the weekly shoppers at our center and benefit our co-tenants. We're beginning to see a trend with the re anchoring of certain well located supermarket centers where local niche operators are coming in that do not compete head to head either with the major full size super markets or more importantly the Wal-Mart super centers. We're going to continue to watch that trend.

The second tenant on the watch list was Pen traffic. We have two Pen traffic supermarket locations. One in TU Wanda Pennsylvania and the other in Columbus Ohio. Total exposure is limited to approximately 2 cents of FFO. Both stores are correctly sized for the marketplace. We believe our stores to be profitable, and they'll either be sold or be part of the Pen traffic restructuring. But it's always their short-term risk and we'll keep you advised as to that. Pen traffic recently announced that they're closing 41 stores of their 211. None of our stores were on that list.

Shifting now to acquisitions. Quick overview of our joint venture acquisitions to date. We have acquired to date three portfolios, our Ohio portfolio, Kroger, Safeway portfolio and Wilmington Delaware portfolio. On a consolidated basis they consistent of two million square feet, 99% occupied. We acquired them at a going-in cap rate in excess of 10% and with an anticipated mid-teens going in leverage return. Three-quarters of the total rents are from the top ten tenants, all are national solid credit tenants including Kroger, Safeway, Lows, Giant eagle, Target Bed bath and beyond. 95% of that is fixed with the weighted average cost of 6.25% and with staggered maturities.

The portfolio to date is performing consistent with our forecast. More specifically, with respect to the Wilmington Delaware portfolio, the market square property is now 100% leased, four new tenants have joined that asset including Trader Jones and (inaudible). Phase two remains 100% occupied with strong anchor sales. With respect to phase three we're in discussions with a host of tenants for the lease-up of that phase and although we'd like to see it lease up sooner rather than later, given the earn-out structure of that component of our acquisition, the timing of when that lease is up will have no material impact as to our earnings for 2004.

With respect to our Ohio supermarket portfolio at the Amhearse location Giant Eagle is now expanding into the former in-line CBF space extending to 77,000 square feet. That's currently under construction and it strengthens Giant Eagle's already solid position in the market.

Lastly, with respect to the Kroger Safeway portfolio, along with collecting a mid teen's return we're already beginning to see additional opportunities to further enhance an already attractive return from this portfolio. For example, at one of the southwest locations, Safeway has purchased land adjacent to the existing store and will build a new store at its own expense. We will then enter into a new lease with them that will increase both our current rent and our residual value.

In terms of our acquisition outlook going forward, most investors felt that 2003 was a difficult and competitive acquisition market. Notwithstanding this fact, we exceeded our acquisition goals this year and did so without compromising our investment expectations in terms of either yield or asset quality. We acquired approximately $150 million of assets to date, which are expected to contribute approximately 10% external growth for 2003.

As is the case in 2003, we expect 2004 to remain highly competitive. However, given our value-added capabilities, coupled with the fact that we only need to do a few smart deals to meet our acquisition goals, we feel we're in an advantageous position. Although it's too early to give 2004 acquisition guidance, we believe our previously stated 2004 goal of approximately $100 million or 5% external earnings growth should be achievable. That being said, we are going to remain opportunistic and disciplined. We will not dilute long-term shareholder value or short-term earnings growth.

I'd like to switch topics now and briefly mention two recent promotions within our management team, which I believe to be one of the best in our sector. Joan Napalotono was promoted to Direct of Operations and Bob Sallum was promoted to Director of Property Management. Joan has been with us since 1995. Bob has been with us since 1998. Both have been important contributors to our team and I congratulate them on their progress.

In conclusion, we're quite pleased with our results in third quarter and year-to-date. More importantly, this performance is consistent with our focused strategy, which is, one, create a stable portfolio and cash flow and continually redevelop assets to further enhance value. Two, create a solid balance sheet and capital structure, which will enable us to have continued access to attractive capital. Finally execute a rational opportunistic and disciplined external growth program that, when coupled with solid internal performance and strong capital structure, will provide long-term shareholder value. At this point I thank you for your time and we'll take any questions.

Thank you, sir. [operator instructions]

Your first question comes from David Ronco of Royal Bank Of Canada.

Good morning, here with Jay Leupp. First question for Ken, from a big picture perspective can -- without getting into too many numbers, how dependent do you think your 2003 estimate is upon further acquisition activity in the fourth quarter?

Not at all, from a very big picture and small picture. 2003 projection assumes no acquisition activity. If it were to occur, it might help a little bit in '03, but it's far more focused on what it does for '04 and beyond.

Great. Staying on the topic in terms of acquisitions, is the number of opportunities dwindling, or are you still seeing a pretty robust pipeline and related to that what have been the pricing trends I guess in relation to what things look like in the second quarter?

Some of this is anecdotal, because we look at almost every transaction that is being brought to market. There's still a lot of assets being brought to market. But cap rates has compressed anywhere from 50 to 100 basis points over the past year. It's hard to talk quarter-to-quarter. We have never been winning bidders of stabilized well-marked transactions that is generally not where we find the value. So in markets like this, some of our peers will announce aggressive acquisition activity and we congratulate them. Our focus has been more where there's a value-added opportunity, either at the real estate level or at the structuring level. And if you look at the deals that we've announced to date, they've kind of fallen into one of those two categories. None of them were well-marketed deals. So we are looking for deals that are somewhat off of that radar screen and aren't as conducive to saying it's tightened 50 bits from there. But that being said, stabilized portfolio that would trade at a nine cap a year ago is trading at an eight cap, maybe below, and almost every seller is under the impression that if they go to market and aggressively market something they're going to get attractive prices. So that does limit to some extent the number of deals that we're aggressively pursuing. But counter balancing that is we only need to do a few smart deals. So we remain pretty excited about what we're seeing.

Great. One final question, I guess just given the competitiveness of acquisitions these days, one of your peers, retail peers, I should say, mentioned that development had become more attractive to them, ground-up development from a risk reward perspective given the tightening of cap rates. Do you guys feel that way at all or is acquisition still your primary external growth function?

We like to stick with what we're good at, and while we find ourselves occasionally playing developers, more often because in case of some of the mark center trust assets what we were left with was virtually land. We are far more focused on the redevelopment and the value-added component. By existing well located high borrowed entry properties where we can then increase the NOI by expanding the property, recapturing below market anchors such as grand union or Bradleys or Caldora, doubling, tripling the rent, that's what works faster, I think and we're going to stick with that.

Hi, guy, thank you.

Thanks.

Your next question comes from Paul Adornato of Cobblestone Research.

Hi, Paul, how are you?

Very good thanks. Looking ahead to '04 and '05, could you characterize the redevelopment pipeline as you see it? I realize that it's opportunistic to a large degree, but would you expect that the next two years will be greater than, plus than or equal to what we've seen over the last two years?

It's very hard to predict, Paul, because as you said it's opportunistic. I am pleased to see that even as early as next year, there may be two or three deals that we didn't think would be right for harvesting. That seemed to be ripe in it. The stars have to align. You have to have the right below market situation and the right ability to capitalize on it. So I'm going to give you a non answer which is hard to tell you whether it will be as much or more than next year and I'd be surprised that it will be more than was the previous year just because we've had a great run with some of our redevelopments. But we do expect to continue to see above normalized same store results, the redevelopment pipeline continuing, both from the Ames, the two (inaudible) we just mentioned future aims we just discussed and there's some other properties in our portfolio that are ripening for that.

Thanks. And looking at the new and renewal leases, if you were to separate out those leases that were signed at recently redeveloped properties from the existing, from the rest of the portfolio, how would those numbers look?

Good question. Let me just -- in terms of our 10% renewal growth that we were talking about before?

Yes.

Mike, Jon

You know, in general, Paul, what we've seen is double digit increases both in terms of renewal leases and new leases as well at properties other than the redevelopment. Specifically, looking at some of our new leases this quarter, we had a situation where we re tenanted two of our long island shopping centers that were former regimens (ph) locations and both of those situations we were able to over double the rent. Not to say that we expect to do that all the time. But certainly situations like that have had fueled you know double digit increases fairly consistently over the last couple of years.

Okay. Thank you.

Good to talk to you.

Your next question comes from Ross Nussbaum of Smith and Barney. Please proceed.

Good afternoon. Ken or Mike, can you discuss a little bit more detail the planned refinancing, I guess the question is I am looking at the debt maturity schedule, are you looking to, you're looking to term out some of the debt and in exchange for that bringing it in at a lower rate. Is that what you're thinking of doing?

Let's not make too much of this, but what we're looking simply to do is to extend some of our maturities. And also tighten the spreads, simply because spreads have come down, and with our bank loans that are not life insurance or conduit loans, you can go back and discuss with your lenders the refinancing of them, even if you've already swapped into the interest rate. The net effect to you and me as shareholders or to me as shareholders, is that we will increase our maturities and increase the percentage of fixed rate and improve the overall kind of maturity profile. There may be some upfront costs to do that, and that's what Mike was referring to. But we're talking about like 1 to 2 pennies at most.

At most, correct.

Does that include the potential write off of amortization costs on the old loans that would now be included in FFO.

Yes.

One to two cents. Next questions is you talked about potentially $100 million acquisition target for 2004, I assume it's on a gross basis. What do you think given the joint venture structures you've been utilizing what do you think flows to the bottom line in terms of a net number?

Again, remember our overall capitalization for every hundred million dollars works roughly two-thirds debt, one-third equity. So let's just say roughly 30 million. Our equity participation in that 30 million is just over 20%, 22, to be precise. But probably more important, Ross, is while this is a slight oversimplification, and you can run the math on your own, that every hundred million dollars that we acquire, what we have found is in our past three acquisitions and if you just do the math, it will generate four to five cents of external FFO from that acquisition. So that's kind of where the roughly 5% comes from.

I'm taking by your answer here you're planning on doing all of your acquisition activity within the joint venture?

Yes. There are exceptions to that for OP units and otherwise but we try to keep things very simple and straightforward. We have a fully discretionary acquisition fund. Our current fund. We have about $100 million of buying capacity left in fund one. We could then turn to fund two, and we think it's an ideal structure for us. We make sure we report with high level of transparency so it's easy to understand. It drives earnings. Keeps our balance sheet dry and strong and enables us to fuel growth irrespective of where the market is on any given day.

Is there any change in terms of the commitments of those joint venture partners given that several of them are either no longer shareholder or have sold down their positions?

No.

Last question is multi family, two stage question. One, any updated time frame on disposition of those assets. And number two, can you give us an update on the performance in terms of same store NOI?

John, we have a breakout, specifically.

We do. In terms of NOI. Multi families during the current quarter provided NOI of about $800,000. So give or take that's a little over three million dollars on an annual basis and those have performed fairly consistently over the last couple of years. We have had some uptick in occupancy at our North Carolina property. So those are performing consistently at this point.

In terms of disposition, one of them we financed out of several years ago. So that one is a little bit more difficult and we said to dispose of. But both are ripening, disposition. We don't have anything specific to announce at this point.

Thank you.

[operator instructions] At this time I have no questions, sir.

Okay. I'd like to thank everyone for their time.

Ladies and gentlemen, thank you for joining us in today's conference. You may now disconnect your conference lines.