Acadia Realty Trust (AKR) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Acadia Realty Trust third-quarter 2005 earnings release conference call. 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

The Company would like to inform its 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 predictions 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 as discussed from time to time in the Company's filings with the SEC. These factors can cause actual results to differ materially from those expressed or implied by such forward-looking statements.

During this call, Management may refer to certain non-GAAP financial measures, including funds from operations and net operating income, which they believe to be meaningful and helpful to investors when discussing results in the REIT industry. Please see Acadia's financial and operating reporting supplement posted on its 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 would like to turn the call over to Ken Bernstein, Acadia's President and Chief Executive Officer.

Thank you. Good morning. Joining me today is Mike Nelson and Jon Grisham. We're going to review our third-quarter results as well as discuss our acquisition and redevelopment pipeline. In reviewing our results, we'll walk through the three key components of our business plan, all of which contributed to our quarter's strong performance.

First our portfolio performance. As you can see our strong same-store NOI growth and occupancy gains, our portfolio performance in the third quarter continued to drive our internal growth.

Second, our balance sheet -- Mike will walk through our continued strong ratios and limited interest rate exposure. In the third quarter we continued our goal of locking in and extending as much debt as practical off of a ten-year treasury that periodically dipped below 4%.

Third finally, our external growth program. In the third quarter we continued to add to our key external growth initiatives. Most significantly in our New York urban infill platform. We also continued to spend time focusing on the potential accretive harvesting of various assets from our first investment fund.

Later in the call I will update you on the status of our external growth initiatives as well as the status of our Fund I. Now I'd like to turn the call over to Jon.

FFO for the third quarter of 2005 was $0.30 per share. In comparing this to third quarter 2004, it's important to note the following three items. One, the $0.30 for 2005 included $0.01 of income received through our Fund I following settlement of our bankruptcy claim against Penn Traffic. Secondly, 2005 FFO also included approximately $0.01 of income received through our funds attributable to the timing of percentage rents and our Mervyn's investment. Thirdly, the $0.23 for 2004 included a charge of $0.02 to reserve for potential payment following flood damage incurred at our Mark Plaza.

Adjusting for these three events, 2005 FFO of $0.28 versus 2004 FFO of $0.25 presents a more apples-to-apples comparison of the two quarters. The key drivers of the $0.03 of growth were from primarily three areas -- one, same-store NOI growth; two, earnings on our preferred equity investment in Levitz; and three, an increase in our fee income, which was partially offset by increased G&A expenses which were a direct result of expanding the Company's infrastructure to support the increased level of fee earning activities.

Earnings per share from continuing operations for the third quarter 2005 were $0.22, which was up from $0.11 over third quarter 2004. Along with the factors I just discussed, our share of gains through our Funds I and II from the sale of certain Mervyn's locations contributed an additional $0.07 of GAAP earnings for third quarter 2005.

Turning to our same-store net operating income, on a quarterly basis same-store NOI was up 6.6% over the same quarter 2004. This result was positively skewed by the lease up of a 40,000 square foot box at the Ledgewood Mall which is one of our remaining Mark Center's legacy assets. Ex the effects of this lease, same-store NOI for the quarter was up 5.8% and same-store NOI on an annual basis or year-to-date basis was up 4.8% ex this same lease, which we think is more indicative of the growth within our portfolio.

This same lease which contributed to our growth in same-store NOI and increased portfolio occupancy had the opposite effect on our third-quarter leasing spreads. New and renewal leases totaling 168,000 square feet commenced during the quarter at rent spreads of a -11.4% on a cash basis. Ex this lease, our rent spreads for the quarter were a positive 12%, which we feel is more consistent with what we've experienced in prior years. Mike will now discuss our balance sheet and earnings guidance.

Our financial ratios continue to track strong for the third quarter, as evidenced by the following ratios, all of which include the Company's pro rata share of our joint venture, debt and interest expense. One, debt to market capitalization of 32%; FFO and AFFO payout ratios of 61 and 64% respectively; a 3.8 times fixed charge ratio; and 81% fixed-rate debt with an all-in cost of 5.7%. We are continuously reviewing and revising our debt profile in order to maximize exposure -- to minimize exposure to interest rate risk and maintain a rational debt maturity schedule.

During the quarter, we completed a $17.6 million ten-year fixed-rate mortgage loan at an all-in rate of 4.98%. During October we completed an additional fixed-rate refinancing of $12.5 million at a 5.125 rate. We paid down floating-rate lines of $10 million at the Acadia level and $10 million at the Fund II level.

As a result of these transactions, Acadia's debt is now 86% fixed-rate, with a weighted average maturity of approximately seven years. Given the current yield curve, we can borrow money at long-term fixed rates that approximate current floating rates. Accordingly we are currently in discussions with various lenders to secure ten-year fixed-rate financing on an additional $30 to $33 million of debt.

Now I'd like to discuss our 2005 earnings guidance. As mentioned in our press release, we have increased our earnings guidance, which is now expected to range from $1.07 to $1.09. This compares with our guidance provided during the second quarter of $1.04 to $1.07, which included a $0.02 non-cash impairment charge related to the sale of the Berlin shopping center. This $0.02 charge was not baked into our guidance of $1.01 to $1.09 provided at the beginning of 2005.

In summary, the progression of our earnings guidance for the year is as follows. We started the year in the range of $1.01 to $1.09, which has to be adjusted to $0.99 to $1.07 to account for the Berlin $0.02 charge. During the second quarter, we increased the lower end of the range from $0.99 to $1.04 and we are currently anticipating a range of $1.07 to $1.09.

While we will be providing guidance for 2006 in our year-end conference call, as we have more clarity in terms of the variables which could influence earnings, I'd like to review third-quarter earnings relative to our current 2006 outlook. As John discussed, our adjusted third-quarter FFO was $0.28, which we believe is an appropriate run rate as a base for 2006 earnings projections. That being said, there are negative as well as positive factors that could impact 2006 earnings.

On the negative side -- one, if LIBOR rates continue to increase as they have over the last year, interest expense could increase by approximately $0.01 to $0.02. As discussed previously, we will continue to review financing alternatives in order to mitigate this exposure.

Second, during 2005 we have experienced extremely low tenant credit losses in the portfolio. Looking forward to 2006, we think it would be imprudent to assume that this is a long-term trend. And we continue to provide for unforeseen tenant credit issues which could impact earnings by up to $0.04.

Third, the full year effect on G&A of the investment in expanding the Company's infrastructure to support the increased level of fee generating activities could impact 2006 earnings. We continually review G&A expenses to maximize efficiencies and effectuate core savings wherever possible such as the previously announced change in auditors.

Counterbalancing these negatives is our external growth program. The pace and near-term accretion from these growth initiatives are difficult to predict. As previously discussed, a substantial portion of our value added acquisition program is not expected to contribute significantly to 2006 earnings. Thus, while we feel it's premature to give acquisition guidance at this point, we do think external growth should provide some positive accretion in 2006.

As all components of our business plan have continued to produce strong results for the quarter and nine months ended September 30, we remain focused on the continued execution of our plan and are excited about our prospects for future growth. Ken will now continue the discussion.

Thanks, Mike. I'm first going to talk about our portfolio performance, and then turn to our external growth initiatives. As Mike and Jon discussed, our strong same-store NOI growth year-to-date of approximately 5% continues to be driven by strong leasing and tenant performance. Our portfolio occupancy increased 60 basis points to 93.9% over the second quarter. Along with strong occupancy gains this year, our portfolio has also continued to benefit from strong tenant performance.

As we reiterated over the past year, one of the key variables in a shopping center company's performance is the amount of internal tenant reserves that will actually be utilized. To date our default rates and related reserves actually utilized have been very low. And while there continues to remain very little on our radar screen to cause us any specific concerns of this changing, we are carefully watching consumer trends in general and their potential impact on our retailers and our shopping centers. And as Mike and Jon discussed, these internal reserves remain an important variable in our 2006 outlook.

In terms of actual tenant exposure on our radar screen, one anchor tenant worth brief discussion is Albertsons. last month Albertsons announced that it was pursuing strategic alternatives and, while we're not going to comment on that process and any potential involvement that we might have to our RCP venture, we can discuss our current portfolio. We have four Albertsons in our portfolio, three are Shaw's, one's an Acme. These are all well located northeast shopping centers, both size stores that we suspect would remain core operating stores in connection with any potential transactions. That being said, we'll continue to keep you posted as any major events transpire.

Second, in October Levitz Furniture filed Chapter 11. And while we're not a direct landlord to any Levitz, we do have a preferred equity investment of now $19 million from an original $20 million preferred equity investment transaction that we closed in the first quarter of this year. Since closing that investment, one of the properties in that portfolio was sold, which reduced the first mortgage by $11.5 million to $38 million.

Of the now 29 properties in that portfolio, the majority of the value of the portfolio is ascribed to five key properties located in California, New York, and New Jersey. The properties are owned by our RCP venture partners. The properties are primarily in well located high barrier to entry markets with strong redevelopment and value creation potential. And given that, the investment was not made based on Levitz remaining as a tenant, but based on the underlying value of the real estate.

And given that our position in the capital structure is now behind only 38 million of debt, down from 50, in a portfolio that we currently value at $80 to $90 million conservatively, we are comfortable that there's limited exposure to our position. In fact, we look forward to exploring if we can work with our partners to potentially invest additional capital and create additional value. So to recap, our portfolio performance remains solid with strong same-store NOI growth driven by strong leasing results and strong tenant performance.

Turning now to our external growth initiative, in the third quarter we continued to build on our acquisition platform. First with acquisitions in our New York urban infill program; second, important progress in our RCP venture as well as additional acquisition activity. With respect to our New York urban infill program which we launched just over a year ago in conjunction with our partners, P/A Associates, we continue to see interesting opportunities in the mid-sized urban retail redevelopment arena, especially in the New York metro area.

We now have six New York projects that we have either closed on or are under contract to close with an estimated total acquisition and redevelopment cost of between $200 and $275 million. In the third quarter we added the following -- in September we entered into a conditional agreement to acquire a controlling leasehold interest in the Brooklyn Terminal Market in Canarsie, Brooklyn. While we referred to this transaction briefly on the last call as something that hade been in our pipeline, we can now provide a little more albeit limited color.

It is contemplated that a significant portion of this 15 acre, 530,000 square foot property will be redeveloped into a retail center. We have strong anchor tenant interest and are going through the initial stages of approval and redevelopment process. And unlike most of our New York transactions to date, which have been as of right, this redevelopment is subject to various approvals, thus it's premature to discuss total development costs, returns, or timing until we're further through the process.

However in general this project should be the same scope, return, and timeframe as our Pelham Manor development. We will provide all the appropriate detail upon the successful closing of this acquisition, hopefully in the future.

In August, our venture announced the purchase of 260 East 161st Street in the Bronx for $49 million. The property is a 220,000 square foot office building and is located directly opposite the newly constructed 750,000 square foot Bronx courthouse complex. It's three blocks east of Yankee Stadium. The prime catalyst for this development is the new courthouse, which is slated for opening in 2006 and will dramatically transform 161st Street.

Demand among retailers and office tenants for locations in this already underserved submarket is expected to increase significantly. The property is currently 100% occupied. We intend to redevelop a portion of the current office space, turning it into retail uses. On top of the $49 million purchase price we anticipate investing between $10 and $20 million for additional redevelopment opportunities in the project.

Given that the current unleveraged deals if we do not redevelop and only renew existing expiring leases to market should grow to 8% within the next 12 months. We are confident that we can achieve post redevelopment yields consistent with our other redevelopment projects upon the stabilization of 161st Street.

Also in the third quarter and previously discussed on our last call in July, we purchase our Amboy Road, Staten Island shopping center for 16.8 million. Additionally, over the past year we previously closed three other New York acquisitions -- Fordham Road in the Bronx, Pelham Manor in Westchester, and Broadway at Sherman and Manhattan. Thus in total these six projects with anticipated acquisition and redevelopment costs between 200 and 275 million are anticipated to be completed in the next 12 to 36 months with unleveraged redevelopment returns in excess of 10% on total costs.

From a short-term earnings perspective, the six redevelopments provide little accretion in 2005 and 2006, but upon stabilization these projects should start contributing between $0.08 and $0.14 of FFO, phasing in between 2007 and 2008. And thus they're helping us build a nice pipeline for future growth.

Turning now to Chicago and in anticipation of the White Sox victory, in September we expanded geographic footprint of our urban infill platform when we entered into an agreement to acquire a 20,000 square foot retail building in the Lincoln Park section of Chicago. Located on the corner of Clark Street and Diversey Parkway with over 400,000 people in a three mile radius, the property will be acquired for $9.75 million. It's anticipated that the acquisition will close in the first quarter of 2006 was an unleveraged yield of approximately 8% on a GAAP.

Tenants include Starbucks, Nine West, Vitamin Shoppe, The Body Shop, Cold Stone Creamery. And along with its strong location, the property has significant long-term growth potential. The property will be directly acquired by Acadia as part of its ongoing asset and capital recycling program. It will be acquired from an affiliates of the Klaff organization, which is Acadia's joint venture partner in our RCP venture.

Turning to our RCP venture, last year we also launched the second component of our growth strategy, 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. In the fourth quarter of last year we commenced our first RCP venture investment with our participation in the acquisition of Mervyn's. In the third quarter this year, several important announcements were made with respect to the significant progress that's been made in that investment.

On the transaction side, two large sale leaseback transactions were announced totaling a sale of 61 of the properties, 4.6 million square feet for $617 million or equating to $134 a square foot. As was previously disclosed, Mervyn's was acquired for just over $1.2 billion, and from a real estate perspective consisted of over 22 million square feet, thus providing an acquisition cost of just under $60 a square foot. Of the square footage, only approximate 25% was in the form of leases. The majority in his fee owned or long-term ground lease.

Without commenting on the specific internal acquisition price allocation that we made with respect to the assets that were sold, we're quite pleased with these two transactions where over $600 million or 50% of our purchase price is recovered from a sale of less than 25% of the overall portfolio. And while it's premature to extrapolate it to what percentage in the portfolio would provide 100% return of acquisition costs, it's clear to us that this will be a very successful investment and that our consortium partners both on the operating side and the investment side are doing an outstanding job of maximizing the value of this investment.

In terms of our general acquisition outlook notwithstanding an overheated acquisition environment, we are confident that there should be sufficient future opportunities to move in Eagle a company of our size while enabling us to remain disciplined and focused. We recognize that estimating short-term external growth is made more difficult by our more back ended value added investments. But given the current pricing and risk-adjusted returns for most stabilized properties, we believe our time, resources, and capital is best suited pursuing value added opportunities that, whether immediately accretive or not, will translate into long-term shareholder value.

Turning to the performance of our first fund, AKR Fund I. On the last call I discussed a brief overview of those fund's assets, their purchase price and performance. On page 31 and 32 of this quarter's supplement, we further updated the potential waterfall impact of a profitable sale or recap of some or all of Fund I to better reflect our current thinking on the value potential. We'll continue to refine this model as appropriate, but with approximately half of the Fund I income coming from stabilized assets, we expect to pursue some level of harvesting over the next year.

For example, if the stabilized half of the portfolio were to be sold at today's cap rate range of 6 to 8%, as you can see in analysis, the sale of this half of the fund, even at an 8 cap, would result in a return of the allocated equity of $50.5 million and $47 million of profit or thus 106% or effectively all of Fund I's equity of $91.9 million. And the sale at a 6 cap range could result in profit of $107 million plus the allocated $50 million of equity or 172% of the Fund I equity.

Depending the size and structure of a transaction, a sale or recap of the fund could result in a significant NAV contribution from our gain on sale and payments of promotes and/or possibly an accretive earnings impact from our increased cash flow. For example, if we sold or recapitalized a sufficient component of the stabilized portion of the Fund in midyear 2006 that returned our investors their capital, the increase in our ownership of the remaining portion would go from 22% to 37.8% and could provide $0.02 to $0.03 of annual incremental cash flow upon closing from this remaining portion, which would then grow as those assets achieved stabilization.

Eventually if the total profit in Fund I were to be harvested at our current estimated cap rate set forth in the supplement, the profit to the Fund would be between 55 million and 130 million and most likely, at least today, in the upper half of that range. Thus the profit from our promote above and beyond our profit on our 22% pro rata share of investment could be in the $11 million to $26 million range on a fund of only $90 million of equity.

While it may be premature to include any of these potential benefits in calculating our current NAV, nor are they reflected in our current earnings, we are focusing appropriate attention on this type of harvesting and we'll keep you posted as the process continues.

To conclude, we continue to be pleased with our third-quarter performance and our business model. All three components of our business plan are on track. Our core portfolio performance remains strong; our balance sheet is solid; and third, finally, our acquisition initiatives are laying the foundation for future growth, enabling us to invest in exciting value added opportunities when worthwhile acquisitions are extremely difficult to come by.

Finally, we'll keep you posted as our discussions of potential Fund I transactions evolve and we'll continue to outline the potential benefits in our supplement. I'd like to thank and congratulate the members of Acadia for their hard work in the third quarter and the strong results that accompanied this effort. And now we would be happy to take any questions.

(OPERATOR INSTRUCTIONS). Ross Nussbaum, Banc of America Securities.

It's Christy McElroy here with Ross. Sorry if I missed this, but did you provide a purchase price and a cap rate on the Canarsie, Brooklyn asset under management?

No, and I purposely didn't. The cap rate on those types of deals is less relevant because more often than not the NOI quickly disappears. But until we get further into the development process I've been purposely vague on that because there's a host of different issues political and otherwise than I'd rather get past.

And can you just discuss in general terms, what's the competitive retail landscape like in that trade area?

That area and most of the boroughs, although there are few exceptions and now we're getting fully retail, are fairly significantly under retail. Without talking about Canarsie specifically, although this is the case, throughout the five boroughs the ratio of retail GLA per capita is approximately 6 square feet, whereas if you go nationwide it's closer to 20 square feet. And so what we have found, especially amongst the national bigger box retailers, is a tremendous demand to secure new locations that meet their footprint.

But aside from just in the five boroughs, what's it like on the Brooklyn waterfront area right there? We haven't been there in awhile.

I don't have that data. I'll see that we post it shortly.

Okay. And then on Mervyn's -- sorry if I missed this, but how much have you sold so far?

There have been two transactions announced for just over $600 million.

And the 2 million in net gains that you guys saw during the third quarter, does that reflect everything that you've sold so far?

Correct.

Can you give us some sense on the timing of further Mervyn's sales over the next year? I know just in general vague terms, even though it's not in FFO, we're trying to get a sense for your gains in '06.

Keep in mind, we made a $25 million equity investment between our two funds. And I don't mean to be coy about this, but as these transactions occur we'll announce them. And I know it makes it a little more difficult to predict, but we generally don't give predictions of future asset sales and things like that.

Okay, and then on the asset that you have under agreement in Chicago, how much more capital do you anticipate investing in the asset?

Short-term, meaning over the next few years, not a lot.

Great, thank you.

Jay Leupp, RBC Capital Markets.

I'm here with David Ronco. Ken, in your discussions about acquisitions going forward you're talking about cap rates in the 6 to 8% range. How much deal flow are you really seeing with deals going in cap rates in those ranges? And also, to the extent you're looking at development opportunities -- just ground up, not redevelopment -- what type of hurdle or cap rates are you seeing right now?

Let's talk about the easy part first, which is acquiring existing stabilized assets in the 6 to 8 range. We're being very selective, Jay, and they really have to have unique location and other compelling attributes to make us excited about the fixed cap range even on up to the 7 to the 8. But at the 7 to 8 it starts making some sense. And that volume for high-quality locations is very infrequent. So if you'd look over the past year or so you've seen one or two of those that we've done, but for the most part it's the redevelopments, which was the second part of your question I believe.

Our redevelopment hurdles. What we're looking for is, for instance in our New York urban infill program, is to redevelop well located high barrier to entry acquisitions north of an unleveraged 10% yield. Our view then is irrespective of where interest rates go we should have a fair amount of cushion from a cash flow perspective. And similarly, more or less irrespective of where exit cap rates go, these should be very accretive and profitable investments for us to make.

Okay. And then in terms of redevelopment activity, do you expect that really to be the primary source of accretive investment activity essentially for the next one, two, three years, given what you're seeing in development and acquisitions?

One, two, three months, yes. I'm not smart enough to gauge one, two, or three years, Jay, unless you can give me a better sense of where interest rates go and where the corresponding capital markets go. What we have found -- and you and I have been through enough of these cycles -- is that when there is a shift it can shift pretty darn quickly and all of a sudden the risk-adjusted return benefit of the hard work from redevelopment shift and all of a sudden it's a good time to buy existing cash flow.

Our Wilmington, Delaware was a prime example. We bought a million square feet of relatively stabilized shopping center -- Target, Lowe's, etc. -- at north of a 9 cap. That could transpire. I don't see it happening in the next quarter or two, but that could come back in the next certainly one, two, or three years. And that's where I like the fact that we're underlevered and we have a lot of discretionary capital and we'll shift on a dime for this.

Okay, and then just a one/two-part follow-up. On your Levitz investment, the preferred, what kind of access does that give you to the credit risk committee and do you expect to have any kind of say in the activity after the bankruptcy in terms of either acquiring or restructuring the real estate in that portfolio?

That position in and of itself doesn't give us any access. But we are certainly keeping our eyes, ears, and plays (ph) open to anything that we can do to create additional value.

Okay. And then the last question is just on the potential sale of Fund I. You talked a little bit about the effects of what a transaction could be on your NAV and on earnings. Are you working to structure a sale at Fund I in one direction or another with respect to the accounting treatment of a sale in terms of whether you're looking to move your earnings with that sale or move your NAV? Is there one bias in one direction or the other?

Our bias is to make a lot of money for our fund, investors and our shareholders. And only after we do that analysis do we kind of trickle-down through where does it hit. Is it in NAV pop, is it in FFO pop, etc.? And so it's really from a view of what makes sense at this time.

Thank, Ken.

Paul Adornato, Harris Nesbitt.

I was wondering if you could talk about the Chicago transaction. What's the plan there? Is it fully stabilized? It seems like it had a very nice going in yield. Is there any upside from current levels?

First of all, there's strong internal growth just on the existing leases, and then we think there's also some mid-term lease roll opportunities and then there are some potential longer-term opportunities. But we're not outlining those just yet.

Okay, and you said that was sourced from the Klaff relationship?

Yes.

What was there motivation for selling? They're not exactly unsophisticated owners.

No, no, and I think that they made a terrific sale without looking into their pockets which we really try not to do. Opportunistic investors are selling a wide range of assets and I think it's hard to argue with them about doing that. We're seeing in our RCP venture overall announcements of sales and it is extremely profitable for them to do that.

And we could sit here and argue all day long about whether or not it's a seller's market and to what extent and whether it's cyclical or secular shifts. But for a lot of entrepreneurs, very shrewd, very smart, it is a great time for them to be sellers. This fits nicely into our strategy, Paul, so we're happy to do that as we sell the Berlins of the world and recycles and pass it's like this, it makes a lot of sense for our shareholders.

And given kind of your increasing presence throughout the country, how do you feel in terms of having people on the ground in other places? Or G&A expenses overall in terms of personnel?

Very good question. First and foremost, we look at what do we need to do to do the best job on a given investment or a given portfolio, etc.? What's it going to cost us and does it justify it? And then we also try to make sure we're staying very disciplined about what are we good at, what can we do, where's our reach, and where maybe is this better for someone else to do?

It's a very vague answer to say if there's a great opportunity and it requires us to spend the money on a G&A basis, we'll do it. And you've seen our G&A increase as we've had to build infrastructure. Right now I think we have a pretty good infrastructure for what we're focusing on, but if tremendous opportunities arose that required us to further supplement it, we'll do it.

Okay. And could you help me with my Canarsie geography? There's a new -- relatively new Target anchored center right along the Belt Parkway, close to Kennedy Airport. Is that the general region that you're talking about?

We're further out. In this level of density we're a whole different world away.

Okay, thank you.

Michael Bilerman, Citigroup.

Jon Litt's on the phone with me as well. Ken, let's just spend a moment on the Klaff arrangement. Do you guys have a first and last look at everything that he may put up for sale?

No, in terms of what he's putting up for sale? No. We certainly talk about it and we are always welcomed to bid, but for the things that he owns that we don't have an investment interest in, he has a fiduciary responsibility to his investors and he is going to do what is in those investors' best interest and I think he's done that.

In your effect you're managing all of that anyhow, right?

Substantially all, yes.

And there was no arrangement you set up initially to try to get some sort of last look even if it was at a higher price?

No, and it's always nice to have, Michael, but I don't think -- I know Hirsch wouldn't do something that transcends his obligation to his partners, so it just wouldn't have been appropriate. That being said, there's some things that fall right into our sweet spot and for that our cost of capital and our competitiveness can be very strong. And there's others -- and you're aware of some of the portfolios that are being sold -- where we're not interested or we're not competitive.

Right. Just a moment on guidance. I guess your full-year guidance and what you've earned year-to-date implies a 4Q range of about $0.25 to $0.27. You've basically been running at about $0.28 net of all the impairment charges and gains the last three quarters. So I was wondering what takes you down below that in the fourth quarter.

Mike discussed a bunch of the variables. Our collection -- our default rate has been so low, Michael -- and it's not just us, it's the shopping center sector in general. And we should all just be cognizant of it. So far notwithstanding any of the headlines about gas prices and consumer spending, etc., etc., our default rates have been so low that the reserves that we normally think are prudent and then for a company of our size, keep in mind, one or two bankruptcies, one or two what they call in our business "midnight moves" where tenants just disappear, can actually hit the bottom line.

And we try to reserve for that because I know when it happens it will happen quickly and I want to make sure that our shareholders understand that that is one of the downsides of a Company of our size. We can move the needle very quickly up, but we can also take steps back. That being said, because I don't want over scare people -- one of the reasons we have gravitated towards higher barrier to entry assets, more infill locations is we have found over past cycles that those assets outperform in the down cycles. And so hopefully, on a relative basis at least, we'll outperform. But on an absolute basis we always feel more comfortable holding onto call it $0.01 a quarter because we might need it.

And so how much reserves are you budgeting in the fourth quarter relative what you actually took on average of the last three?

At least $0.01 -- at least $0.01 plus.

Keep in mind, that's only $300,000.

Right. And so it's $0.01 additional relative to where it was the last three quarters?

Correct.

And then what are your budgeting --?

Let's be clear about this. We don't get to reserve in what we announce as our earnings. We only get to reserve on the internal and then once a quarter Mike and Jon come in and say, yes, once again now for two or three years running we haven't needed it. But that doesn't mean we should take it out of our internal reserves.

Understood. And you look at the fees which had been closer to 3 million the past few quarters which obviously it's affected a little bit by the recent activity that you do. Can you just give us a sense of what you're sort of targeting for the end of the year in terms of G&A and the fee line and how that increases next year?

You know, the fees are obviously by nature a little bit lumpy. In terms of the fourth quarter, again, part of the reason for the $0.25 to $0.27 is that fees within any given quarter can vary by $0.01. In terms of looking forward to 2006, again, it's very difficult at this point to pin down exactly where we think fee income is going to come out at. But when we give 2006 guidance at year end we'll go over that all in more detail with you.

And as it relates to the G&A piece of that, we are able to monitor and make sure that one doesn't get significantly outstripped by the other.

So it's fair to say that when you look your guidance for the fourth quarter you probably have $0.01 due to higher interest expense on the floating-rate debt, $0.01 from the provision for doubtful and $0.01 less fee, and that sort of takes you from $0.28 to the $0.25?

That's a fair assumption in general.

In terms of the six projects, Ken, that you outlined can, these redevelopments, which is the closest what you're going to work on that's going to come to fruition?

I keep on asking our partners the same thing. We're working on all six. Fordham Road -- my guess is the one that could top the (indiscernible). Although, remembered, Sears contractually has the right to stay until July 2007. But, come July 2007, we highly anticipate that they will be leaving. But that one is probably moving along the fastest -- although others can move pretty darn quickly once a few other pieces fall into place.

And you effectively have all approvals except for the Brooklyn one that you announced. To do exactly what you want to do, all zoning, you can build the retail you want to do and you can market and there's not going to be any issues in terms of timing?

Well, this is New York City, so I don't want to -- I guess I'd remove a couple of those "alls" in everything we want to do. What I said was these are -- other than Canarsie these are all as of right. Or in the case of Pelham Manor, the village of Pelham Manor rezoned the warehouses, proactively rezoned them to retail. That doesn't mean that we don't have various different steps in process to go through, but we don't have a general rezoning, which can be a lengthy process in New York.

And then thinking about Fund II overall, you effectively will tie up call it maybe about a third of the capital with these redevelopments. What's the prognosis for the remaining two-thirds? And how quickly do you think they're going to be able to put that money to work?

Our goal ideally was to put at about 100 million of equity, call it $300 million of acquisition or redevelopment a year and we feel like we're on the pace. It gets back to the same question that Jay asked earlier. What I can't tell you is if and when over the next two to three years there's going to be a more prolific buying of stabilized assets. Because that kind of acquisition activity can happen quickly and in the larger size than these redevelopments.

What we're seeing is if the world continues as it is today and rates and cap rates and returns etc. remain where they are, it feels as though we can put out about $100 million of equity a year either into the acquisitions or the acquisition and redeveloped. Does that answer your questions clearly?

Yes, that does. And you're earning asset management fees on the entire capital, right?

Correct.

If you don't put out the capital in that timeframe, is there any claw back that the fund investors have on those fees?

We have extension rights, so that it can go beyond the three years, the initial investment. And then as you go beyond, well beyond that -- I think it's another one or two years beyond that even -- then there is -- there are some use it or lose it provisions. And look, we enjoy the fees, but we're much more focused on making profitable investments. And in the past when we haven't seen profitable investments, we don't put the money to work.

So there is always that risk, but I think if you look at how Fund I is performing, how fund II looks like it's shaping up -- or at least on the Mervyn's side. I think that if we continue to stay focused more on seeing what multiple on our equity we can invest for our investors and then supercharge to our shareholders, I think that would be the key thing.

And my last question was just on Mervyn's. Is there a plan to distribute any of the gains, the dividends to the shareholders at all? Right now I guess you booked a paper gain on the sale of those assets.

Right now we haven't needed to or haven't made such plans.

But conceivably, you've probably at some point -- if this entity effectively got all the cash in and paid down the debt, it' --?

It's certainly a possibility.

And at that point you would get the cash -- your share of the cash flow out of it? Or it would be still in the Fund?

The waterfall within the fund first goes through return of capital to those fund investments, so it really is so speculative, Michael, to try to figure out which hits when. All high-class problems or high-class things to figure out, we'll have a much better sense of that I think over the next 12 plus months.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS). There are no more questions at this time. I will now turn the call back over to the host of today's call for final remarks.

Thank you all for joining us. We look forward to seeing as many of you as possible at NAREIT. Thank you for your time.

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