Acadia Realty Trust (AKR) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 Acadia Realty Trust earnings release conference call. (OPERATOR INSTRUCTIONS).

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 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, 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 discussion, there will be an opportunity for all participants to ask questions. At this time I'd like to turn the call over to Mr. Ken Bernstein, Acadia's President and Chief Executive Officer. Please proceed, sir.

Thank you, Cindy. Good afternoon. Joining me are Mike Nelsen and Jon Grisham. Today we're going to review our fourth-quarter and our 2005 results. In reviewing our results, we will walk through the key components of our business plan, all of which contributed to last year's strong performance.

The three components of the business plan are --

First, maintaining a solid core portfolio. As you can see for our strong same-store NOI growth and occupancy gains, our portfolio performance in the fourth quarter and in 2005 continued to drive our internal growth.

Second key component, maintaining a strong balance sheet. Mike and John will walk you through our continued strong ratios and limited interest rate exposure. In the fourth quarter we continued our goal of locking in and extending as much debt as practical off a periodically inverted yield curve.

Third, finally, key component is creating a profitable external growth platform. In the fourth quarter we continued to add to our key external growth initiatives. In our New York Urban/Infill platform we added two projects. In our RCP Venture we further validated our Mervyns investment through a significant refinancing. We also continued our periodic asset recycling within our core portfolio. And finally, we completed an extremely profitable harvesting from our first investment fund by recapitalizing our Wilmington, Delaware portfolio.

After Mike and John discuss our earnings and balance sheet, I will update you with the status of our external growth initiatives. So now I will turn the call over to John, who will discuss our fourth-quarter results.

Good afternoon. I'd like to briefly discuss our 2005 results.

2005 FFO for the year was $1.09. In comparing this with 2004 of $0.98, the following two items should be considered. First, 2004 FFO included a charge of $0.02 per share, resulting from the provision for an insurance deductible. This reserve was ultimately not required and reversed in 2005. Second, 2005 included a $0.02 non-cash impairment charge related to the sale of the Berlin Shopping Center. After giving effect to these two factors, 2005 FFO remained at $1.09, and this compares to an adjusted dollar for 2004, representing 9% normalized year-over-year earnings growth.

Our fourth quarter 2000 FFO of $0.26 included the following items. On the positive side, we earned $1 million, or $0.03 of Promote income on our Mervyns investment. Counterbalancing this, fourth-quarter G&A included an additional 1.6 million, or $0.05, related to year-end 2005 bonuses. As Mike will discuss, this is not indicative of a run rate.

As it relates to future Promote income for Mervyns and other investments, while it is more likely than not that future Promote income from Mervyns will be more back-ended, we anticipate that in 2006 it will not only be replaced, but significantly increased with Promote income from other sources.

Turning now to earnings per share, EPS from continuing operations for the fourth quarter 2005 was $0.15, as compared to $0.11 for fourth quarter 2004, and for the year, $0.67 versus $0.45, an increase of 49%. Along with those factors I mentioned for the fourth quarter '05 FFO, EPS was also positively impacted by our share of gain from the sale of a portion of the Mervyns portfolio.

Lastly, looking at same-store net operating income, our same-store NOI grew by 5.7% in 2005. This positive result was driven by increases in revenues, primarily from positive rent spreads and occupancy gains. On a quarterly basis, same-store NOI was up 2.9%. While increases in revenues during the quarter were consistent with that of the year, NOI growth was partially muted by the timing of charges of approximately 170,000, which included property repair expenses, that disproportionately affected the fourth quarter. Accordingly, the annual growth rate of 5.7% is more indicative of the 2005 performance of our portfolio.

Now I would like to turn the call over to Mike.

Good afternoon. First I'd like to discuss our balance sheet. During 2005, we continued to maintain a solid financial condition, as evidenced by the following ratios. Our debt to market capitalization of 32%, as well as a 3.5-to-1 fixed charge coverage, demonstrates our healthy and conservative loan to value. Furthermore, as of year end, 88% of our debt was fixed rate, with an all-in cost of 5.8%. We have also maintained conservative FFO and AFFO payout ratios of 63 and 67%, respectively, for the year.

In continuing -- in our continuing focus to minimize our exposure to interest rate risk and maintain a rational debt maturity schedule, during the fourth quarter we completed a $34 million 10-year fixed rate refinancing at 5.5%. During the first quarter of 2006, we continued to take advantage of the current yield curve and completed a $20.5 million 10-year fixed rate refinancing at 5.4%. After giving effect to the 2006 transaction, more than 95% of our total debt is now fixed rate at an all-in cost of 5.7% with a weighted average maturity of eight years.

Before turning to our 2006 earnings forecast, I'd like to talk about the re-capitalization of our Brandywine Portfolio and its effect on future earnings. As previously announced, we recapitalized our Wilmington, Delaware portfolio in a transaction whereby our Fund I investors were able to sell their 78% interest for $164 million, while we retained our 22% interest in the properties. From these proceeds, the investors received all of their invested capital and accumulated preferred return in Fund I, totaling $63 million, thus triggering our 20% Promote interest in all future Fund I earnings and distributions.

The balance of the proceeds were used to provide $44 million of bridge financing. Following the permanent financing of the portfolio, which we anticipate to take place in the first half of 2006, and after holdbacks of $6 million for potential post-closing obligations, we expect there will be additional distributable proceeds to the investors of $38 million. We are entitled to our 20% Promote, or $7.6 million, of this amount, which will be payable from the investors' share of the remaining Fund I operations over the next two to three years. Additionally, our increased interest, from 22% to 38%, in the future operations of the remaining Fund I assets is projected to provide earnings of $1 million, or $0.03, in 2006.

Now I'd like to discuss our 2006 earnings forecast. We are projecting FFO of between $1.14 and $1.19 per share. The primary assumptions and drivers include, on an internal growth basis, during 2006 we anticipate our same-store net operating income to grow approximately 2 to 4%.

While in 2005 we continued to experience low tenant credit losses in the portfolio, and while there is nothing on our radar screen that would indicate any near-term significant anchor bankruptcies, we feel it prudent to provide a more conservative reserve for potential leasing and credit losses. As such, our 2 to 4% growth includes reserves of between 3.5 to 4.5 cents, as compared to our 2005 actual of 1.5 cents. This, when combined with our increased interest in the Fund I operations of approximately $0.03, will provide a total of $0.03 to $0.06 of internal growth in 2006.

On the external side, we are forecasting 2006 growth of 2 to 2.5 cents. As we have previously stated, and Ken will discuss later, our recent acquisition focus has been in the areas of our New York Urban/Infill redevelopment program and our RCP Venture. These platforms are not expected to provide significant short-term accretion in 2006, but should provide significant earnings over the next several years.

Lastly, on the fee income and general administrative expense side, as Jon mentioned, fourth-quarter G&A should not be annualized to arrive at an annual 2006 amount. While the annual 2005 G&A of $15.5 million is expected to increase by $3 million, this is less than the annualization of the fourth quarter 2005. Of this increase, $1.6 million, or $0.05, results from the amortization of the 2005 restricted shares granted in January of 2006, and the $1 million amortization of the onetime bonus previously disclosed. The balance of the increase is a result of the full-year effect of our 2005 investment in human resources.

Furthermore, as a result of the vesting of restricted shares in the first quarter of 2006, a disproportionate amount of approximately $0.02 of G&A will be front loaded in the first quarter. This increase in G&A will be more than offset by projected Promote and fee income. While additional Promote income from Mervyns is not included in our assumptions, we expect that our 2006 Promote income will increase substantially. The Promote income from the Brandywine transaction should be approximately $3.5 million, or $0.10, in 2006.

Our forecast also assumes that fee income from other sources will, on the low end, decrease by $0.01, and on the high-end increase by $0.01. Accordingly, additional 2006 fee and Promote income will offset G&A increases on the conservative end, and provide accretion of up to $0.02 on the upper-end.

In closing, we remain energized and excited about the future and our ability to provide superior growth, not only for 2006, but for future years as well.

I now turn the program over to Ken to continue the discussion.

Thanks, Mike. First, I'd like to briefly review our portfolio performance, and then I will discuss our external growth strategies.

As Jon discussed, our strong same-store NOI growth last year of 5.7% continues to be driven by strong leasing and tenant performance. Our portfolio occupancy increased 40 basis points to 94.3% over third quarter, with new and renewal rent spreads at 10.7%.

Along with strong occupancy gains this year, as Mike mentioned, our portfolio also continues to benefit from strong tenant performance. As we continue to reiterate, our tenant default rates and related reserves actually utilized continue to remain very low, and while there's little on our radar screen to cause us specific concern of this changing, we're carefully watching consumer trends and in general -- and their impact on our retailers and our shopping centers. And as Mike and John discussed, these internal reserves remain an important variable in our 2006 outlook.

Turning now to external growth. Along with the strong core portfolio performance, solid balance sheet metrics, in 2005 our external growth initiatives made significant contributions to our overall performance. In the fourth quarter we completed several important transactions, including two new acquisitions in our New York Urban/Infill program, important progress on our RCP Venture, as well as additional acquisition activity and recapitalizations associated both with asset and capital recycling.

With respect to our New York Urban/Infill program, which we launched in 2004 through AKR Fund II, and in conjunction with our partners P/A Associates, we continue to see interesting opportunities in the mid-size urban retail redevelopment arena, especially in the New York Metro area. We now have six New York redevelopment projects that we have closed on, as well as our Canarsie, Brooklyn transaction which is under contract. These projects could have an estimated square footage of between 1.25 million and 1.5 million square feet, and total acquisition redevelopment costs of between 275 and $325 million.

In the fourth quarter, we added to our previously announced redevelopment projects two new projects. And while both are smaller in size than our previous redevelopments, they each will make important contributions to our platform above and beyond their size.

With respect to 216th Street, in the fourth quarter we acquired a 65,000 square foot garage on 216th Street in the Inwood section of Manhattan. We plan on relocating a New York City agency from another one of our New York City locations into this building and entering into a long-term lease, creating a single-tenant office building. We expect the project will begin this spring and will be completed approximately 12 months later. The total redevelopment cost, including acquisition price, will be approximately $25 million, and should produce unleveraged returns similar to our other projects. This project is significant in that not only is it a profitable redevelopment, but that the relocation will enable us to more expeditiously proceed with the other redevelopment project from which we're relocating the tenant.

Our second project, Ozone Park. In December, we acquired a 40-year leasehold interest in land located at Liberty Avenue and 98th Street in Ozone Park, Queens. The development plans at this property includes 30,000 square feet of retail anchored by a CVS drugstore, and a 98,000 square foot self storage facility to be operated by Storage Post.

This project is significant above its $13 million redevelopment size in two respects. First, the lease with CVS is signed, all approvals are in place, and construction is proceeding immediately, and will be completed and occupied later this year. More importantly, it will be the first of our New York redevelopments to include self storage as a component of the project. And while there are certain components of urban mixed-use projects that are somewhat less appealing to us, in urban supply-constrained markets, the self storage business has a host a very attractive and complementary attributes. Storage Post, which is affiliated with P/A Associates, will be a partner with us in the Liberty self storage complex, and we anticipate them joining us as operators and as partners in future redevelopment projects in New York City, where self storage will be a potential addition and complementary component of our retail redevelopment.

Storage Post is a New York-based self storage developer and operator of modern, climate-controlled self storage facilities, primarily in the Greater New York area over the last five years. Their team has been a significant private developer of self storage in the New York Metro area, developing over 2 million square feet of self storage, as well as managing another 1 million square feet on a third-party basis. The majority of the facilities are managed under the trade name Storage Post, Self Storage Plus and Self Storage Zone.

In terms of our existing Urban/Infill projects -- Fordham Road, Pelham Manor, Broadway at Sherman, 161st Street in the Bronx, Canarsie, Brooklyn -- these projects are all proceeding through their various stages of redevelopment. Leasing interest remains very strong and timing continues to be in the range outlined on our previous calls. We plan on spending some time on our next call with a more in-depth update of these projects' timing and cost, and we'll include that information as well in our next quarterly supplement. But in short, these seven projects currently have anticipated acquisition and redevelopment costs totaling between 275 and $325 million, and are anticipated to begin completion starting in the next 12 to 36 months, with unleveraged redevelopment returns approximating 10% on total cost of fund stabilization.

From an earnings perspective, the seven redevelopments, while providing little accretion in 2006, upon stabilization, these projects should start contributing between $0.08 and $0.16 of FFO, depending on the ultimate size and development returns achieved. And these earnings will be phased in between 2007 and 2009; thus they're helping us build a nice pipeline for future growth.

The second key component of our growth strategy is 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 2004 we commenced our first RCP Venture investment with our participation in the acquisition of Mervyns. In the third and fourth quarter of last year, several important announcements and transactions were made with respect to this investment.

Along with the two large-scale leaseback transactions that were announced in the third quarter of last year, which were in excess of $600 million, in the fourth quarter the consortium completed a major refinancing of the remaining of the assets, such that we have now received a total distribution of $42.7 million on our original investment of $23.3 million. Obviously, we are quite pleased with this transaction, where 170% of our investment has already been returned. And while it's premature to count future profits, it's clear to us that this will be a very successful investment, and that our consortium partners, both on the operating side and on the investment side, are doing an outstanding job of maximizing the value of this investment.

In terms of additional RCP investment activity, we are continuing to work on a wide variety of potential opportunities. With respect to the announced Albertson's transaction, which includes our RCP Venture partners, we anticipate participating in the consortium acquisition as part of our venture with Klaff and Lubert-Adler. However, due to the pending nature of the transaction and certain confidentiality agreements, we will not be able to comment on the transaction or take questions regarding our potential participation.

In addition to our Urban/Infill and RCP platforms, in the fourth quarter AKR Fund II acquired a 42-year ground lease interest in a 112,000 square foot building occupied by Neiman Marcus. The property is one of the anchor boxes at the Oakbrook Center, a super-regional Class A mall located in the Chicago Metro area. The ground lease was acquired for $6.9 million, which represents a 10.7% cap rate. We acquired this asset from the same group that sold us the Kroger Safeway portfolio. And while this is a small transaction, it has an attractive risk-adjusted return, keeping in mind that for a company of our size, even a few small deals can make a difference.

In addition to the New York Urban/Infill and RCP investment activity, we recently closed on two additional investments as part of our ongoing asset recycling program within Acadia. As previously announced, we closed on Clark and Diversey property in the Lincoln Park area of Chicago. Also, in January we acquired a 60% interest in the A&P shopping center located in Boonton, New Jersey. The property is a 63,000 square foot shopping center anchored by a strong A&P supermarket. The remaining 40% interest is owned by a principal of P/A Associates, one of our partners in our Urban/Infill redevelopment program. The interest was acquired for $3.2 million of equity, and is subject to our pro rata share of debt, which is $5.2 million, thus creating an implied purchase price for our 60% interest of $8.4 million, and at a cap rate of approximately 8%.

Along with the asset recycling in the fourth quarter, we also made significant progress on the capital recycling, or harvesting front. As previously announced, as well as discussed in detail by Mike, just after year end we recapitalized our 1 million square foot Wilmington, Delaware portfolio, replacing our Fund I investors with a new investor group, New York-based GDC Properties, a premier developer of residential and mixed-use property. The transaction was completed at a 6% cap rate and an implied value of $211 million, as compared to our cost basis of $108 million. We retained our existing 22% interest and continue to operate the portfolio and earn fees for the services. As Mike discussed, at the closing, the Fund I investors received a return of all of their invested capital in the entire Fund I, thus triggering our 20% Promote interest in all future distributions.

There are 32 remaining assets comprising approximately 2 million square feet in Fund I. And as a result of the Promote interest, Acadia's ownership interest in the balance of Fund I has increased from 22 to 38%. Additionally, as detailed on page 31 of our supplement, we anticipate earning Promote income ranging from 18 million to $23 million over the remaining life of the Fund. These amounts will be recognized as assets or sold to recapitalize and the proceeds are distributed, which we would expect to occur over no less than three years, but potentially as long as seven years.

To conclude, we continue to be pleased with our fourth-quarter and 2005 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 as we continue to keep our ratios strong and our floating rate debt to a minimum. Third, finally, our acquisition initiatives are laying the foundation for future growth. We are investing our time and resources in capital in value-added opportunities that, while more back-ended from an earnings perspective, appear to us to be far more attractive on a risk-adjusted basis. Finally, we've begun the profitable harvesting of earlier investments, which will provide significant earnings potential over the next several years.

I'd like to thank and congratulate the members of Acadia for their hard work, dedication and accomplishments this year, and we would be happy to take any questions at this time.

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

It's Christine McElroy here with Ross. I just wanted to clarify the 3.5 million in Promote income, or the $0.10 that you're expecting in 2006. Is that part of your 7.6 million share of the net proceeds from the sale of the Brandywine?

That's exactly right.

And that $0.10 is included in your FFO guidance?

That's right.

Can you just kind of walk us through your thought process when considering whether or not to include that income in FFO? I know when you announced the transaction that was kind of up in the air.

We spoke with other REITs, and we spoke with NAREIT about this, and it's a universal consensus, based on the people we've spoken to, that Promote income, as long as it's classified and reflected as fee income in the GAAP financial statements, is to be included in FFO. And it's really that straightforward.

Could we assume that an additional 3.5 million will be in '07 as well?

No. In '07, and perhaps maybe a little remaining piece of it in '08.

With regard to the G&A, can we expect that same bonus impact in Q4 '06? Is there some level of seasonality there?

I would expect for the most part, other than the timing of some of the G&A in the first quarter '06 that Mike was referring to, the balance for the year should be for the most part level quarter-to-quarter.

Lastly, what's behind the volatility in your operating expenses, and how do you think about this lying on a run-rate basis?

In terms of the property operating expenses?

Yes.

It's primarily due to seasonal factors, and that's why if you look at -- on a quarter-to-quarter basis, it's difficult just to annualize a quarter and come up with a run rate number, so you really have to look at it on an annual basis and come up with an average quarterly amount. It's probably the best approach to take in trying to build a model.

Michael Billerman, Citigroup.

Jon Litt is on the phone with me as well. Just following up -- the 2.6 million between the bonuses in '05 and the special bonus for '06, that effectively is going to be straight-lined over the course of the year?

That's right.

And then, talking about your 2 to 4% same-store growth, that includes getting the extra $1 million of income from your Promote share of the Brandywine Portfolio?

No.

No, it does not. The 2 to 4% same-store NOI growth does not include that. Rather, that is added on top of the 2 to 4% to get to the $0.03 to $0.06 internal growth for the year.

Then how come if you started at $1.09, and you have $0.06 on top of that, takes you to 1.15; you then have another 2 to 2.5 of external growth, so you're at 1.17. And then you potentially have another $0.02, I guess, potentially from your G&A. So, that basically takes you to 1.19? Is that the way you're thinking about it?

That's exactly right.

And your 2 to 4% same-store growth, how much of that is being impacted by -- you said your provision for bad debt?

On the low end, the additional provision for bad debt pretty well negates the 2% growth so that it's a net zero. And then on the high-end, it brings the after-reserve NOI growth to about $0.03. So the $0.03 from that, plus the $0.03 for the additional Brandywine share of NOI, that gets you to the $0.06 on the high end.

So your 2 to 4% same-store growth excludes a higher provision for bad debt?

No, it includes it. For example, on the low end, 2% equates to about 4.5 cents, the reserve; 4.5 cents gets you to a net zero. Then adding the $0.03 for the Brandywine additional NOI, that gets you to the $0.03 of total internal growth on the low end. Conversely on the high end, 4% equals about 6.5 cents, using a 3.5 cent reserve; that gets you to a net $0.03. Add the $0.03 for the additional Brandywine NOI, that gets you to the total $0.06 of NOI growth on the high end, from the internal side.

So, it basically includes a bad debt and your Brandywine.

Exactly.

That 2 to 4% includes Brandywine and the expense. Your 2 to 4% same-store growth is $0.03 to $0.06. Right? And then on top of that, you have the Brandywine, which should add more cents. You see what I'm saying?

It's not, though. Let me try to track (multiple speakers)

We can do it off-line. That's fine. We don't need to go over it again. I'm being slow; I apologize. Where is the external growth? What do you need to invest, and what's your timing of investment to generate your 2 to 2.5 cents?

It really depends on not as much the deal size or amount, because a host of our deals, as you know, have very little FFO growth embedded into them initially. And that's not a major concern of ours. What we're really more focused on is total return. It could be one slightly accretive transaction day one of $20 million, or it could be another two or three redevelopment projects. What we're looking at right now are a host of our RCP transactions, several different potential New York redevelopment projects. And we think from those, there's probably a couple of pennies of initial accretion, above and beyond what we're really trying to achieve. As we get better visibility, we'll give much more clarity to you for your model.

That's helpful. You talked a little bit about Albertson's and your potential involvement there, and RCP. Can you talk about how active, in terms of transactions that you're pursuing on the retailer front, and how active you want to become there?

We are active, and I think we're probably as active as we want to be. We're spending, I think, the appropriate amount of time. But more importantly, Klaff and Lubert-Adler have established themselves as, I think, the premier group in navigating through this arena. And so having them as partners has been the single most important aspect to our participation in this. So the real question is how active are they, and they're extremely active, as you all read and hear.

We think that there will be continued opportunities along the lines of what has been previously announced. We also think there's going to be some interesting more niche opportunities, hopefully. And where we are most focused is in our geographic area, where we can help do similar type transactions as the Mervyns style, but maybe those more within Acadia's scope. So we're spending a fair amount time on that as well.

Ken, what are you doing in terms of if Klaff and Adler are -- there's a retailer out there, they're pursuing an opportunity -- what's your involvement? What is Acadia doing outside of providing capital?

Within (indiscernible) -- doing upfront to provide capital, or when a transaction is closed?

Outside of when a transaction gets announced and you're going to provide the piece of equity and the funds are going to provide some equity, what -- are you guys providing helping with due diligence? Are you (multiple speakers)

Absolutely. Without getting into -- look. In terms of every deal that's been done, once we determine where there's an opportunity, we divvy up the responsibility, and we say who's going to handle this region, who's going to handle discussing with the following potential replacement tenants, and it's truly a team effort. In some instances -- we announced that we had worked on Toys R Us, for instance -- you could probably look at a map and guess which regions we were in charge of -- those where we have the most core expertise, and we spent a significant amount of time, resources and capital on that -- and which areas we would probably have relied on our consortium partners for the value confirmation. So it's really deal-by-deal specific. We think we're fairly to very involved, but we're also thrilled with our partners. So when there's something that they can take a lead on and where they have the expertise, we're more than happy to do that.

Paul Adornato, Harris Nesbitt.

I was wondering if you could tell us a little bit more about your Urban/Infill partner, P/A Associates. How large of an organization is that, and how has your partnership transformed their business over the last couple of years?

I hope we've transformed it positively. Paul Slayton and Aaron Malinsky have been real estate developers directly and indirectly for several decades. Aaron Malinsky was the former head of real estate and vice chairman at A&P, and prior to that was part of the Waldbaum family supermarket and organization, so he also has the tenant perspective, as well as the development perspective. Their organization includes half a dozen other professionals along with them. We are their primary capital source, although they put capital both into their company and into our transaction.

And they are a fabulous extension of what we are able to do, because -- one, they're an entrepreneurial, seasoned private company. And there are times when, especially in York City, you're better off not showing up as a publicly-traded REIT in terms of some of these discussions. And then also, because they have spent decades in the five boroughs looking for these kind of locations. Whether Aaron was doing it on behalf of Waldbaum's or A&P, or Paul and Aaron doing it as developments, they have a unique perspective that enables us to see off-market transactions that we otherwise would not be looking at.

In terms of how we work together as an organization, once we've identified a transaction, our leasing team, our construction, our finance work with them. But they're intimately involved. And hopefully it has been a very good partnership from their perspective in terms of what it's done for them as a company. It certainly has been good for us.

Thanks. That's helpful. You highlighted the potential for more exposure to storage in New York City. Maybe you could give us a little background on their involvement in operating storage facilities.

As I mentioned, they have had a host -- developed and managed and operated a host of them through their Storage Post division. The interesting thing about storage, especially for vertical redevelopment, is that storage requires three to five parking spaces per storage, per building, as opposed to in our retail, where it's three to five spaces per thousand. So, they are very parking-compatible if you go in multilevel. Some municipalities recognize that, especially in the New York area, and they're more than happy to allow the storage to come effectively into the air of some of our properties. What that's enabling us to do, and a few of our projects would be far more competitive in terms of our pricing, or conversely, achieve the kind of yields that I think we deserve to achieve, while still holding onto, in most instances, the vast majority of the retail ground level and second level retail that's available in these projects.

And switching to the Promote and incentive fee stream, I was wondering if you can give us a sense of how lumpy you expect those cash flows to be. Are the Promotes in general recalculated every quarter or every year? Maybe you could just give us some color on that.

I know that some groups do a calculation on some type of (indiscernible) method. We don't. We account for the Promotes as we receive the actual cash, so that it will either come from the cash flow from the existing assets. And Jon and Mike discussed that. Our step up, for instance, from 22% to 38% should create about $1 million of additional cash flow in 2006. And then that hopefully continues on, and hopefully grows.

And then similarly, as we sell or recapitalize other Fund I assets, since we have returned all of the capital that our fund investors have put in, we get our 20% Promote, as that capital is distributed out, off the top. So it's really dependent, in terms of that second piece, of when we either sell, refinance, recapitalize assets to create those distributions. So it could be very lumpy. Someone could make as an offer tomorrow that we can't refuse, in which case it could be unbelievably lumpy. But what I said before, and my guess is based on where the redevelopments are and the balance of those assets, and based on the timing of the Kroger Safeway portfolio, that we expect it to be not less than three years, and probably out there into seven years. If you remember, we said it was 18 to $23 million. Again, your guess may be as good as ours above and beyond that, in terms of how those dollars then spread out.

Mike Mueller, JP Morgan.

A few things. Going back to the last question on the Promotes, just to clarify as it pertains to the $0.10 in '06 -- will that be spread out equally over the quarters, or will that be lumpy as well?

It will be spread out throughout the year.

The 3.5 million Promote income, and then you mentioned another million from the step-up in ownership. That million is in addition to the 3.5 million, is that correct?

That's exactly right.

In terms of the self storage that you were referring to, will you have an ownership stake in that, or will you just sell it outright?

We will have an ownership stake going into this. What we choose to do with them once we stabilize it is, obviously, open.

Last question. You mentioned something about G&A being a little more front-end loaded this year. Can you give us a rough ballpark estimate of where you think it will come up (indiscernible) in terms of Q1?

If you take in total 2006 G&A, we've given the forecast of about $18.5 million. If you were to take that and divide it by 4, then you would take that first-quarter number, and you would add another 600,000, or approximately $0.02, to get a ballpark first-quarter number. And then, obviously, the balance would be spread out over the remaining three quarters.

(OPERATOR INSTRUCTIONS). Ross Nussbaum.

A couple of questions. First, on the G&A front, the G&A at the Company has, obviously, escalated pretty sharply over the past 12, 18 months, and is looking to increase into this year. What's the scalability of the organization at this point? If you had to peg the gross dollar amount of total assets that this company could acquire under the sort of current scale and G&A structure, what do you think that is?

That's a great question. The part of it that's going to make it hard for me to answer is it costs us virtually nothing to take on another Kroger Safeway portfolio, and it costs a heck of a lot of money -- it's money well spent -- when we get involved in our redevelopments, or also on the Mervyns side. What I've urged everyone to do, though, is if -- you can't look at the G&A without also looking at the fee revenues that come in. And as it relates, for instance, to Mervyns, we staffed up, and we have had people who spend virtually all their time on Mervyns. Well, we get reimbursed for that. We're not making a profit on the G&A/fee side of it, but man am I happy that we did it. So, it really depends on where the next opportunities occur.

Now, that being said -- because I realize I haven't answered your question -- we have now filled in a bunch of the different slots necessary for us to continue to do our New York urban redevelopment program, so I don't expect a host of additional staffing associated with that. Unless we saw a tremendous increase in other platforms -- RCP or something else, for instance -- I think our staffing, hopefully, is leveling off. But again, I'm looking at it not as G&A isolated, but G&A relative to fee revenues counterbalancing it, and more importantly, are we getting a very high return on that invested capital. So far, the answer has been yes.

The next question is on the Neiman Marcus leasehold transaction. Why didn't the owner of the mall buy that leasehold interests?

We had discussions with them to confront -- there were specific reasons, and I'm not going to discuss their motivations and lack thereof, other than we were very comfortable that it was something worthwhile for us to do, and that we were not stepping on someone's toes unnecessarily.

I guess you could understand, from an outside perspective, it's hard to sit here and look at a 10.7 cap rate and not understand why the mall owner wouldn't want to take that.

And so you can also understand from my perspective why I would pick up the phone and call the mall owner, and make sure that in that specific ownership structure there maybe were some partnership issues (inaudible)

What's the remaining term of the ground lease?

Bear with me one second.

I think it's 40 years.

I have it. I think it's 40 years.

Okay. And the last question I have --

42 years. We had a bunch of 40, 42s, so I was just --

The last question I have is the relationship with your urban partner, P/A Associates. When you looked at doing the self storage deal with them, did you look at using another self storage company? I'm wondering to what extent -- as a share -- how would a shareholder get comfortable with sort of an arms-length nature of a relationship there, where now you're going into a self storage business that happens to be run by your partner, and Acadia didn't necessarily look at going with another player? Can you walk us through how that thought process worked?

Absolutely. And I assure you -- one, that we did; two, that it's arms-length. We're not talking about a conflict on my side. My interests are totally aligned with our shareholders, and I want to make sure we're doing the best development possible. We spent a lot of time, both with the Storage Post people and understanding the business. And also, Ross, we have no obligation. They're simply putting in one-third of the equity for one-third of the deal, and we have decision-making control. If we decided after we built the facility that it is better off for us to turn around and slip it to another operator, we can certainly go do that. What we think we have in this marketplace is the ability to get in and build these as part of our structures, keeping in mind that when you bring in an outside partner, everyone wants to do things their own way. This way we control all the decision-making, we control the development process, and get them stabilized. Once they're stabilized, if someone else is willing to pay us a price in excess of our future estimated cash flows for that component, if someone is willing to ground lease it, buy it, etcetera, then we'll go do it. And neither us nor our partners are allergic to that. They have been builders of storage and are happy to sell it.

(OPERATOR INSTRUCTIONS). There are no other questions in the queue, so this will conclude our Q&A session, and I will now turn the call back to Mr. Bernstein for any closing remarks.

Cindy, thank you. And I'd like to thank everyone for joining us, and look forward to speaking to everyone soon.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect your lines.