Acadia Realty Trust (AKR) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Acadia Realty Trust second quarter conference call. My name is Alicia, and I will be your operator. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of your conference. If you require assistance press star 0 and an operator will assist you. As a reminder this conference call is being recorded for replay purposes. I would now like to introduce your host for today's call, Mr. John Grisham with Acadia Realty.

Thank you, Alicia. Thank you and good afternoon everyone. Thank you for joining us for Acadia Realty Trust second 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 industry 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, weather, and obtaining necessary governmental approvals related to planned redevelopment project 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 on our website for a reconciliation of these non-GAAP financial measures with the most direct comparable financial measures calculated and presented in accordance with GAAP. Following management's 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, Acadia's President and Chief Executive Officer. Ken, please begin.

Thank you, John. Good afternoon, everyone. Along with John Grisham is Mike Nelsen, we are quite pleased with our second quarter results which provide further reinforcement that our business plan remains on track. Today in reviewing our second quarter results we'll walk you through three key components of our business plan. First portfolio performance, we'll our discuss second quarter and year-to-date performance. As you can see from same store NOI growth our portfolio performance in the second quarter remains strong reflecting the stability of the portfolio and progress of redevelopment. Secondly we'll cover our balance sheet. Mike will walk you through not only our strong ratios but continued progress we're making in limiting our exposure to interest rate increases. Third and finally, our external growth program in the second quarter we continued to enhance our external growth initiatives with three additional acquisitions. More importantly last week we announced launching of AKR fund II with $300 million of discretionary equity. We'll walk you through formation of fund II and update the acquisitions made in the second quarter for AKR fund I as well as discuss our retailer controlled property venture which we formed earlier this year. I will turn the call back over to Mike and John.

Thanks, Ken. John will now discuss the company's results of operations for the quarter and six months ended June 30th, 2004.

Thank you, Mike. Refer to our press release issued yesterday as well as our quarterly financial supplement as published on our website for a full detail of our financial and operating results for the three and six months ended June 30, 2004. I will now summarize those results. Note that all per share amounts discussed are on a fully diluted basis. FFO for second quarter 2004 was $8.1 million, or 26 cents per share. This represents a 13% increase over year ago second quarter which was 23 cents per share. In comparing the two quarters, it is important to note that the current quarter included income of approximately 1 cent per share from merchant development activities and a half month of asset management fees from the company's new acquisition fund, AKR fund II. For the six months ended June 30 FFO was 15.2 million, or 50 cents per share. FFO for the same period in 2003 was also 50 cents per share. However, this included income of approximately 6 cents from merchant development activity as well as a lump sum additional rent payment received from a tenant in connection with the reanchoring of our Branch Plaza.

Earnings per share for second quarter 2004 was 13 cents, compared to 9 cents for the same quarter 2003. And for the six months ended June 30, 2004, earnings per share was 23 cents, which was the same as that of the prior year. On a same-store basis, net operating income for the second quarter of 2004 increased by 2.8% over the year-ago quarter. This was the result of increased rents from our core portfolio from both leasing and redevelopment activities. For the six months ended June 30, 2004, same-store net operating income increased by 5.9% over the prior year. This was attributable to the same factors for the quarter as well as a decrease in operating expenses primarily winter related experienced in the first quarter of 2004. Mike will now continue the discussion of our financial condition and operating results.

Thanks, John. In addition to strong earnings, one of our core business philosophies has always been the maintenance of a strong balance sheet. We've been able to continue to build a solid financial condition, which is one of the strongest in our sectors, as evidenced by the following ratios, all of which include the company's pro rata share of our joint venture debt and interest expense. Debt to market capitalization of 38%, FFO payout ratio of 60%, fixed charge coverage ratio of 3.4 times, and 82% fixed rate debt after giving effect to a $19.5 million payoff of floating rate debt on July 1st, 2004, with an all-in cost of 5.7%. With regard to the company's debt position our key focus is on maximizing our maturities and minimizing interest rate exposure. During the second quarter, we were able to extend the maturity of $48.6 million of mortgage loans by five years until 2012 and reduce interest spreads by 35 basis points. We have locked rates and are currently in the process of converting another $8 million of floating rate mortgage debt to a $15 million 10-year fixed rate loan. When we have completed this transaction, the company's fixed to floating rate debt ratio will be 84% fixed rate.

Turning to our 2004 guidance, we have announced an increase in 2004 FFO guidance from originally reported 95 cents to $1, to 99 cents to $1.01. Second quarter 2004 FFO of 26 cents included two cents of income from merchant development activity and other fees that may not repeat in the second half. These amounts will be replaced by additional asset management fees of approximately 2 to 3 cents for each of the third and fourth quarters of 2004. We believe that the positive effect of these factors could be somewhat offset by interest rate increases, a prudent provision for unforeseen tenant credit losses, as well as anticipated increases in overhead costs resulting from the company's investment in both human capital and infrastructure in order to gear up for fund II. Accordingly, we expect third and fourth quarter earnings to stabilize at approximately 25 to 26 cents per share per quarter with any additional acquisition activity being more relevant to 2005 growth. I will now turn over the mike to Ken so he can continue the discussion.

Thank you, Mike. First we're going to review our portfolio performance. Mike and John discussed our strong same store NOI growth for second quarter and year to date. The NOI growth in the second quarter was driven by redevelopments and reanchorings which increased our portfolio occupancy to 88.5%. The most significant contributors were the completion of our New Loudon development bringing that center's occupancy to 100% and the leasing at that time Bloomfield Town Square shopping center. At 88.5% occupancy we still have lease-up opportunity as we continue to redevelop the portfolio. In terms of leasing activity we executed new and renewal leases totaling 190,000 square feet with average increase of approximately 6% over the previous rent on a cash basis. Earlier this year we had previously given guidance that we felt we could increase our occupancy by 1% this year and 1 to 2% over the next few years as the economy recovers. Our performance to date seems consistent with this forecast. In terms of redevelopment the three redevelopments in our pipeline are continuing on plan. New Louden is now completed, the other two are on plan in total these three will contribute two to three cents to our earnings this year and three to four cents when they're fully on line next year.

In terms of tenant exposures, tenant reserves, bankruptcies , as we said on previous calls with respect to our '04 earnings performance one of the key variables is the amount of our internal reserves that are actually utilized. To date our default and bankruptcy reserves have been minimal and a significant portion of our internal reserves have not been used. While there's very little on our radar screen to cause to us believe that this will change, general prudence causes us to maintain a more conservative outlook. It's always the tenant disappointments that are not on the radar screen that hurt the most. In terms of current exposures the main tenant on our radar screen this year is KB Toys. To date of our six locations only one has been closed, and that has caused one half penny of dilution out of the total exposure of three cents. We anticipate retenanting this store at the same or better rent this year. With respect to balance of the KB Toys locations we don't anticipate any further disruption. However, even if KB stays in business we anticipate recapturing some portion of those locations over time, but the dilution would be short-term in nature. As is the case with KB and has been the case with most of our previous bankruptcies since most of our boxes are well located and are below market rents the loss in FFO tends to be short term in nature. To recap in terms of portfolio performance, 2.8% NOI growth, 1% gain in occupancy driven by redevelopments and progress we're making in terms of the portfolio overall.

Turning now to external growth, quickly update you on our AKR fund I acquisition, our RCP venture, and the launching of fund II. As most of you know the key to our external growth program 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 markets. In terms of fund I which is capitalized with $90 million of equity, in the second quarter we made three investments at an average -- excuse me, an aggregate investment of $8.4 million. The three acquisitions were as follows: In Westchester New York, in Tarrytown, we invested in a 35,000 square foot neighborhood center formerly anchored by a grand union that we're going to redevelop with a new Walgreens drugstore. We also made investments in two properties from the existing 10 million square feet of class realty assets that we are currently asset managing. We've acquired 50% interest in the redevelopment of the Heygood shopping center and the Sterling Heights shopping center.

Consistent with our updated earnings guidance through these acquisitions we've now achieved upper end of our previous guidance of two to four cents of external growth. We anticipate any additional acquisition this year will be less relevant to '04 earnings and will be more relevant to 2005 and beyond. With these three investments in the second quarter we have now fully invested or committed the 70 million of the 90 million of fund I capital with the remaining 20 million to go into our RCP venture investments as they may arise. All future acquisitions will be done in fund II. In terms of our fund II pipeline we're looking at several exciting redevelopment and acquisition opportunities and we'll keep you posted as they arise.

Turning to our RCP venture in the first quarter we launched our retailer controlled property venture, or our RCP venture. As we previously discussed in detail the venture is with the class organization and its long term partner Rupert Adler. It's set up to opportunistically invest $300 million in equity in properties working with healthy and distressed retailers create value from their surplus or liquidating real estate. Acadia through its acquisition funds I and II has the opportunity to invest a total $60 million. 20 million from fund I, 40 million from fund II. We are looking and working on several potential opportunities but there's nothing to report on the acquisition front in terms of the RCP side. However, as part of the creation of the RCP venture we also acquired contracts on approximately 10 million square feet of shopping centers. They will be various investment and redevelopment opportunities that arise from that portfolio as I discussed beforewe've already made investments in two of these properties, and we'll keep you apprised of additional opportunities as they arise.

Turning to fund II, last week we announced the launching of AKR fund II. We had previously forecast raising 200 to 250 million of equity. We increased that to $300 million. Acadia will be 20% of that 300 million, or $60 million. The structure in terms are similar to our fund I with a few minor changes that are outlined in our quarterly supplement. Fund II will include all of the existing investors from fund I and two new institutional investors, and as stated before 40 million of these 300 is earmarked for our RCP venture. Ideally this would leave us with approximately $260 million for acquisitions which assuming leverage on a two-thirds basis would result in $750 million or more of gross acquisitions to be invested over the next three years. We can't predict when or how many dollars will be invested but even if we assume that the acquisition volume is on a somewhat back-ended basis, for example, $150 million in 2005, 250 million in 2006, then 350 million for 2007, that would get us to the $750 million of gross acquisition volume with the balance of the equity potentially being invested in the RCP venture. Using our current formula of every $100 million of gross acquisitions equals four cents of FFO accretion, this could provide us high single to low double-digit external growth from this platform. So even on this somewhat back-ended basis fund II should enable us to create strong external growth over the next several years which will nicely compliment our internal growth.

In terms of our acquisition outlook, as was the case with fund I and now fund II, our size, our structure, is such that our external growth does not require us to have to overly stretch for or produce unrealistic volume of investments 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 overreliance on historically low interest rates or historically high multiples. Whether through our RCP venture or other value-added acquisitions, we're confident that there will be sufficient opportunities to move the needle on the company of our size.

To conclude, we continue to be pleased with our business model. All three components of our business plan are on track. Portfolio performance remains strong, and as the economy improves we should be able to continue to drive our reanchorings and redevelopments and our occupancies. Our balance sheet is solid and we have strengthened it further by limiting exposure to rising interest rates. Our dividend payout ratio is one of the strongest in the sector and this puts us in the position to provide our share holders not only a safe dividend but one that can grow as our earnings continue to grow. Third and finally our acquisition enough activities are both creating highly accretive growth as well as laying the foundations for future incremental growth. Now with the launching of fund II we can continue to make significant acquisition on a discretionary basis independent of the public markets. Fund I has been a significant driver of our earnings at a time when capital was plentiful. Our structure for fund II should be that much more valuable to our shareholders if and when the markets been more constrained. I thank everyone for their time. We'd be happy to take any questions.

If you would like to ask a question please press star followed by 1 on your touch-tone telephone. If your question has been answered or you wish to withdraw your question please key star followed by 2. It is start 1 to ask your question. The first question is from Jay Leupp with RBC Capital Markets. Please go ahead.

Hi everyone. Jay Leupp here with David Rocco. Can you talk about cap rates that you're seeing just for acquisitions in general and what you're contemplating in terms of when you're giving guidance related to fund II what sort of cap rate expectations that you have going forward?

Cap rates for stabilized core assets are in the sevens and we're seeing them even below that periodically. We historically have not been the winning bidder for those kind of assets, especially at this point in the and we feel even more strongly right now because historically cap rate movement has lagged interest rate movement. So far we have not seen any material shift in cap rates as interest rates have been moving up or -- and/or forecasted to move up. So the type of deals, Jay that we've done over the past few quarters, the redevelopments, which are less cap rate sensitive, are much more likely to be the kind of deals we're looking at. We're less concerned and our model is less predicated on whether we buy at a 7 cap, 9 cap, 11 cap and more focused on where do we get the property over one, two, three years in terms of stabilized NOI. For those projects we still see our ability to create unlevered returns in the low double digits, whether it's 10, 11, or 12%. Then you apply leverage and we're able to achieve mid teens returns to our investors and our shareholders before you start adding on to our shareholders sake the additional fees and promotes.

And then just one follow-up related to occupancy and your outlook going forward. You had the nice 1% pickup this quarter, the 88.5% level. What are you contemplating through the back half of the year and how does that fit into your guidance, and can we at this point assume anything close to a straight line ramp-up in occupancy going forward?

What we had said earlier this year in terms of our guidance was that we thought we could get this to 88.5 this year. So we're already there, and we certainly hope to be able to add to that this year, perhaps another 50 bips or so but I don't think a straight line for this year. What we've said overall is as the economy improves we think that our portfolio can stabilize in the low to mid 90s, but it's dangerous to predict whether that's an '05 event, which quarters, and '06, et cetera. So, you know, an additional 1 to 2% over the next year is something we're shooting for and hopefully we'll be able to achieve.

Thank you.

The next question is from Paul Adornato with Maxcor Financial. Please go ahead.

Thanks. Good morning. Does the Mervyn's portfolio have any interest or hold any opportunities for you through your JV partners?

We're certainly reading about everything you guys write is of interest, but other than that we're not going to comment at this time.

Okay. And in terms of the guidance, Mike, you mentioned a number of positives and negatives. How much of the increases due to core operations for this year?

The core operations we anticipate will be approximately 2 cents, 1 to 2 cents.

Okay. Okay, great. Thanks.

The next question is from Mike Mueller with JP Morgan. Please go ahead.

Two questions. One, can you comment on the dividend relative to the taxable limit minimum? Where are you at this point?

We're not close to pushing against the taxable minimum. We should be in excess of the IRS guidelines.

With respect to G&A I think you mentioned something about infrastructure and ramping up.

Right.

Can you put that into dollar terms for G&A?

We're looking at approximately somewhere between -- a little bit under a penny for the balance of the year.

Okay. And one penny for the balance of the year, does that mean two cents for next year?

That's right.

And then just kind of rehashing, you were talking about some Q2 refinancings and some stuff that was coming up. What was the timing of the refinancing that took place in the second quarter? Was it back end loaded? Mid, or when do you think that will happen?

It was done at the end of the quarter. As a matter of fact, it was done at the -- right at June 30th. I apologize. That's right.

We completed that one June 30th.

And that was for 48 million?

That was 48.6 million.

Okay.

And with regard -- we're currently in the middle of the additional $8 million of refinancing, which should be done within 20 days.

Okay. Great. Thanks.

My pleasure.

The next question is from Roth Lufton of Banc of America Securities.

I'm here with Amy Dalone. Ken, you've put 8.4 million to work in the quarter. Obviously you're going to be ramping up the pace over the next couple of years. I guess my question is, what have you missed out on the last six months or so that you were really actively chasing? I guess I'm trying to get a sense of, you know, what is your hit rate right now in terms of the deals that you're chasing?

What have we missed out on the past six months? There were a few portfolios, one nice $60 million asset that unfortunately the due diligence didn't check out on, and when the implied cap rate got to a level that I just didn't think it was in our shareholders' interest we passed on. So to say what did we miss out on, we missed out on a host of seven-cap assets where we didn't think there was a lot of growth or on a risk-adjusted basis we thought there was more downside than up side. In terms of what we see going forward, we have a very strong team at finding well located properties, preferably with below market lease where we can turn those properties around and fortunately, there's enough volume for a company of our size, and that we can do -- I mentioned, you know, for example, 150 million of acquisition volume by next year would be a ramp-up, but, in fact, that was the volume we did last year. So it's a volume that doesn't require us to be everywhere, and allows us to use our value-added skill set.

Now, Ken, last year's activity primarily was two deals, if I'm not mistaken.

Correct.

In large part. Is that what you're kind of anticipating going forward? A couple of large deals as opposed to some smaller one-offs?

We can do both. We did a few small deals this year because if they're in our backyard and if they're compelling we'll do them but generally we're more interested in the deals that are 10 million to 100 million in size, not the deals that are 300 million, but also not the deals that are 3 million. And, you know, a lot of it has to do with do you have a motivated seller, do you have -- is the right opportunity there. We have enough capital now that we can afford to do single asset $15 million shopping center acquisitions and achieve our goals. We have the infrastructure to do that and I'm not concerned but we also could take down a $300 million portfolio if it was compelling.

Couple of quick income statement questions. Where did the merchant building fees show up on the income statement and can you tell us more about it who did it come from and what asset was it?

Sure. It's showing up on the income statement as gain from sale of properties and it's, as you recall in the first quarter of 2003, we reported a gain on the merchant development activities, and the current receipt was an adjustment of that sale, that came through as a release out of escrow that we never anticipated getting.

So this was from target?

That's correct.

This was a target investment.

Was this anticipated in your original guidance, FFO guidance for the year?

No. The thing with our merchant development fees, like lease termination fees and other nonrecurring or what we kind of view as underrecurring, every year there seems to be some. We don't like to count on them because in this case we weren't sure if we were going to get it, it was predicated on the construction cost coming in at a certain level. So we don't bake those into our earnings. It's cash profit, plus FFO, so we certainly are happy to take when it we get it, and as soon as we get it we let you know.

Other income item, interest income was up pretty significantly in the quarter. What caused that?

John, you want to take that?

Sure. We have -- we did a couple of small mezzanine-level loan deals. It's really more a treasury function than a primary investment strategy, but that added the incremental interest income that you're seeing for the quarter.

To get that, the deal flow question, Roth, one of the ways that we find our deal flow is enhanced when developers or other capable operators are in need of some type of bridge loan cap one way of the other, being a source of that type of capital happen often led, and, in fact, one of the deals we did this year resulted from making a bridge, or mezzanine loan, and then converting that into an equity interest. So we'll periodically do that.

So what was the dollar value of the mez loans that you lent during the quarter?

In the aggregate I'm going to say 4 to 5 million, perhaps.

And the returns you're anticipating on the yield on these investments?

Low to mid teens.

And this is a business that you anticipate kind of dabbling in going forward?

Yes. It's not -- we're not setting up a mezzanine fund. Again, we look at all different ways to put capital out within our core expertise, and, you know this can just be one more way to more importantly increase future true deal flow and then John also mentioned an attractive treasury function to it, too.

And the loans are on retail assets?

Only retail assets.

Final question. Part of your same store NOI growth this quarter came from your two residential properties, a robust 16%. Is there any update terms of your disposition plans for those assets?

We are still committed to selling them. There are at the REIT level certain tax issues that make it far more advantageous for to us do it in a 1031 fashion. We thought we had that solved, then on the buying side there was a hiccup that delayed from the being a transaction that I hoped was actually going to occur this quarter but we're still committed to disposing of them. That being said they're performing fine. One of our key marking tools is saying we're not owner operators of apartments, so that the next guy can do a better job but these are providing attractive cash flow and we will sell them but we'll only sell them when it makes sense for our shareholders.

So if you found a home for the money you'd actually be a seller very near term?

Absolutely.

And the acquisition side of it would not go into the fund?

Correct.

It would just be on your balance sheet?

We have the ability to do 1031 transactions, as one of several carve-outs to the fund. If you had a $25 million apartment complex you'd acquire a $25 million shopping center, we think we could do that on a tax-neutral and FFO-neutral basis but we're not going to overpay for a shopping center just so we don't have to talk about apartments.

Thank you.

The next question is from Jonathan Litt with Acadia. Please go ahead.

It's Gary Boston and John Litt with Smith Barney. Not that we wouldn't want to -- just a quick question on the guidance regarding your management fees for the balance, which I think you said would be up another two or three cents a share. In that guidance how much is assumed in terms of either closing out fund I with an RCP investment or starting to ramp up investments in fund II in the second half of the year?

It's all straight asset management fees. Any additional closings would have some incremental benefit to this year. It's just that chances are it will have more of an impact next year. So that no additional acquisition activity whatsoever is needed for that.

I think John had something.

What's the prospects on getting fund I fully invested?

Fund I in terms of the real-estate side, John, is fully invested what. We did, for a host of reasons, is we're marked the final 20 million of fund I to go into our RCP venture. So of our 60 million that's going into the RCP venture, 20 is from fund I, 40 is from fund II. That was at the desire of the investors of fund 1, also made sense for us, and for now fund I is completed, all of our acquisitions that we're going to announce going forward will be fund II except for that 20 million slug that will go into the RCP piece.

And when is the RCP piece close?

RCP venture is going to be different retailer controlled property investments that we may make over the next one, two, and --.

So it's really more like capital calls? The money is there and will be drawn down as needed?

Exactly.

That's it for my questions.

Great.

We have no more questions in the queue at this time. Would you like me to repeat the instructions?

No, I think we're all set. Thank you everyone for listening.

Thank you.

Ladies and gentlemen, thank you for joining today's conference, this concludes the presentation. You may now disconnect. Good day .