Acadia Realty Trust (AKR) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Acadia Realty Trust third-quarter conference call. My name is Jeanne. I will be your conference coordinator. (OPERATOR INSTRUCTIONS). At this time, we will turn the call over to your host, Jon Grisham. Sir, over to you.

Thank you. Good afternoon, everyone. Thank you for joining us for Acadia Realty Trust third-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 Web site at Acadia Realty.com under the Investor Information section. We are also hosting a Web cast of today's call, as well as a replay of the call on our Web site.

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 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 in discussing results in the REIT industry. Please see our financial and operating reporting supplement 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 discussion, there will be an opportunity for all participants to ask questions.

At this time, I would 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 Grissom joining me this afternoon is Mike Nelson, our CFO. We're quite pleased with the continued progress our team has made during the third quarter both in terms of our internal portfolio performance, balance sheet strength and our external growth initiatives.

Today in reviewing our third-quarter results we will walk you through the three key components of our business plan. First, portfolio performance. We will discuss our third-quarter and year-to-date performance. As you can see from our strong year-to-date same store NOI growth, occupancy gains, leasing spreads, our portfolio performance in the third quarter remains strong reflecting the stability and upside within our portfolio and the progress of our leasing and redevelopment.

Second is our balance sheet. Mike will walk you through not only our strong ratios, but also our continued progress in limiting our exposure to interest rate increases and extending our weighted maturity.

Finally, external growth. In the third quarter, we continued to enhance our external growth initiatives on two important fronts. First in the third quarter, we completed the first investment in our Retailer Controlled Property venture through our participation in the acquisition of Mervyn's.

Also in the third quarter, we announced the launching of our New York Urban/Infill redevelopment platform that has included the announcement of two exciting acquisitions. So after Mike and Jon discuss our financial performance and our guidance, I will walk you through our portfolio performance and our external growth initiatives.

At this point, I will turn the call back over to Mike.

Thanks, Ken. Jon will now discuss the Company's results of operations for the quarter and the nine months ended September 30, 2004.

Refer to our press release issued yesterday, as well as our quarterly financial supplement published on our Web site for a full detail of our financial and operating results for the three and nine months ended September 30, 2004. I will now summarize those results. Note that all per share amounts discussed are on a fully diluted basis.

FFO for the third quarter 2004 was 7.2 million or 23 cents per share compared to 6.7 million or also 23 cents per share for our year ago third quarter. In comparing the two quarters, it is important to note that the current quarter included a charge of approximately 2 cents per share resulting from a provision for an insurance deductible relating to recent flood damage at our Mark Plaza property located in Wilkes-Barre, Pennsylvania. Ken will discuss this further later in the call.

This 2 cent charge was offset by approximately 1 cent of income from merchant development activity, as well as a full quarter of Asset Management fee income from the Company's second opportunity fund.

For the nine months ended September 30, 2004, FFO was 22.4 million or 73 cents per share. FFO for the same period in 2003 was also 73 cents; however, this included income of approximately 4 cents from a lump sum additional rent payment received from a tenant in connection with their reanchoring at our branch plaza.

Earnings per share for the third quarter 2004 was 10 cents compared to 9 cents for the third quarter 2003, and for the nine months ended September 30, 2004, earnings per share was 32 cents. This compared to 31 cents for the same period last year.

Same-store net operating income for the retail portfolio increased by 3.2 percent for the nine months ended September 30, 2004 over that of the prior year. This was primarily the result of increased rents from our core portfolio and occupancy gains from leasing and redevelopment activities.

Same-store NOI for the third quarter 2004 over the same quarter of 2003 declined by .5 percent. This was primarily a result of the timing of estimated provisions for specific potential tenant defaults. Specifically in the current quarter we provided approximately $200,000 of reserves, while the year ago quarter included a reversal of $150,000 reserve that was previously established that year. The reserves that we established in 2003 was related to the giant Eagle bankruptcy and the assumption that that lease would be rejected at our Hobson West Plaza. In fact, the lease was acquired by another operator, and the reserve was no longer required.

Excluding the impact from the variance in tenant credit reserves, same-store NOIs for the third quarter '04 over the same quarter '03 would have been a positive 2.5 percent. It is important to note that year-to-date NOI to year-to-date NOI result is a better indicator of the growth of our core portfolio as it eliminates this quarterly timing of adjustments for estimated reserves.

Mike will now continue the discussion of our financial condition and operating results.

Thanks, Jon. Once began we have been able to continue to maintain a healthy financial condition, which is one of the strongest in our sector as evidenced by the following ratios, all of which include the Company's pro rata share of our joint ventured debt and interest expense.

Debt to market capitalization of 37 percent. FFO payout ratio of 65 percent for the nine months. A fixed charge coverage ratio of 3.2 times and 79 percent fixed-rate debt with an all-in cost of 5.8 percent.

We are continuously reviewing and revising our debt profile in order to minimize exposure to interest rate risk and maintain a rational debt maturity schedule. During the third quarter, we successfully converted $8 million of floating-rate mortgage debt to a $15 million 10-year 5.64 percent fixed-rate loan.

Additionally subsequent to September 30, 2004, we have paid down approximately 10.8 million in floating-rate debt. We are also in the process together with our joint venture partner of finalizing the refinancing of the Crossroads Shopping Center mortgage debt from a floating-rate, which we fixed at 7.16 percent through a swap maturing in October 2007 to a fixed-rate 5.37 percent loan maturing in 2014. This refinancing will also provide Acadia with additional proceeds of approximately $14 million after paying 1.4 million to unwind the existing swap. After giving effect to these transactions, Acadia's debt will be over 88 percent fixed-rate, and we will have availability under our existing credit facilities of over $50 million.

With regard to the refinancing and termination of the Crossroads swap, we, together with our auditors and hedge consultants, are researching the proper accounting treatment for this transaction. The results of each of the options range from one, a fourth-quarter 2004 charge of $1.4 million or 4.5 cents a share. Two, amortization of the 1.4 million through the original maturity of the swap in June of 2007 or 2 cents a share for 2005. Or three, amortization of the $1.4 million through the maturity of the new loan or about .5 percent per share per year. Our current 2004 and 2005 forecast assume the second option.

The economics of this refinancing are attractive given the interest rate savings, the additional proceeds which will be available, and the extended due date. Consistent with our view of the rising interest rate environment, we believe that fixing interest rates today is a prudent path, and this transaction should result in a midteens return to Acadia on the incremental costs of terminating the swap. We will keep you apprised as to the final decision as to the proper accounting treatment.

We believe that the third-quarter results, after adjusting for the onetime insurance charge related to the Mark Plaza, represent a stable and reoccurring earning. Accordingly, we expect 2004 results to achieve 97 to 99 cents per share, assuming that the Crossroads swap accounting is resolved as previously discussed.

Looking forward to 2005, our preliminary guidance is $1.00 to $1.09 a share. This broad range is a result of the following. We are projecting 2 to 3 cents of internal growth. The pace of our external growth initiatives are difficult to predict in both timing of transactions and when the earnings impact will be realized. Our projections for 2005 included between 2 and 6 cents from acquisition activity. Fee income, other than asset management fees, on existing investments are expected to increase by 2 to 3 cents.

As we have discussed, while we believe that fixing interest rates today on stabilized properties is the right decision for the long-term, there will be some short-term earnings dilution until any excess proceeds are deployed in higher yielding investments. Additionally the ultimate resolution of the treatment of the termination of the swap transaction at Crossroads could have an effect on 2005. These factors could swing 2005 interest expense by up to 2 cents.

We continue to experience low credit issues in the portfolio, and while we cannot predict what the future will bring in terms of tenant bankruptcies, we continue to provide a more prudent reserve for potential credit issues and have provided incremental reserves of up to 3 cents a share. We like the rest of corporate America have been somewhat surprised by the cost of both implementing and monitoring the effect of Sarbanes-Oxley. It is unclear if the ongoing cost of complying will be significantly reduced after the initial implementation.

Additionally we are investing in human capital to gear up for our external growth initiatives. As a result of these factors, we are projecting an increase in general administrative costs of between 1 and 3 cents.

Notwithstanding the broad range of our 2005 guidance, the fundamentals of our business remains solid, and as our internal and external progress unfolds, we will keep you updated as to that progress and be able to provide more specific and narrow guidance. Ken will now continue the discussion.

Thank you, Mike. First, we are going to review our portfolio performance. Year-to-date our same-store NOI growth and our retail portfolio was up 3.2 percent. As Jon explained, our quarter-over-quarter growth was muted primarily as a result of the timing of estimated provisions for potential tenant defaults, and it is not indicative of our experience over the nine-month period as a whole.

In terms of portfolio occupancy, it increased 60 basis points to 89.1 percent quarter-over-quarter and increased 130 basis points on a year-over-year basis. We executed new and renewal leases in excess of 230,000 square feet with an average rental spread increase of approximately 15 percent on a cash basis.

We have previously given guidance that we felt we could increase our occupancy this year by 1 percent to 89 percent and 1 to 2 percent over the next few years as the economy recovers. Our performance to date seems consistent with this forecast.

In terms of tenant exposure and tenant bankruptcies, as we said on our previous call with respect to 2004 earnings performance, one of the key variables and one of a key variables looking to 2005 guidance 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 is very little on our radar screen to cause us to believe that this will change, general prudence causes us to maintain a more conservative outlook going into 2005.

In terms of specific tenant exposure on our radar screen for 2005, it remains the same tenant as 2004, which is KB Toys. To date of our six locations, only one was closed. That caused a half a penny of dilution this year. We have already retenanted that store at a 10 percent positive leasing spread over the KB lease.

With respect to the five remaining leases, KB Toys has recently announced the closing of up an additional one-third of its remaining stores. We do anticipate that some and perhaps all of our five remaining stores will be rejected and we will recover them in 2005. However, as we stated on the previous call, these leases are at or below market so that the dilution should be short-term in nature, probably two quarters or so. If all five stores were rejected, the maximum exposure in 2005 would be about 3 cents. We expect the actual impact to be about half of that.

And finally as we previously announced in the third quarter, we took a cautionary reserve of 2 cents a share associated with flood damage to our Mark Center Plaza Shopping Center. We took this reserve because there remains the potential that our normal $100,000 deductible could be raised to $730,000 if it is determined that the flood was directly caused by a main storm, in this case Ivan. While our insurance carrier has not yet determined its position, the ISO has included Pennsylvania as part of the hurricane. So while we are aggressively pursuing a favorable outcome, even if our position is legally correct, predicting the timing and results is like predicting the weather. Accordingly, we have determined that the reserve is prudent and appropriate.

So to recap our portfolio, performance remains solid with 3 percent NOI growth and over 1 percent occupancy gains.

Turning now to external growth. In the second quarter, we announced the launching of our latest discretionary acquisition fund, AKR Fund II, with $300 million of discretionary equity. AKR will invest 20 percent or 60 million of the capital into the Fund 2. Our goal is to invest this equity over the next three years and assumes that we utilize about two-thirds leverage.

In the third quarter, we announced transactions that should utilize approximately 50 million of this 300 million of equity just keeping us nicely on track for $300 million of equity investments over the next three years.

The recent transactions that we have completed fall into two categories of our growth strategy. First is our RCP venture. Second is our New York Urban/Infill platform.

In terms of RCP, in the first quarter we launched our retailer controlled property or RCP venture. As we previously discussed in detail, the venture is with the Klaff organization and its long-term partner, Lubert-Adler, with its goal being to opportunistically invest over the next three years at least 300 million of equity in Retailer Controlled Properties working both with financially healthy and distressed retailers to create value from their surplus or liquidating real estate. As we previously stated, Acadia's goal is through its acquisition Funds 1 and 2 to invest at least $60 million of the Fund's money in the RCP venture over the next three years.

In the third quarter, we commenced our first RCP venture investment with our participation in the acquisition of Mervyn's where we joined the investment consortium of Sun Capital, Cerberus and our RCP partners, Lubert-Adler/Klaff, in the acquisition of Mervyn's from Target Corporation. The acquisition price was $1.175 billion for the Company, and our initial investment was $23.2 million of equity divided equally between Funds 1 and .

Mervyn's is a 257 store discount retailer with a very strong West Coast concentration where the vast majority of the stores are well located in high barrier to entry markets enabling a recapitalized and refocused operator the opportunity to create a potentially very exciting retail platform.

Furthermore, given the high quality of the locations and at a cost basis for us of under $60 a square foot, the additional opportunities also remain compelling. While the Mervyn's transaction is not anticipated to provide more than a penny per share of initial accretion in 2005, we are confident that the longer-term earnings contribution over the next few years will be well in excess of our usual midteens plus returns on other similarly sized equity investments. Our participation in Mervyn's is the first of what we hope will be several exciting and profitable investments with our partners in our RCP venture who we feel have clearly proven themselves to be one of the premier groups in this arena.

Turning to our other key component of our acquisition strategy, which is our New York Urban/Infill program, we have launched this program with the New York development team P/A Associates. Acadia through our Fund 2 will invest approximately 90 percent of the equity in these projects, and P/A will be a minority partner and also see receive additional profit participation if superior overall returns are achieved on the platform.

We are excited by the opportunities that we see in the mid-sized urban retail redevelopment arena, especially in the New York Metro area. As opposed to other parts of the country, national retailers are underrepresented in this market, and due to the high density and disposable income, the retailers can profitably pay very attractive rents here.

Our first redevelopment for our venture was the purchase of 400 East Fordham Road in the Bronx for approximately $30 million. The 117,000 square-foot property is a multilevel retail commercial building located on East Fordham Road near Fordham University in the strongest retail area in the Bronx with over 650,000 people in a two-mile radius.

Sears is the primary anchor with a lease dating back to 1964 with only three years remaining on its lease and no renewal options. Sears retails on four levels with a total growth leasable area of close to 100,000 square feet. In the event that Sears does not answer into a new market rate lease, we will redevelop the property for multitenant use.

As part of the redevelopment, there is the potential for significant additional expansion. The total cost of the redevelopment projects including our acquisition cost is currently estimated to be between $35 and $40 million, but this may change depending on the ultimate scope of the project. Either way upon completion of the redevelopment, it is anticipated that the project will earn an unleveraged yield in excess of 10 percent and a leveraged IRR the mid to upper teens.

The property is currently financed with a $18 million nonrecourse bridge loan. While this project is projected only to be modestly accretive in 2005, it should provide growth consistent with our other acquisitions upon stabilization and will be one of what hopefully will be several future redevelopment that we can add to our pipeline and that will help fuel our long-term growth.

In October we announced that also in conjunction with P/A Associates, we entered into a long-term ground lease to redevelop a 16 acre site currently improved with 300,000 square feet of warehouse space. The redevelopment plan is to convert this site into a community retail center of at least 200,000 square feet. The ground lease is for a total of 95 years. The property is located on the border of the Bronx in Westchester County in Pelham Manor, New York. The property is approximately 10 miles from Manhattan with 400,000 people in a three-mile radius. We anticipate the redevelopment will cost between 30 and $33 million with construction anticipated to commence within the next 24 months. Upon stabilization we are projecting the property will generate an unleveraged yield, again in excess of 10 percent with a leveraged IRR in the high-teens. The property is currently operating on a cash flow neutral basis, with the ground rent approximating the rent being collected from the current tenants.

Again, from a short-term earnings perspective, there will be little accretion until the redevelopment is stabilized. While back-ended, these redevelopments from a total risk-adjusted return perspective are far more exciting than the short-term accretive long-term potentially dilutive acquisitions of stabilized properties that we are seeing.

In terms of our acquisition outlook, our size, our structure, and our outlook is such that we do not believe it wise nor necessary to overpay for investments in order to just create short-term growth. We are confident that whether through our RCP venture, our value-added redevelopments or other opportunistic investments that may arrive, there will be sufficient opportunities to move the needle on a company of our size.

We recognize that estimating short-term external growth is made more difficult by these back-ended investments, and our current pipeline includes more of these same. But it also includes a host of potentially immediately accretive transactions. Predicting which hit and win is always a difficult process, thus this is part of the reason for our unusually broad 2005 preliminary earnings guidance.

What I can assure you is that our team is excited by the opportunities that we are working on and has proven itself over the past several years in successfully uncovering and creating compelling opportunities during a very competitive acquisition environment. We are going to continue to remain disciplined and focused on creating real estate value that whether accretive in 2005 or not will translate into long-term growth and long-term shareholder value.

So in conclusion we continue to be quite pleased with our business model. All three components of our business plan are on track. Our core portfolio performance remains strong as evidenced by our occupancy gains, leasing spread, NOI growth. Our balance sheet is solid, and we have strengthened it further by limiting our exposure to rising rates and by extending maturities. Our dividend payout is one of the strongest in our sector, and this puts us in a position to provide our shareholders not only with a safe dividend but also one that can grow as our earnings continue to grow.

And third and finally, our acquisition initiatives are laying the foundation for strong future growth. Both our RCP venture and our New York Urban/Infill platform are enabling us to invest in exciting value-added opportunities at a time when even the most secondary shopping centers are trading at unprecedented cap rates. Nevertheless, during a period where capital is currently cheap and easily available and worthwhile acquisitions are extremely difficult to complete, we are very excited by the investments we are making, as well as our disciplined evidenced by the deals that we're not electing to do. When the cycle shifts, our strong balance sheet, dry powder and accretive acquisition structure should enable us to be that much more valuable and create that much more value for our shareholders.

I would like to thank our team for their hard work and the results that they achieved during the third quarter, and at this point, I would like to thank you for listening and we will take any questions.

(OPERATOR INSTRUCTIONS). (technical difficulty)--. Michael Bilerman. Smith Barney.

I was wondering how many other Urban/Infill redevelopments you may be targeting and what sort of infrastructure you have to deal with that, or is that mainly going to be handled by P/A?

Well, we are working in conjunction with P/A, and we're doing a fair amount of the heavy lifting, although they are fabulous partners to have. Our goal would be to do a total of two or three a year over a twelve-month period. Their goal is perhaps even more ambitious than that, and that is great, although obviously we have the final decision-making on it.

Our infrastructure is in pretty good shape from a construction leasing and redevelopment perspective. If it grew significantly more than that, I would suspect that we might see the need for one or two more mid-level leasing and construction people.

And they have to bring you each deal that they find? You have a right of first offer effectively?

Yes. Although we work very much in tandem, Michael. We are looking at it with them. They are very connected into the New York market. I won't get into the whole lengthy story of their background, but they are very tapped in. So they are seeing a lot of deals that are not hitting the general radar screen and are very valuable from the perspective as well as their real estate actions.

You don't foresee us seeing any additional announcements probably until at least next year? Projects?

We are working on a host of different things. They usually take a while. So it could be a while before the next one, but we try not to predict when the next ones will occur.

You had another gain. I assume that came from the merchant building activities. Can you just review with us where that stands currently, where the gain came from and how much may be in the hopper?

This was our Bethel, Connecticut gain. We did a merchant development for Target. There was a reserve based on where the total construction costs would come in. Fortunately the construction costs came in lower, and thus, there was residual payments. This was the final one from the Bethel merchant development.

Every year we have some type of onetime gains. We try to break them out that way. They are great because it is cash in hand, but they also create a little lumpiness so we just take the money and we explain what it is. There is probably a similar amount out there, whether it hits next year or not from other projects. It's always hard to predict.

Have you got anything embedded into your guidance?

No.

The provision that you guys took in the quarter, the 200,000, does that relate to KB or something else?

No, it relates to a handful of smaller tenants.

How much square footage and can you give us a little bit more color on that?

Well, the total square footage is probably no more than, say, 20,000-25,000 square feet in the aggregate, and it's basically revolves around tenants that have slipped into two or three months of delinquency. So just to be conservative we have established these reserves.

None of these are national tenants.

No national tenants.

And the reserve represents how much of their future rent payments?

Well, it represents no future rent payment. It just represents almost all of their current rent obligation that is in arrears.

Paul Adornato. Maxcor Financial.

You mentioned that we should expect to see G&A increase by 1 to 3 cents next year. How much growth will that accommodate do you think?

Well, there are two components to it. One is a no growth component which is potential costs associated with Sarbanes-Oxley. It is creating shareholder value of a different kind I suppose, but we're not -- it's not going to create FFO growth.

The other components are as we continue to improve our overall staffing for our leasing and redevelopment and acquisition programs. And that depends -- it's a timing issue as to when acquisitions hit and the exact amount of accretion from them.

And so how much maybe would be attributable solely to Sarbanes-Oxley? Could you break it up that way?

About a penny for Sarbanes-Oxley I would think and the balance is -- (multiple speakers).

And I assume you are going to start hearing more and more about increased costs associated with Sarbanes-Oxley.

Already we're hearing it from just about all the companies. In terms of the balance sheet, as you fix more of your debt, do you have any change in terms of your target leverage overall?

The leverage level we are comfortable with, our view is that a 4 percent 10-year treasury is compelling from a borrower's perspective and that spreads are also extremely tight right now. So we can avail ourselves of cheap long-term debt, or what we think will be perceived as, we will view in years to come, we're going to increase our maturity level. But that does not really change our overall view of debt levels, which we are comfortable about where we are standing.

Okay. As you fill out more of your joint ventures and fee income rises as a percentage of total income, any thoughts as to the mix of fee income versus rental income? Is it more efficient to have fee income as opposed to rental income, and should we expect to see a target of fee income as a percent of total income?

We have not worked it out as a specific target. The deals we are doing, while they have fee income components to them, for the most part are very much focused on the real estate investment. And then our back-end piece, which I don't view as fee income, our additional back-end profit participation, so that is really what drives our focus on it. If it ever got to the point where the fee income was growing significantly and out of whack, we would be looking at that and perhaps a little concerned about that.

Okay. Thank you.

Ross Nussbaum. Banc of America Securities.

A couple of questions. First with respect to the 400 East Fordham Road acquisition, what was your pro rata investment in that if we account for I guess it's a joint venture owning a share of a joint venture?

Right. The purchase price was 30 million, and I will use rough numbers. But this is pretty darn close. If the purchase price was 30 million, if the nonrecourse debt is 18, so there was 12 million of total equity, Fund 2 is 90 percent of that 12 million. AKR is 20 percent of that 90 percent.

Okay. Two related questions. One, what is the current yield? I know you mentioned the stabilized yield, but what is it throwing off today on that 30 million?

Because the Sears rent is grossly below market, it is a mid single digit.

And the rate on the debt?

Is a floating-rate at 175 over LIBOR.

Okay.

It is cash flowing, but we're not looking at this as a current cash flow investment as you can imagine.

Okay. With respect to the Pelham Manor ground lease, what happens once you start tearing down the investor buildings to build the retail center? Do you start capitalizing those ground lease payments, or do those continue to get expensed?

We are anticipating that it will all be capitalized.

Okay. So there would not be a negative hit to earnings once the rent stops?

We believe that this is a development opportunity, and any of this other activity would be incidental to that development opportunity.

I'm assuming any termination fees you will have to pay to the current tenants would get capitalized into the total costs as well?

That is correct.

Ken, here is the bigger picture question with both of these investments. Your share of these investments is rather small. At the end of the day, is it worth your time to be pursuing investments of this size, or should you be holding out for doing a larger deal?

Well, at our size, a $30 million redevelopment from a time perspective, from an earnings growth perspective, from a total value creation perspective, there is no doubt in my mind it can make sense, and we can pencil out exactly why it does. But if you remember that every $100 million of stabilized acquisitions, 100 million gross acquisitions, stabilization costs is going to throw off -- it has historically thrown off well in access of 4 percent growth. Three of these could be a year's worth of external growth.

Additionally we think that these are going to be very profitable, and they don't in anyway preclude us from the larger acquisition. I'm hard pressed to other than our RCP large acquisition to look out over the past 12 months and say, gosh, I wish we had participated in that larger acquisitions. So I think it's a good use of our time and resources. I think it is going to be accretive, and I don't -- I think it's a $10 million or less size. I think that you're right.

And the final question is on Mervyn's. Can you help us understand what exactly is going to be flowing through to your P&L? You talked about 1 cent of accretion this year. Where does that come from?

This is effectively day one a sale lease-back, and so there is some cash flow coming from it. And I apologize for being vague. We are one of multiple of partners in this, and the priority is to make sure that this is a very successful long-term investment, not necessarily our other partners not being public or less focused on where the cash flow and how it comes in the first quarter, second quarter, third quarter.

So there are no profits coming off of Mervyn's actual retail business hitting your P&L?

Correct.

Nor are there any gains on sales of real estate? It's just going to be a straightforward sale lease-back for the time being?

For the purpose of our guidance, I think it would be premature to assume anything other than that. When it hits, great.

Jay Leupp. RBC Capital Markets.

Good morning. I'm here with David Ronco. A few questions. First on occupancy strategy, what gives you the confidence that it sounds like you have to give the occupancy pickup predications that you're making for the next few quarters? Can you give us some color as to if you are just back filling empty or vacating retailers or if this is a proactive occupancy strategy that is going to lead to net gains over time and may be push you guys into the low to mid 90s?

Okay. Just a few things. One, in terms of the next few quarters, what we said was our goal was for this year to get 100 (inaudible) increased to 89 percent and that we felt pretty comfortable that we were going to get there since we are already there. And then over the next couple of years, I hope I did not mistake that, I may have -- over the next couple of years, 1 to 2 percent gains per year we think are achievable based on as we have redeveloped centers and so we have turned either obsolete or a less leasable space into more leasable based on the ability to lease those spaces up. We have I think one of our Aims boxes remaining, and we anticipate that will eventually lease up. And then it's the general dialogue that we have in our weekly and monthly meetings without leasing teams looking at what is out there. There is always the chance that there is setbacks out there that could put us back, but we see no reason that this portfolio could not get to a low to mid '90s occupancy rate if the economy improves and if we continue to make the kind of gains that we have been making.

One follow-up on that and then we have just got a couple more. Strong ramp spreads this quarter. Do you see those pickups coming with similar rent spreads going forward?

These have been more like last quarter, and because of our size, it is real important to recognize that last quarter the rent spreads were a little light. This quarter they are a little Strong. What we have seen is for the most part our portfolio is older infill centers. Not necessarily the gorgeous ones that you see on the cover of annual reports, but they tend to have lower embedded leases. And so we have the ability as these leases turn to make some money. It has been our strategy and it's also what we own.

So you know more of the same, sure, but don't count on it quarter in, quarter out. I have no clue as to what is, but this is a general pace we have been able to do and I think we can continue to do.

And then on the RCP Venture with the Mervyn's acquisition, given their 257 locations that they have, can you just describe a little bit more what your relationship is going to be there and the opportunity that you're going to see? Because from our perspective, this could become your acquisition pipeline for the next 10 years?

Well, you are out on the West Coast so you have a better sense than the East Coast people of how compelling the real estate is. At this juncture, we're really not talking much about -- and I apologize for being somewhat vague -- but there's a host of moving parts. Yes, there is some great real estate there, and whether it is Mervyn's as a revitalized operator or other opportunities, you know we are there to assist our partners and to help create value for them and for us and we won't do deals that don't make sense for us. So to the extent that there is additional pipeline from it, fabulous. To the extent we just make a lot of money on our investment, that works, too.

Dave Ronco here with a follow-up. On the East Fordham Road project, Sears I know you talked about the rents being grossly below market. I wondered if you were at liberty to talk about how far below the market those rents really are, and say you were able to get Sears or another tenant in at market, how much would that help your return there?

Well, what I can say is that we are confident that we can stabilize this at a north of 10 percent unlevered return. I am being fairly vague about this because obviously there's a lot of dialogs that are going on right now and I don't want to upset them. And their rent from 1964, you can assume is significantly below market. The rent that we are seeing in the marketplace -- Gap has just opened there; a host of other retailers are clamoring to try to get in. You know they range from $75 a foot, well on up north of 100. And there is just a scarcity of space and the density there is unbelievable. So we are thrilled by the level of interest we have had from other tenants, and we are interested to see how the dialogue with Sears goes, as well as with the other tenants. We will keep you posted.

Just a follow-up to that. You were talking about unlevered returns. Being that you're seeing a lot of deals, how you looking at these deals in terms of return hurdles? Is it unlevered returns? Is it IRRs? Because I'm assuming you set some parameters being that there are so many deals in the pipeline.

Yes, and it depends on the density. A unlevered 10 in New York City we feel pretty darn good about because of the stickiness of cap rates irrespective of the inevitable cycles that we go through. So we are shooting for unlevered yields, and I find that to be a far better indicator. But we look at unlevered yields. We also look at leveraged returns. It is very attractive debt and as long as we don't think it's a teaser rate.

If you are borrowing over LIBOR today and then you wake up a year later and say, oops, we are way off because rates went up, well, shame on you. But to the extent that you're locking into long-term inexpensive debt and you can be borrowing 10-year money now at close to 5 percent, you've got to take that into account in looking at your leverage returns, and we are certainly looking at that in some instances.

And then IRRs are important because we think it is a mistake not to value the residual irrespective of whether you intend an asset for two years or 20 years. So we look at all three for redevelopment. You've got to keep your eye on the unleveraged return; otherwise, you can get very badly fooled.

Mike Mueller. J.P. Morgan.

The first question on guidance. I appreciate you guys putting guidance out. I understand that there's a lot of moving parts and it is a 9 cent range. But just thinking about it a little bit more, the swing on acquisitions it sounds like that is about 4 cents. That could sway the numbers.

I was just wondering, how should we look at guidance? Is it a $1.00 to $1.09? Do you think it is the midpoint, but you are playing conservative and a little bit more aggressive, or you really think it's in the upper end, but if everything goes wrong, you kind of back down to a flat growth year? Because it's just a big range given a 4 cent swing factor for acquisitions.

Right. We think everyone should use absurdly broad ranges like us and then maybe it would let us off the hook. You know we look at what we have, which I think Mike Nelson pointed out, was more or less a 25 cent, 24 to 25 cent run-rate. We don't feel comfortable including in our guidance non-recurring FFO for merchant developments or otherwise. And then we look at what is in our pipeline in terms of lease-ups, redevelopment and then most importantly acquisitions, and it is just a huge mistake to count chickens before they are hatched.

Every deal we do has the risk of not happening until it has happened. We have -- I guess what I can say, though, I cannot remember the last time we did less than 5 cents of external growth. It has been several years. And we have proven ourselves to be able to do it without having to chase deals that don't make sense.

So in general we are comfortable. We give a wide range knowing that our goal is to get to the upper end and hopefully beyond. But the realization is, if for some reasons deals don't happen and don't make sense, we may not be at the upper end of the range.

Secondly, Sarbanes-Oxley and 404 is new territory to everybody, and we are not going to skimp on that.

Third, our credit loss -- our credit loss has been fortunately very low, and we will have to see how that plays out over the next year or so. There's nothing other than KB Toys that we are looking at saying, oh gosh, we are in trouble. But we started every year being cautious on credit loss, and then if we are pleasantly surprised, great.

And real quick on the acquisition guidance of 2 to 6 cents, at the midpoint of that, that is about 100 million of gross acquisitions. Is that in the ballpark?

Yes, what you're seeing as our acquisition programs evolve is that the ratio of yield size, that FFO, fluctuates. Our Kroger/Safeway transaction was extremely accretive. On a $50 million deal, it was over 4 cents. And then our two redevelopments, $60 million of redevelopments that initially are going to be less than half of that upfront. But the 100 million -- we all try to pencil it to growth acquisition costs, and that is probably as safe a method as any, and that sounds about right.

And last question with respect to Sears, have you had any meetings with them, conversations? Do you have any sense of their intentions at this point?

Yes and as those unfold and become clearer, we will talk to everybody about them. Obviously we're going to be in open -- in continual conversations with them and other tenants.

Wayne Rogers. Rogers Realty.

My questions have been answered. Thank you.

I'm showing no questions at this time. I will turn the presentation back over to you, Mr. Grisham, for closing remarks.

Okay. Thank you all for your time, and we look forward to speaking to you soon.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.