Acadia Realty Trust (AKR) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Acadia Realty Trust fourth-quarter and year-end conference call. At this time, all participants are in a listen-only mode. My name is Mike and I will be your conference coordinator today. (OPERATOR INSTRUCTIONS) A question-and-answer session will follow the presentation. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Mr. Jon Grisham, with the company. Please proceed, sir.

Thank you, Mike. Thank you for joining us for Acadia Realty Trust's year-end 2003 conference call. A copy of yesterday's press release as well as our financial and operating reporting supplement are currently available on Acadia's website at AcadiaRealty.com under the investor information section. We're also hosting a webcast of today's call, as well as a replay of the call on our website.

At this time, I would like to inform our listeners that in addition to historical information, this conference call contains forward-looking statements under the Federal Securities law. These statements are based on current expectations, estimates and projections about the industry in markets in which Acadia operates, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that can cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, changes in national and local economic conditions, competitive market conditions, financial difficulties of tenants, timing and pricing of acquisitions, and changes in expected leasing activity and market rents.

During this call, management may refer to certain non-GAAP financial measures which we believe to be meaningful in discussing results in the REIT industry. Please see our financial and operating reporting supplement posted on our website for a reconciliation of these non-GAAP financial measures with the most directly comparable financial measures calculated and presented in accordance with GAAP.

At this time, I'd like to turn the call over to Ken Bernstein, Acadia's President and CEO. Ken, please begin.

Thank you, Jon. Along with Jon Grisham, joining me today is Mike Nelsen, our CFO, and Joel Braun, our CIO. 2003 was an important turning point for our company. We are quite pleased with our fourth-quarter and year-end results. All components of our business plan contributed in laying the foundation for our solid performance last year and for the creation of an exciting platform for growth going forward. As we've stated in the past calls, the three key components of our business plan have been the creation of, first, a strong portfolio, second, a strong balance sheet, and third, an opportunistic external growth program that enables us to continue to drive growth without having to overpay for or make indiscriminate acquisitions or rely on capricious short-term rates to justify questionable investments. So with these three components in mind, we will review our performance for last year and discuss 2004.

Mike and Jon will start by discussing our 2003 financial results and the status of our balance sheet. Mike.

Thanks, Ken. 2003 was an exciting year in which Acadia's earnings continued to keep on track, and we were able to maintain our balance sheet strength. Jon will now walk you through our earnings results for the fourth quarter and the year ended December 31, 2003.

Thanks, Mike. Refer to our price release issued yesterday as well as our year-end financial supplement for full detail of our financial and operating results for the quarter and year ended December 31, 2003. The following is a summary of those results. Note that all per-share amounts discussed are on a fully diluted basis.

FFO for the fourth quarter was $5.7 million or 19 cents per share. It is important to note that the 19 cents includes charges totaling 4 cents for the following two items. One, a non-cash charge of 1 cent for the write-off of straight line rent related to our termination of the former anchor lease at our Town Line redevelopment project. A new lease has been executed with Stop & Shop at a 33 percent increase in total rents with no interruption in rent payments. As such, straight line rent accounting aside, the anchor upgrade is accretive both in terms of cash flow as well as the underlying economics.

Second, fourth-quarter activity also includes a charge of 3 cents for option-based compensation. As adjusted for these charges, FFO was 23 cents for the quarter, which was in line with our 2003 guidance and represents a 20 percent increase over our fourth-quarter 2002 FFO from continuing operations. FFO for the year was 26.9 million or 92 cents per share. Adjusted for the 4 cents of charges that I just discussed, FFO was 96 cents or one cent above the high end of our 2003 guidance.

In comparing 2003 FFO for the year to 2002 FFO, one might want to consider two other factors for a true apples-to-apples comparison. First, 2003 activity also included 4 cents of additional rents received during the first quarter related to the assignment of an anchor lease. And then secondly, 2002 activity included 13 cents of lease termination income received from a single former tenant. Taking these items into consideration, 2003 FFO for the year represented a 14-percent increase over 2002 FFO from continuing operations. On an earnings per share basis, the net loss for the fourth quarter was 1.2 million or 4 cents per share. This included the previously discussed charges as well as an additional non-cash write-off of 10 cents of unamortized PI costs related to the anchor tenant buyout at the Town Line Plaza. This compares with 2002 fourth-quarter income from continuing operations of 1.5 million or 6 cents per share. Net income for the year ended December 31, 2003, was 7.1 million or 27 cents per share, compared to 2002 net income from continuing operations of 11.5 million or 45 cents per share.

Turning now to same-store net operating income, the performance of our portfolio for the quarter demonstrated the underlying strength and stability of our shopping centers. (indiscernible) property net operating income for the portfolio increased 2 percent for the fourth quarter of 2003 over 2002. In comparing 2003 NOI for the year to 2002, it is important to note that 2002 activity included approximately 1.6 million in rents from four former Ames locations. Excluding the temporary loss of these rents, 2003 NOI was up 1.6 percent year-over-year. Including the impact from these closings, NOI declined $1 million or 2.4 percent. Importantly, two of the four former Ames locations have now been reanchored and opened during the fourth quarter of 2003, which Ken will discuss in further detail.

Now, Mike, will discuss our balance sheet and 2004 guidance.

Thanks, Jon. In keeping with one of our primary business goals, we've continued to maintain our solid financial condition, which is one of the strongest in our sector and can be demonstrated by the following ratios. Debt to market capital ratio at year-end was 39 percent, as compared to 49 percent at the prior year-end. Our FFO payout ratio of 63 percent for the year 2003, notwithstanding the 10 percent increase in our dividend in the fourth quarter. Our 3.0 fixed charge ratio puts us in the upper quartile of our peers. And at December 31, 2003, debt on a consolidated basis including our pro rata share of joint venture debt is 85 percent fixed rate with a low-end (ph) weighted average interest rate of 6.1 percent.

Along with these strong ratios, we have $50 million available under our existing credit facilities which should be more than adequate to fund our foreseeable capital requirements. Maintaining a strong balance sheet is one of our primary goals and as such, we are always striving to further strengthen our financial condition. We're currently in the process of extending and staggering the maturities of our debt through 2013 while executing forward swaps to complement our current swap position and thus maintain our reduced exposure to interest rate fluctuations.

Based on the current level of floating-rate debt every 100 basis point increase in LIBOR only affects our interest cost by 1.2 cents.

We believe that our operating results for the fourth quarter at 23 cents of FFO after adjusting for the option based compensation charge of three cents and the non-cash write-off of straight line rent of a penny represents stable and recurring operations. Therefore, in projecting results for the year 2004, we are starting with a base of 92 cents.

We expect that the redevelopments that Ken will speak about will add 2.5 cents in 2004 and same-store NOI should increase by between 1 to 2 percent or add 1.5 to 3 cents.

2003 was an extremely good year for Acadia in terms of credit tenant issues with write-offs running less than one-half of one percent of gross tenant revenues. We will continue to strive to keep these credit losses to a minimum but are cautiously providing a credit reserve more in line with our historical experience which will provide an additional reserve of a half a penny to two cents in 2004.

While the current interest rate environment continues to be one of the lowest in history, we expect that more likely than not, interest rates will be rising and are providing for a two percent increase in LIBOR over the course of 2004 which will increase interest expense by a penny.

Finally, while we still anticipates the acquisition environment will remain highly competitive, we expect to be able to identify and complete transactions which meet our criteria and these will add between two in four cents of incremental FFO in 2004. We are therefore providing guidance for the year 2004 of between 95 cents and a dollar of FFO per share and earnings per share of between 40 and 45 cents.

Ken will now continue the discussion.

Thanks Mike. First we are going to review our portfolio performance and then we will discuss our acquisition performance. On a year-over-year basis, we increased our portfolio occupancy by 1.3 percent from 86.3 to 87.6 percent. This increase was driven in part by the re-tenanting of two of our former four Ames locations which I will discuss in a minute. Our current occupancy still reflect the temporary effect of the vacancy of the two remaining Ames locations which account for approximately 3 percent of our occupancy.

We are subdividing those two Ames boxes and anticipate re-tenanting them over the next year, this quarter we recently signed a lease for the first portion of the space with a TJX Corp. division, and we anticipate them opening in about 90 days.

We executed new and renewal leases for 8 percent of the portfolio with average increase of approximately 10 percent over our previous base rents on a cash basis. On the redevelopments front, in the fourth quarter our team made significant progress with the redevelopment of two of our former Ames locations, Home Depot opened at our Plaza 422 Shopping Center and Bon Ton opened at our New Loudon Center.

We released these two boxes at approximately a 60 percent increase over the former Ames rent. With the execution of two previously announced additional leases at our New Loudon Center, we are going to be 100 percent occupied at that center this year and we are in the process of leasing the balance of the Home Depot anchored center at Plaza 422.

In the fourth quarter, we also announced a new addition to our redevelopment pipeline with the reanchoring of our Town Line Plaza in Rocky Hill, Connecticut. We are bringing in a new Super Stop & Shop Supermarket to replace a former GE Market, the new supermarket anchor is paying a total rent at a 33 percent increase over that of the former tenant with no interruption in rental payments. We anticipate that this project will be completed during the first quarter of 2005.

In total, these three redevelopments will contribute approximately two to three cents of FFO in 2004 and three to four cents when they are fully on line in 2005.

Turning now to tenant reserves and bankruptcies. As Mike discussed in connection with our earnings guidance, one of the key variables in our 2004 earnings will be the amount of internal reserves that are actually utilized. The past few years our general collections have exceeded our expectations and while to date there is no indication that there is any change, we're going to continue to take a somewhat more conservative or revergent (ph) to the mean view of general collections.

Additionally, with respect to be more high-profile bankruptcies, historically we have been quite successful in taking the short-term FFO losses associated with these bankruptcies and turning them into long-term profits and value. On our radar screen right now, KB Toy's recently filed bankruptcy. We have six stores in our portfolio which in the aggregate represents approximately 3 cents of FFO.

All the leases are in our well-located, higher-barriered entry Northeast Mid-Atlantic properties and all of them have rents that are at or below market. However, even if KB stays in business, we anticipate recapturing one or more of these leases but the dilution because the leases are at or below market should be short-term in nature.

Thus in our guidance we have built in an anticipated one half of a penny to 1.5 cents reserve for dilution in 2004 associated with KB. The other tenant on our radar screen, Penn Traffic Supermarket filed bankruptcy last year, we have to Penn Traffics, one is in our core portfolio, the others in our joint venture. Our total exposure is only approximately two cents, however, we do anticipate getting the joint venture lease back this quarter. So in our guidance we have built in a reserve of between one half of a penny and 1 cent of FFO dilution in our 2004 guidance.

In short, with respect to our portfolio's performance, we're pleased with last year's performance and remain cautiously optimistic looking forward. Our redevelopments and occupancy gains should continue to drive our internal growth. We anticipate any dilution from the inevitable anchor recycling process to be short-term in nature.

Turning to external growth, last year our external growth initiative contributed approximately 9.5 cents or 10 percent to our earnings base. This accretion is evidence of how a few good deals can significantly drive the earnings of a Company at our size.

Last year we acquired two portfolios totaling approximately 2 million square feet or approximately $135 million. It was the Kroger/Safeway portfolio and the Brandywine portfolio. We discussed both of these acquisitions in great detail on previous calls. A quick update, both portfolios are performing ahead of their initial underwriting with leverage deals that are now in excess of 15 percent.

In terms of future acquisitions we are going to continue to remain opportunistic and disciplined, we are going to focus our attention where we can use our skills, flexibility and structure to create significant incremental value.

And it's with that philosophy in mind that we created our latest venture and I would like Joel Braun now to discuss that.

Last month we completed the transaction with Klaff Realty which accomplished two things. First and more important, established the venture with Klaff and it's long-term capital Lubert-Adler, to opportunistically invest 300 million of equity in any of the following three ways. First, working with financially healthy retailers to create value from their surplus real estate. Second, acquiring properties designation rights or other control of real estate or leases associated with retailers in bankruptcy. And third, to complete sale leasebacks with retailers in need of capital.

The keys to this transaction and the reasons why we find it exciting are twofold. First, this business is complementary to our core business of buying and redeveloping shopping centers. Historically Acadia has been successful in reacting to major tenant bankruptcies. We have successfully and profitably released our Caldor, Ames, and Bradley stores to Wal-Marts and Home Depots. Through the venture, we can now be involved on a proactive basis. We have been playing defense in the past and we can now play offense with one of the premier teams in the game.

Second, we see these future investments as a complement to our existing acquisition business. The opportunities in his arena have no particular correlation to real estate cap rates and thus, it should serve as a source of transactions even when property buying opportunities are limited because of high prices. These investments are in addition to the typical Acadia shopping center purchases and provide new avenues for investment without being duplicative of our core value added acquisition activity.

Our goal is for the venture to invest 300 million in equity over the next 36 months. Acadia will have the right but not the obligation to invest up to 20 percent of the equity of each deal in the venture. To the extent that the venture is successful in investing the full 300 million, Acadia along with its existing fund or subsequent funds shall have the opportunity to invest as much as $60 million.

The second component of our agreement with Klaff is Acadia's acquisition of Klaff's rights to provide management, leasing, disposition development and construction services and to collect the associated fees for an existing portfolio of properties or leasehold interests comprised of approximately 10 million square feet. This transaction does not involve the acquisition of any interest in the properties themselves.

This component to the transaction will be immediately accretive in 2004 generating approximately two cents of FFO. Not only is this transaction accretive, and gets us into the business day one, it also has an excellent chance of creating additional investment opportunities as we work with the numerous properties involved.

Thanks Joel. So to conclude, again I'd like to reiterate that we're quite pleased with our performance and the quarter and year-to-date. All three components of our business plan our on track, first, our core portfolio remains strong and stable and aside from the short-term disruption of Ames last year and potentially KB Toys this year we believe that are well located, value and necessity based portfolio will continue to provide us with a solid base to build off of.

Second, our balance sheet as strong. In fact it is the strongest in our Company's history. This puts us in the position to provide our shareholders not only with a safe dividend but one that can grow as our earnings grow.

Third and finally, our acquisition initiatives are creating important and highly accretive growth, our two portfolio acquisitions last year as well as our Klaff venture are just the first of several opportunities that we hope to deliver in years to come. We recognize that it's a competitive marketplace out there but if you look at the structure of our venture and the types of deals we do I think you'd agree that if we can continue to leverage our talents and our resources, the internal stability of our core portfolio combined at our strong balance sheet, dividends and highly accretive external growth opportunities, puts us in a strong position to provide our shareholders with ongoing, long-term growth and value creation.

I'd like to thank our team for their hard work and dedication and at this point I'll open the call to questions.

(OPERATOR INSTRUCTIONS) Jay Leupp with RBC Capital Markets.

Good morning I'm here with David Ronco this morning. Just a couple of follow-up questions on your comments on Klaff Realty and external growth. Could you draw together your earlier comments on guidance with what you expect to do with Klaff Realty in 2004 and how that works into the perspective FFO growth that we're talking about on the call here today?

Right now our view is as it relates to Klaff, most of the external accretion separate of the acquisition from the asset management business will be in '05. That being said, we're looking at a lot of exciting things and they could present a portion of '04, Jay, but we are not going to earmark "X" pennies from any one specific acquisition at this point.

With respect to 2004, can you give us some thoughts on both occupancy growth and same-store NOI growth in the portfolio? And also maybe some follow-up comments on what gives you the confidence that you seem to have that you will be able to continue to source acquisitions in this low cap rate environment?

In terms of the core portfolio, our guidance for '04 included about 100 basis points occupancy increase. And if you're talking about '04 and I assume you were -- '04 not '05? Is that right, Jay?

That's right.

And then we had one to two percent same-store NOI growth. So, I think what that takes into account is the positive traction from the redevelopments we're bringing online. Countered by what Mike and I have both have said is let's remain cautious at the collections and issues like that.

We think and I didn't get into it in the call, but given that we still have three percent occupancy dilution from the two remaining Ames that we ought to be able to create 100 to 200 basis points occupancy growth both '04 and into '05.

In terms at the acquisitions, I don't have a lot of confidence that we're going to be the winning bidder of a stabilized, well marketed portfolio. That's not where our focus has been historically. But when we look at what we see in the pipeline in terms of redevelopments, in terms of deals that are similar to our Brandywine acquisition, our Kroger/Safeway acquisitions, we are comfortable that there will be enough opportunities, keeping in mind we don't have to put out a lot of dollars to make the kind of accretion that we're talking about.

So, I don't see cap rates changing although I'm not sure that I'm the best forecaster of that. I don't see as winning those bids, but if you look -- last year was a competitive year and we were able to find some exciting deals, this year it's a competitive year and I am very excited by what we've done so far with the Klaff venture and that will continue to bear fruit in years to come.

On the two to four cents of accretion you guys have in your guidance for '04 from acquisitions, I guess as a follow-up here. Given that you've been relatively conservative in the past with guidance as it regards acquisition. I'm wondering whether you've identified some specific assets or deals that you are going after and whether you expect to fund those through a JV or you've given some more consideration to just doing them through Acadia solely given your balance sheet flexibility?

I'll answer half that question, David. Which is we like the model we have set up right now. We have a lot of different choices in terms of how to fund deals, there's a ton of capital in this marketplace and we recognize that, we're always reviewing our alternatives. But I think that it's safe to assume one, while we still have this first fund operating; secondly, we said in the past that more likely than not a second fund would follow on. This structure works very well. It provides all of us as shareholders a highly accretive return on the dollars we put to use. But we also are open-minded to other structures and whether that's OP transaction which would be done utilizing effectively our balance sheet and our capital and could not be done through the joint venture structure. We are looking at those too.

Great, thanks a lot.

Ross Nussbaum with Smith Barney.

Good morning. I think last quarter you had talked about doing some debt restructuring to the tune of 60, 65 million and you had mentioned that there could possibly be a restructuring fee. That looks like it didn't happen. Can you talk about where you stand in terms of terming out your debt?

The debt restructuring and we were being a little vague, but we thought we had an opportunity to buy out some above interest rate debt on a win-win basis that would have caused a one-time hit to earnings. It didn't play out that way. We didn't incur the charge and all of the debt is listed in our supplementary so you can kind of if you want play a guess came as which debt maybe we wanted to pay off.

Mike, when he walked through our guidance and our balance sheet explained some of the extensions as you see some of our loan maturities in our supplements, again, you can expect to see us extending a host of those loans and then as part or interest rate management, entering in swaps or converting them to pure fixed-rate loans.

With respect to the Klaff venture, let's say you do put up 20 percent of the equity and put out 60 million of equity over the next three years, how much leverage do you plan on adding to that equity?

It really depends. While we are very leveraged sensitive from a risk perspective, some transactions won't lend themselves too much leverage going in. And others could be consistent with our joint venture fund two-thirds leveraged. I would say let's be conservative and assume that were using the two-thirds leverage but you may find early on that we're using a lot less leverage at the acquisition phase and then as we stabilize the situation, put more leverage onto it.

I don't really care other than the risk component on this, what we're more focused on is making risk adjusted superior returns from the $60 million were putting out.

Of that 60 million, some of that could go into the strategic opportunity?

Correct.

So it would actually -- your pro rata share would not be 60, it would be something significantly lower than that potentially?

Yes. It could be half that amount. What we will look at as the deals mature and as we figure out whether we do a fund 2 and what the fund 2 structure looks like is how to allocate the capital so that -- what we try to do is not be overexposed to any one transaction, overexposed to any one tenant, overexposed to any one year of lease maturities or debt maturities and try to stay relatively blended so that we can continue to create the type of growth that we've been doing.

And final question. I want to make sure I'm understanding your guidance correctly. You are talking about two to three cents of additional FFO from redevelopment. That's from Plaza 422, New Loudon, the same-store NOI growth that you're forecasting any half of two cents, is that -- that's from projects other than those major redevelopments, is that correct?

Correct.

Thank you.

Thank you.

Mike Mueller with J.P. Morgan.

It's Josh Biederman (ph) here. A couple of little things here. Anything given that you think cap rates are still sort of up there, even though you don't know where they are going to go but anything on the opportunistic disposition side that you can see in '04 potentially?

Yes, we've historically sold noncore assets for opportunistic sales. There are still those opportunities. For instance, we have still two residential projects and we have said in the past that those are not part of our core focus. One of them had suffered from overbuilding and occupancy had dropped off a year and half ago. We've now seen that restabilize, we brought that occupancy back up to a more restabilized level this quarter. That would be an opportunistic sale because the cap rates for residentials still are very low and that's not part of our core business.

And then we're always open to and looking at other asset sales. We're focused on the same issues that everyone is which is redeployment of proceeds, can we find better assets to put it into, what we have said is on the whole, we'd don't anticipate any material dilution from our opportunistic asset sales and we are trying to stick with that.

And then one other thing here. In terms of the Klapp venture, are you more likely to see sort of one-off property acquisitions there or a portfolio or what kind of stuff should we look for?

I think historically, their success has been more on the portfolio front. It's a very, very smart and opportunistic group that we're partnering with. So I don't want to pigeonhole it too much. It generally tends to be more on the portfolio nature.

And then last thing, just jumping back to the same-store NOI for '04. Do you have guidance for what you're assuming on rent spreads?

John have we given guidance on rent spreads?

We have not given guidance obviously for 2003, the spread was 10 percent give or take, and our forecast I think assumes a consistent spread going forward.

Okay great. Thanks.

Paul Adornato with Cobblestone Research Trade.

Thanks. Good morning. Could you talk about the dollar volume of your investments that's baked into the two cents or four cents incremental FFO increase? (technical difficulty)

Paul, as you can see when you looked at our Kroger/Safeway deal and our Brandywine transaction, that the dollar volume depending on how accretive the transaction can vary. What we have said in the past and I think it's been a little conservative but it's played out is every hundred million dollars of acquisitions can throw off 4 to 5 cents of FFO. And that's a pretty decent benchmark. But it can vary by a couple pennies either way.

And so activity announced you said most recent Klaff and Klaff transaction is pretty much not included in '04 but really that's an '05 increase?

What we're saying, we are not in a rush and we certainly don't want to give guidance for unnecessary expectations that there's going to be a portfolio acquisition with our newly launched Klaff venture that's going to have material positive impact in '04. If it does, great, and as soon as we're prepared to announce it we will let you guys know.

But the venture is really set up with a view toward '05 accretion and beyond.

(multiple speakers)

Remember that there are two components to the acquisition; one is the venture going forward and the second is the acquisition of the asset management business which we anticipate two cents.

Given the nature of the your business, what would you consider to be a steady-state occupancy level for your portfolio?

If you look at our 87 plus percent to date, and if you remember the two Ames, vacant Ames, is three percent that takes you to 90, 91. I think that there is anywhere from 150 to 300 basis points of occupancy gain achievable over the next couple of years. But it's been three steps forward, one step back in our business because inevitably you get another box back as you are re-tenanting them.

If we can hold onto a 93 to 95 percent occupancy, I'll be thrilled. But again the other good news is, each time we take a step back, Paul, and gotten back in Ames we tended to re-tenant them at significant positive spreads.

Right. So even with 100 basis points kick out in '04, you would still consider yourselves below average occupancy?

Absolutely.

Finally on the Klaff management portfolio. Do you need to add additional personnel or how much time and attention will that take from you to manage that substantial portfolio?

Day one, the infrastructure is in place without additions. As we make additional acquisitions and complete the integration process there will be additional personnel, but again that's probably '05 and beyond and it's very acquisition specific. They have a very good team in place so that it's not going to create any immediate disruption or changes.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. Mr. Bernstein, please proceed.

I would like to thank everybody who has taken the time to listen to this call. And we look forward to speaking with everyone again soon.

This concludes your Acadia Realty Trust fourth quarter and year-end conference call. Thank you for your participation today. You may now disconnect.