Acadia Realty Trust (AKR) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Acadia Realty Trust first quarter 2004 earnings conference call. My name is Sean, and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Jon Grisham. Please proceed, sir.

Thank you, Sean. Good afternoon, everyone. Thank you for joining us for Acadia Realty Trust's first quarter 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 are 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 industries and 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, changes in expected leasing activity and market rents whether in obtaining necessary government approvals related to planned redevelopment projects, as well as meeting redevelopment schedules.

During this call, management may refer to certain non-GAAP financial measures which we believe to be meaningful when 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.

Following management's discussions, 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, Acadia's President and Chief Executive Officer. Ken, please begin.

Thank you, Jon. Along with Jon Grisham, joining me this afternoon is Mike Nelsen, our CFO.

We are quite pleased with our first quarter results which provide further reinforcement that our business plan remains on track. Today, in reviewing our first quarter results, we'll walk through the three key components of our business plan.

First, our core portfolio in the first quarter, same store NOI growth is just one strong indicator that our leasing and redevelopment are driving our internal growth.

Second component, our balance sheet. Mike will walk you through, not only our strong ratios, but also the further progress that we made in the first quarter, limiting our exposure to interest rate increases.

Finally, our external growth program in the first quarter. We continued to enhance our external growth platform, both with a single asset acquisition and more significantly with the launching of an important venture that should provide significant future growth opportunities. We'll walk you through all the components of our external growth platform. We will also touch briefly on corporate governance and board initiatives, as well as our recent secondary offering.

So with that, I'll now turn the call over to Mike.

Thanks, Ken. Good afternoon.

Jon and I will discuss the company's first quarter earnings, financial condition, and projection for the balance of the year.

First, Jon'll take you through our earnings for the quarter.

Thanks, Mike.

Refer to our press release issued yesterday, as well as our quarterly financial supplement, for full details of our financial and operating results for the quarter. Following is a summary of those results. Please note that all per share amounts discussed are on a fully diluted basis.

FFO for the first quarter 2004 was $7.0 million, or 24 cents per share. This represents a 14% increase over first quarter 2003 FFO of 21 cents, as adjusted for 6 cents of income, primarily from lease termination and merchant development income. On an earnings per share basis, net income for the first quarter 2004 was 10 cents, compared with 2003 of 14 cents.

Same store NOI for the portfolio grew 8%, first quarter 2004, over first quarter 2003. Approximately half, or 4%, of this growth was from increased rents in the core portfolio from leasing and redevelopment activities. The remaining half was the result of a decrease in 2004 operating expenses, primarily winter-related charges.

And now, Mike will continue the discussion.

Thanks, Jon. We continue to stress as one of the primary components of our business plan the strength of our balance sheet. We are constantly monitoring financial trends in order to strengthen our financial condition. Acadia currently has one of the strongest balance sheets in our sector, as evidenced by the following ratios at March 31, all of which include the company's share of joint venture debt and interest expense.

Debt to market capital, 35% versus 39% at year-end. FFO payout ratio, 68%, even after a 10% increase in dividends in the fourth quarter of 2003. Fixed charge ratio of 3.1 to 1. Consolidated debt is 85% fixed rate, with a net average interest rate of 6.1%. And at the end of the first quarter, $41 million remains available under our existing credit facilities.

Two of the largest variables for future earnings remains the acquisition environment and interest rate exposure. Ken will later discuss the company's progress on the acquisition front. We are always monitoring our debt maturities and exposure to interest rate movements.

In that regard, during the first quarter, we have successfully completed the extension of $40 million of debt, which was scheduled to mature in 2005, to 2011 and reduced spreads by 25 basis points. And we are currently finalizing an agreement to extend an additional $32 million of debt from maturing in 2007 to 2012 and, at the same time, reducing spreads by 35 basis points.

By entering into forward starting swaps, we have locked in a fixed interest rate of just over 6% on these amounts through their extended due dates. After these transactions, we will be able to maintain a fixed rate debt ratios of 85%, which is a level that we are comfortable with.

In terms of our earnings guidance for 2004, it's a little early in the year for us to revise our previous guidance. That being said, as Ken will get into later in the discussion, we feel comfortable that our current acquisition activity will contribute incremental external earnings at the higher end of our previous range of 2 to 4 cents a share.

Offsetting this is the short-term dilution of approximately a penny, resulting from the recent exercise of 1 million options in connection with our secondary offering. We are therefore reaffirming our preliminary 2004 FFO forecast range of 95 cents to $1.00. and our earnings per diluted share of 40 to 45 cents.

I will now turn over the floor to Ken to continue the discussion.

Thank you, Mike.

First, we're going to review our portfolio performance. As Mike and Jon discussed, we had strong same store NOI growth. Even with the strong NOI growth, our portfolio occupancy in the first quarter remained at 87.5%. So we still have lease-up opportunities as we continue to reanchor and redevelop the portfolio and take advantage of the apparent economic recovery.

As we previously outlined, 3%, or approximately 1/3 of our vacancy, is associated with the lease-up of our two remaining vacant Ames locations. As we said, we are subdividing these two boxes. They're at our Greenridge Plaza Center and our East End Plaza Centre, and we anticipate retenanting them over the next year.

Already at our Greenridge Shopping Center Plaza we've signed leases, or about to sign a lease, for about half of the former Ames space. The first lease was signed with AJ Wright which is a division of the TJX Corp. The two anticipated leases will be signed with rent, at a blended rent, in excess of 20% over the former Ames rent.

As we've previously given guidance towards -- we've said that we believe we can increase our occupancy by approximately 1% this year and 1% to 2% per year over the next few years as the economy recovers. We are comfortable with that outlook at this point.

Turning to redevelopments, we have three current redevelopments in our pipeline. They are continuing on plan. They are our New Loudon Plaza, our Plaza 422, and our Town Line Shopping Center. In total, these three projects will continue -- will contribute an incremental 2 to 3 cents of FFO this year, and 3 to 4 cents of FFO when fully online.

Turning to tenant reserves and bankruptcies. As we've said on our previous calls, one of the key variables in our 2004 earnings performance will be the amount of internal reserves that are actually utilized. On our last call, we outlined our views with respect to the more high profile tenant bankruptcies. Right now on our radar screen, the only tenant of significance for this year is KB Toys. We have six stores in our portfolio, which represent in the aggregate gross rent of approximately 3 cents of FFO.

In our guidance, we have said we anticipate a minimum of 1/2 of 1 cent to 1 and 1/2 cents of dilution this year. All our leases are in our higher barrier to entry, mid Atlantic portfolio, with rents that are at or below market. To date, the only KB store that has been closed and rejected is in our Brandywine property, and that will cause approximately 1/2 of 1 cent dilution this year and we anticipate retenanting that store at same or better rents this year.

With respect to the balance, even if KB stays in business, we anticipate recapturing some portion, but the dilution again should be short-term in nature. It's not clear when the balance will be recaptured, so we're going to continue to retain our internal reserves as stated.

Turning to external growth, as most of you know, the key to our external growth platform is a highly accretive discretionary fund with several prominent institutional investors. What we like about this structure is the ability to create significant earnings growth without having to overly expose our balance sheet, or be overly dependent on somewhat volatile public market capital. In the first quarter, we made progress, both in terms of building major long-term growth initiatives, as well as in terms of continuing our smaller, but important one-off acquisition pipeline.

In terms of planting the seeds for long-term growth, in the first quarter we launched our retailer controlled property, or what we are now calling our RCP venture. As we discussed in detail at year end, the RCP venture is with the Klaff organization and its long-term partner Lubert-Adler to opportunistically invest $300 million of equity in retailer controlled property, working with both financially healthy and distressed retailers to create value from their surplus or liquidating real estate. In terms of the status of the venture, we're looking at and working on several potential opportunities, but there's nothing to announce at this point.

As part of the creation of the RCP venture, we also acquired Klaff's retail asset management contracts on approximately 10 million square feet of properties. There are various redevelopment and investment opportunities that we are seeing within this portfolio, and we'll keep you apprised as those opportunities arise.

Turning to single asset acquisitions. In the first quarter, our fund, along with a long-term development partner, Hendon Properties, purchased a $9.6 million distressed first mortgage loan, for $5.5 million. The mortgage is secured by a 235,000 square foot shopping center that is only 56% occupied.

This week, we secured ownership of the property and thus, we're now -- have a going in, unleveraged yield that is in excess of 10% before we commence redevelopment and stabilization of the property. Our acquisition costs going in now is just under $25 a foot.

In terms of our current single asset acquisition pipeline, along with pursuing our fair share of larger transactions that we're always reviewing, there are three single asset investments that we intend to close in the second quarter. The first is an acquisition redevelopment in our backyard here in Westchester, a small neighborhood center that we're going to reanchor with a new Walgreen's Drugstore. The other two are properties within that 10 million square foot class asset management portfolio.

Assuming that these three acquisitions that are in our pipeline close in the second quarter, and combined with our first quarter activity, we should have achieved the upper end of our current 2 to 4 cents of external growth guidance. In terms of our guidance above 4 cent, we are always looking at a wide variety of opportunities, and as these additional opportunities arrive and come to fruition, we will keep you posted as to their accretion for 2004 and 2005.

Turning now to our anticipated Fund II. As we stated in the past, we anticipate closing on our Fund II, our second fund, in the early portion of the second half of this year. The structure and turn should be similar to our Fund I. It should include all of our existing Fund I investors and hopefully some new investors. It will be larger than our Fund I. Fund I was $90 million. Fund II should be between $200 and $250 million of equity. And that will give us buying power on a leveraged basis of $600 to $750 million of acquisition over the next three-plus years.

If you use our current formula, which is every $100 million of gross acquisition activity, results in a approximately 4 cents of incremental FFO to Acadia. If we can create the $600 to $750 million of acquisition activity over the next three years, Fund II can be potentially highly accretive and should be able to provide us with high single, or even perhaps low double, digit external growth from this platform.

Both with respect to our current Fund I, and our anticipated Fund II, our structure is such that our external growth does not require us to overpay for assets or be the winning bidder in an overheated auction in order to create growth. We are confident that if we remain disciplined, and opportunistic, that our value-added focus will create exciting long-term growth opportunities for our shareholders that are not predicated on the overreliance on historically low interest rates or historically high multiples.

Turning to our recent secondary offering last month. We completed a secondary only offering for 5,750,000 shares. The largest participant was Yale University's Endowment Fund, with 4.2 million shares. The balance was from our former chairman. Yale reduced their ownership stake from 32% to now 16%. They entered into a lock-up with respect to the balance of their shares. Yale continues to be an important shareholder, a board member, and a significant investor in Fund I and is anticipated to be a significant investor in Fund II.

The transaction, which was at no cost to the company, gave us the opportunity to provide further clarity as to Yale's long-term commit to the company and clearly answered how Yale and the company were going to address Yale's large ownership stake. Additionally, the secondary allowed us to further diversify our shareholder base and increase our float and get our story out.

Turning to the corporate governance front, we recently nominated two new independent board members, Suzanne Hopgood and Wendy Luscombe, to our Board. Both should be strong additions. Assuming a successful election at our annual meeting next month, our Board will be seven members, the two new members, as well as five existing Board members. All of Acadia's outside trustees standing for election are fully independent.

In conclusion, we continue to be excited about our business model which is a combination of efficient capital recycling and highly accretive value-added investing. All three components of our business plan are on track. Our core portfolio performance remains strong. And as the economy improves, we should be able to continue to drive our reanchorings, our redevelopments, and our occupancy.

Our balance sheet is strong, and we have strengthened it further by limiting our exposure to rising interest rates. Our dividend payout ratio is strong. And this puts us in a position to provide our shareholders with, not only a safe dividend, but one that can grow as our earnings growth continues.

Third, finally, our acquisition initiatives are both creating highly accretive growth, as well as laying the foundation for future incremental growth. Our capital structure enables us to make significant acquisitions on a discretionary basis, independent of the public market.

With our anticipated launching of Fund II, we can continue this highly-accretive platform. Fund I has been a significant driver of our earnings at a time when capital was plentiful. This structure should be that much more valuable to our shareholders if and when the capital markets become more constrained.

I thank everyone for listening, and at this point we'll take any questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from Jay Leupp with RBC Capital Markets. Please go ahead.

Hi, good morning. Here with David Ronco. Just a few follow-ups on some of your comments.

The drivers of the same store NOI growth of 8%, do you anticipate that level of same store NOI growth over the next couple of years? And what NOI growth assumption, Ken, are you making for the guidance that you're giving this year?

Well, I'd ask Jon. And I'll let Jon walk through the particulars.

Okay.

The portion, which -- as he laid out, was 1/2, which was due to cost savings, winter-related. We are not in the business of predicting snow. So that part we'll stay away from. The key drivers, though, are our redevelopments. And a normalized, stabilized portfolio, Jay, is going to provide low single-digit, 1, 2, maybe 3 percent, same store NOI growth. Any more than that would require a significant economic rebound. One that we're not forecasting.

Okay so --

Our drivers will be the redevelopment and the lease-up. Remember we're only 87.5%, 88% occupied. So it will be the lease-up over the next few years and our redevelopment.

So for the current year guidance, it's safe to assume that for the core same store NOI you're assuming a 1% to 3% growth rate?

That's right, Jay. In fact, for our 2004 forecast, we estimated 1% to 2% for 2004, which was going to hopefully contribute 1.5 to 3 cents. And we think that's more reflective of the ongoing stable core portfolio.

Okay. And then just one set of acquisition-related questions. I missed it, just the part you said about the 4 cents. Is that per 100 million of acquisitions in the venture in terms of annualized FFO accretion?

Yes on a gross basis.

Okay. And then what cap rates are you assuming behind that assumption? And do you expect to stay in your existing markets with the new venture?

The cap rates range, and we're really -- we're total return focused, Jay. So it's less about whether it's an 8, 9 , or 10, or even, I guess a 5, 6, or 7 going in, as opposed to where do we stabilize it, if you think about our Kroger/Safeway acquisition.

Right.

That really didn't fall into cap rates. Our recent -- we purchased this debt, at $25 a foot, that happened to be a 10 cap going in, but even if it were an 8, it was only 56% occupied.

So it's less about a cap rate, but if you want to assume cap rates at the upper end of where the range is right now, that's probably where we're a player. And that's in the, you know, the 8-plus. Not the sub-8s. Unless there's significant upside.

Geographically, we're far more focused on, one, playing in markets that we know and understand, but also getting in at the right price and opportunistically. I think we can lose money as effectively overpaying for an asset in our backyard as somewhere else. So we tend to be disciplined across the board. It's unlikely that you're going to see us greatly expanding our geographic focus into markets that we don't understand.

Good, Ken. Thank you.

Your next question comes from the line of Ross Nussbaum with Smith Barney.

Hi, good afternoon. I'm here with Jon Litt. Ken, can you shed some color on the three single assets that you've got going closed this quarter? Can you give us a sense of the size in terms of dollars?

You know, we're still refining, because some of them are investments into deals, Ross. And so a combination of not wanting to count our chickens before they hatch, and still finalizing what percentages we're going to own. I'm going to beg off on that. We hope to get these completed shortly, and then we're going to provide a lot of detail on it.

And these are going to take place within the strategic opportunity fund?

Correct.

Okay. Can you talk about your current level of infrastructure? It sounds like your portfolio could potentially double or trip in size over the next couple of years. How are you staffed right now, and then how are your systems set up to deal with that kind of growth?

Well, if you remember, we sold 2/3 of the Mark Center trust portfolio. So we're used to more GLA, when you talk about doubling in size, with more or less the same senior management team we have. That will currently -- that will absolutely be supplemented as we acquire more assets with more people on to our team.

But the infrastructure, both in terms of our technologies and our senior management team, ought to be able to absorb an irrational growth. If three years of acquisition activity occurs over three months, then obviously that's going to shift a little bit. But I don't -- I'm not overly concerned, either from a G&A perspective, although certainly there will be G&A growth with it, or from an experience and team capability perspective.

You went to -- this is Jon Litt. This most recent deal is in Aiken, South Carolina, which I don't recall being on your target market list. Can you comment on sort of what brought you to the market? What the IRR expectations are? And, you know, I guess in Fund I or in Fund II, how much -- how far afield you're going to go to pursue the opportunities?

Yeah, you're right, Jon, that -- we didn't say, let's go find a deal in Aiken. It was a combination of things. A long-term partner of ours, who we've done several successful merchant development deals with over the past five years, identified that opportunity, Attendant Properties, they're based in Atlanta. So it's far more in their backyard.

The opportunity to buy an asset at $25 a foot, when you know, you guys are tracking deals that are well north of $100 a foot, made it worthwhile, even though it wasn't in our backyard. And when you think about -- and I will return to the Kroger/Safeway portfolio, only because that was clearly outside our geographic expertise, but we acquired those assets at such an attractive price, and there were no management inefficiencies because those were off sale lease backs that we were able to make a fabulous going-in yield on.

We want to be very careful when we move outside of our, let's call it Chicago and East, Atlanta and North parameters, that those are deals that our shareholders and our risk adjusted basis are being well rewarded for. In this case, I expect the IRRs to be in the high teens and beyond on our dollars. So again, when we look at different opportunities, both within our existing portfolio and elsewhere, when we can achieve those kind of returns, and where we think that the risks are mitigated by the price per square foot and the cap rate that we have going in, you know, then we'll take those.

When do you expect Fund II to start making investments?

Fund I should be closing up, and Fund II should start simultaneously in the second half of this year. Fund I, the balance of Fund I's dollars are going to go into the first portion of what we anticipate in our RCP Klaff organization venture. So that'll close out Fund I, and then Fund II should kind of go live simultaneously.

So the funds have a pretty broad mandate, which would includes the Klaff and other opportunities like that that might arise?

Fully discretionary. You know, what we like is, as markets get more volatile, having discretionary capital to take down assets if there's exciting opportunities.

And then conversely, Jon, if we don't see something, we can sit and be patient, and still, we think, provide, you know, decent to good growth.

Can you talk a little bit more about this swap, forward starting interest rate swap agreement, and sort of the costs associated with that, and how you account for them?

Sure. Mike you want to --

Sure. Well, what we did is when we extended the 2005 and 2007 maturities, they were swapped initially, so they were fixed rate at the time. When we extended them, we acquired a swap that commences at the exploration of the original swap in 2005 and 2007 to take us through the extended due date of 2011 and 2012.

The costs associated is built in to the rate, and they build in a two-year forward risk-adjusted pricing, so that, as I said, we get an all in interest rate of just a little bit over 6% through 2011 and 2012.

But just as I looked at it -- the question I had is what would -- if you went out to do a market rate -- what would that be, 7- to 9-year paper, what would the market rate be on the equivalent paper? My sense is it would be probably in the 5, 5.5 range.

You're absolutely right, Jon. But remember, this is existing debt. That,s not maturing for 1 and 3 years. And we said, even though we could do that, we would have to wait until 2005 and 2007. 6% may sound a little wide today. We think in 2005, 2007, it's going to look very smart.

And I imagine this swap was not inexpensive?

No.

Out that far.

Not at all.

Okay. I'm sorry, Ross, I interrupted you.

Yeah, Ken or Jon, one final question. I want to clarify your calculation of same store NOI growth. And, you know, for example, the redevelopment you have New Loudon, Plaza 422, will those -- have those properties been taken out of the same store pool? Are are they in there?

We take out -- we take the redevelopments out. Because of the significant additional costs that we're putting into the deal. So we eliminate those in calculating same store NOI.

But retenanting the Ames, for instance, is that in or out?

At Plaza 422? It's out.

Okay. And final question is, you're releasing spreads. On your new leases, I know it was only, I think, seven deals, it was a small amount of leasing in the first quarter, and it was a negative spread, and one quarter doesn't make a trend. But can you comment on why that -- why you saw a negative spread there?

That's exactly right. It's literally seven deals for a little bit less than 20,000 square feet. There was one or two deals where we did make some concessions to tenants, but it's really not reflective nor indicative of our portfolio, our long-term experience.

In fact, you look at last year, we had over 20% positive spread on new leases. So I think -- our expectation is, as the year goes by, you'll see that number go up. So again, we don't think the first quarter is really reflective.

Okay. Thank you.

And I just wand to remind all participants that it is star one if you have any questions.

Your next question comes from the line of Ralph [DeFayo] with The Investment Center. Please go ahead.

Hello, fellas. How are you today?

Fine.

Good, thanks.

Good. My question is more of a general nature. I have a number of my clients into different REITs, including Acadia, of course. And the thing that worries me is, you know, interest rates are just starting to increase, it looks like. And the REITs are starting to take a hit. And the thing is, that what I'm wondering about in the case of Acadia, is that if interest rates say continue to go up, which from your discussion, you expect them to go up, over the years. As far as being able to raise your rents, as they go up, which would, you know, buffer any downturn in the stock or hopefully help it go up, if the -- because the earnings, the FFO and so forth would be higher, as you can increase your rents.

My question is, do you have the rents staggered? And what is the average maturity of the rents? And, you know, and the whole environment on REITs and the rising interest rates, and how your company fits, and, you know, what do you foretell? You know, what are you expecting the stock to do and stuff like that?

Okay. You know, and first of all, Ralph, I should caution you that we are not macro advisors, we run a real estate company. As it relates to the shopping center sector and our portfolio, in general, lease maturities are staggered, and ours are nicely staggered. Five to ten year, it's really five to seven years average maturities.

What we like is the fact that we still have lease-up opportunity, and again, interest rates can go up for a bunch of different reasons. If interest rates are going up as a result of an improving economy, then those companies that can turn leases and lease-up are arguabley going to have a competitive advantage. So we like the fact that we do have vacancy that we can lease through as the economy gets better. If, as I said, that's the cause of increased interest rates.

From the other side, Mike walked through in detail why we protected ourselves in terms of our costs of debt, so I think we're well situated. What impact and how that translates in terms of REIT multiples, I don't have the faintest idea, and I'm not the best person to guess on it.

Okay. Thank you very much.

Sure.

And your next question comes from the line of Mike Mueller with J.P. Morgan. Go ahead, please.

Hi. A quick question on the Aiken center. Why is it 56% occupied and just wondering what the plan is there? Talk a little bit about what you're going to do.

K-Mart, Mike, was a tenant there. They rejected their lease, so -- There's a Kroger. It's ripe for either a simple retenanting or a more complicated redevelopment. We just got title this week. So we are in the process now, with our partner, of talking to a host of logical box tenants, and we'll go through that process.

And in the interim, we are going to clip a very attractive 10% unlevered yield. So it's the kind of redevelopment situation we want to step into, where we can afford to be relatively patient as we figure out whether we take that box and split it into two or three, or lease it to XYZ box anchor tenant. And then there's other components to the center that we also think we can drive the rents on as a result of once it gets a healthy anchor tenant in there.

Okay. And did you have to put up additional capital to take ownership of the center?

A little bit.

Can you ballpark it?

More than 10 cents, less than a couple hundred thousand.

Okay. Thanks.

And I'm showing no further questions at this time, gentlemen.

Okay. I thank everyone for taking the time to listen. Have a nice weekend.

Thank you.

Ladies and gentlemen, this concludes today's Acadia Realty Trust first quarter 2004 earnings conference call. You may now disconnect your lines. Good day.