Acadia Realty Trust (AKR) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Acadia Realty Trust third quarter 2006 earnings conference call. My name in Gregory and I'll be your coordinator for today. [OPERATOR INSTRUCTIONS]

The Company would like to inform it's 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. Including those discussed under the headings risk factors and management's discussion and analysis of financial conditions and results of operations. These factors can cause actual results to differ materially from those expressed or implied with 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.

At this time, I would now like to turn the call over to Ken Bernstein, Acadia's President and Chief Executive Officer. Please proceed, sir.

Thank you. Good afternoon. Joining me are Mike Nelsen and Jon Grisham. Today we're going to review our third quarter 2006 results.

All key components of our business plan remain on track and are performing as we anticipated. We'll walk through the key components of our business, first our core portfolio, second our balance sheet, third our external growth initiatives and discuss their impact on our quarterly earnings and more importantly on our long-term performance.

First in terms of our core portfolio as we discussed if the last call, we anticipated that our quarterly same-store NOI occupancy growth for the later portion of 2006 would be temporarily muted by the profitable recapture, releasing projects that we're now executing. You see this impact in this quarter same-store results. Short-term occupancy and income loss in exchange for longer-term gains is an important component of our business, which we will continue to aggressively pursue.

In terms of our balance sheet, our discipline with respect to limiting our interest rate exposure has enabled us to continue to maintain very strong financial ratios, Mike will walk you through these ratios and our ongoing fine-tuning. Third and finally with respect to our external growth platform, in the third quarter we continue to plant the seeds for future growth. On the investment side, we continue to focus on our key external growth initiatives.

First, our New York Urban/In-fill platform where we now have a seven property, $370 million redevelopment pipeline, that we're continually making progress with and we're working on other projects that hopefully will add to this portfolio. And second, our RCP Venture, we're along with our second quarter investment in the consortium acquisition of Albertsons and some recent add-ons to that investment. We've recently joined our RCP partners with investments in Marsh Supermarkets and the ShopKo transaction. Additionally we've also continued our periodic asset recycling with an additional core portfolio acquisition. Both the value-added components of our investment business, our Urban/In-fill and RCP Venture, as well as our asset recycling, are adding to our long-term growth and stability. While they're not contributes in the short-term to the current year's earnings and are in fact provide something short-term delusion, the long-term gains from these investments more than outweigh the short-term costs.

After Mike and Jon discuss our earnings and balance sheet, I'll update the status of these initiatives, as well as the status of Fund I, Fund II and the potential for future funds. Now, I'd like to turn the call over to Jon who will discuss the third quarter results.

Good afternoon. I'd like to briefly review our earnings and compare third quarter '06 results with second quarter '06. As well as with our historic third quarter '05 results.

As a reminder, we now consolidate our investments in Funds I and II and account for our Brandy I investment on an unconsolidated basis. To assist the users of our financial statements, we continue to provide a pro rata presentation of our joint venture operations in our reporting supplement as posted on our website.

FFO for the current quarter of $0.30 is consistent with our second quarter '06 result and in line with our 2006 annual forecast. In comparing current FFO with that of the year-ago third quarter, which was also $0.30, it's important to note the two following items. One, third quarter '05 FFO included approximately $0.01 of income as a result of our collection of the settlement of a bankruptcy claim against a former tenant. Secondly, third quarter '05 also included $0.01 of operating income from our Mervyns investment. After adjusting for these 2005 items, the current quarter represents a 7% increase in earnings over the year-ago quarter.

Turning to earnings per share, EPS from continuing operations for the third quarter '06 was $0.12. This compares to $0.14 for the second quarter '06. This $0.02 decline was primarily the reason of charge for the deferral of previously recognized gains on sale of assets at the Mervyns parent level. Comparing current quarter EPS to a year-ago quarter EPS, 2005 third quarter was $0.22. In addition to the factors as I've previously discussed, 2005 was also favorably impacted by approximately $0.06 of income related to the gain on the sale of Mervyns properties.

Discontinued operations in our financial statements represent activity from five assets. The Soundview Marketplace on Long Island and the Bradford Shopping Center in northeast Pennsylvania both of which we announced last quarter. During the current quarter, we contracted for the sale of three additional noncore assets also located in northeast Pennsylvania.

Lastly, I'd like to bring your attention to an item in our third quarter income statement, which has no material net impact to our bottom line. But it does create offsetting income and expense items. General and administrative expense for the third quarter '06 includes the reclassification within our income statement of certain construction-related activities. This reclass had the effect of increasing our construction fee income by approximately $1 million, along with the corresponding increase in our G&A. As I said, it's important to note that this reclass had no material impact on our net earnings. Now, I'd like to turn the call over to Mike.

Good afternoon. Our strong balance sheet is the foundation of our core business model. At September 30th our financial condition continues to strengthen as evidenced by the following ratios, which all include our pro rata share of our joint ventures. A debt to market capitalization of 31%, as well as a 3-to-1 fixed charge coverage ratio, 96% fixed to floating rate debt, and an all cost of less than 6%. FFO and AFFO payout ratios of 62% and 75% respectively and over $100 million of availability under our current lines of credit and cash on hand.

During the quarter, we completed a $23.5 million, ten-year, 6.1% fixed-rate refinancing of our Walnut Hills Shopping Center. Additionally, we completed a forward rate lock at 5.9% on $26.3 million of mortgage debt, which is scheduled to close in July of 2007. As a result of our conservative fixed rate weighting, we have been able to maintain a less than 6% cost of debt despite an over 1.5% increase in LIBOR over the past year. We are currently evaluating additional prospects to fix rates at the redevelopment properties which are expected to stabilize in the near future to take advantage of the current rate environment. We continue to focus on opportunities to minimize our interest rate risk and maintain a balance debt maturity schedule.

In turning to our 2006 earnings forecast, we're maintaining our guidance for the year of between $1.14 and $1.19 a share. Consistent with our guidance and as we discussed in our last call, our expectation is that more likely than not, our 2006 earnings will approach the midrange of the current guidance. I'd like to turn the call back over to Ken to continue.

Thanks, Mike. First I'm going to review our portfolio performance, which is continuing to perform consistent with our expectations, our same-store NOI growth for the quarter of 1.9% was somewhat muted, primarily by our recapture and retenanting at a few of our properties, most significantly in Bloomfield Hills, which we discussed on the previous call in detail. Our retenants of these projects proceeding according with plan with strong releasing spreads and very attractive returns on incremental costs, excluding Bloomfield Hills our same-store NOI growth would be 3.2% for the quarter. And overall, we continue to see positive and stable performance in the portfolio.

Our portfolio occupancy is at 93% and new and renewal rent spreads with were 63% for new leases, 34% for renewals, spreads on new leases were primarily driven by the reanchoring of our Haygood Shopping Center with a Farm Fresh Supermarket at $6.25 per square foot, replacing a former rent of $1.40. Our renewal spreads were principally driven by the renewal of New York City as a tenant at our 161st Street location at a 40% increase in rent.

In terms of tenant exposures, as we continue to reiterate our tenant default rates and related reserves actual utilize continue to remain very low. Nevertheless, we're carefully watching consumer trends and the potential impact of the consumer on our retailers and on our shopping centers.

Turning to asset recycling, as part of our maintaining a strong core portfolio, we continue to focus on the opportunistic upgrading of our core portfolio. In the third quarter, we added another core asset for $18.5 million. This one is in the hub section of the Bronx in New York. The property's located on the 3rd Avenue shopping corridor at 151st Street. It's located in a densely populated, high-bared entry in-fill area that's undergoing a significant rejuvenation in connection with the overall hub redevelopment. This relatively small 40,000 square foot building could either be part of a larger redevelopment consistent with our other redevelopments, or with our going-in yield of approximately 7% and solid growth. This could simply provide attractive core cash flow. This is a continuation of our initiative of replacing noncore assets with high-quality cash flow from properties that are in in-fill supply constrained markets. This core portfolio purchase is in addition to our core portfolio purchases over the past 12 months in properties in Chestnut Hill, Philadelphia, Staten Island, New York, northern New Jersey, Lincoln Park, Chicago.

On the asset disposition side as Jon mentioned, we're currently under contract to sell five properties including four properties located in northeast Pennsylvania. We expect these to close in the fourth quarter. And while there may be some short-term delusion associated with these five dispositions, prior to redeployment, this short-term impact is more than offset by the continual repositions of the portfolio.

Turning now to external growth, along with a solid core portfolio, strong balance sheet in the third quarter, our external growth initiatives continue to make important contributions by laying the groundwork for future growth. In the third quarter, we continue to focus on the key drivers of our external growth program. First our New York Urban/In-fill program, whereas we previously laid out, we continue to see interesting opportunities in the midsize urban retail redevelopment arena, especially in the New York met metro area. We now have seven New York redevelopment projects, three of which are under construction. Totaling 1.5 million square feet and total acquisition redevelopment costs of approximately $370 million. Included on page 37 of our quarterly supplement is a schedule of the estimated timing and cost of this pipeline. And we will update this schedule as we progress. But here's a brief update on the seven projects in order of estimated completion.

Liberty Avenue and Ozone Park, Queens, construction as commenced and we expect we'll be completed shortly and start contributing to earnings in the first half of 2007 with satellite leasing and lease up of the self-storage phasing in over 2007 and 2008. We expect the total cost to be approximately $15 million.

216th Street in northern Manhattan, where we're relocating the New York City Department of Human Resources from our Broadway at Sherman property, construction has commenced and should be completed in the first half of of next year, total cost of this project will be approximately $25 million and not only will we receive an attractive return on this development, but this relocation insures that we can timely vacate HRA from our Broadway and Sherman site enabling that redevelopment to proceed.

Pelham Manor, Westchester, we recently received all necessary municipal approvals to redevelop this 16-acre warehouse site into a community center anchored by a Home Depot. We've begun demolition of the existing warehouses and we expect the construction to be completed in the first half of 2008. With a cost currently estimated to be approximately $35 million.

Canarsie, Brooklyn, this 530 square foot warehouse property will also be redeveloped into a Home Depot-anchored development. This redevelopment is going through approval process with our closing on the contract conditioned on receiving these approvals. And assuming approvals are received, we expect commencing construction in the first half of 2007 and delivering the property in the second half of 2008 with an estimated cost of approximately $60 million.

161st Street in the Bronx, this property is a 225,000 square foot office building located directly opposite the newly constructed 750,000 square foot [inaudible] and it's three blocks east of Yankee Stadium. While the property's currently 100% occupied, we are making strong progress in negotiating to convert a significant portion of the current street level office space into retail uses for an incremental cost that we're estimating to $20 million a total cost of $70 million. We expect beginning this conversion process in the first half of 2007 and completing it in phases but hopefully by the second half of 2008.

Fordham Road in the Bronx, currently anchored by a Sears with a lease expiring July, 2007 with no options, we'll redevelop this into a multilevel retail and commercial building of up to 275,000 square feet. The total cost of the redevelopment project including acquisition cost, is currently estimated to be $110 million. As has been our game plan, we're in negotiations with Sears to recapture the Sears lease prior to expiration, which would slightly improve our timing but for now, we anticipate commencing construction shortly after the recapture of the Sears lease in July of 2007 and completing it in the first half of 2009. We have strong national tenant interest for all of the retail levels.

Finally, our Broadway at Sherman, redevelopment in northern Manhattan, it's our plan to redevelop this current building into a 300,000 square foot mixed-use development with approximately half of it being retail commercial and the other half being a new residential tower continues to be likely that we will not directly develop the residential portion as we discussed in connection with our 216th Street redevelopment. We plan on vacating the existing New York City tenant by the middle of next year and commencing construction on the property shortly thereafter in the second half of 2007, completing the redevelopment in 2009. The total cost for the commercial portion of this development is expected to be approximately $55 million.

In terms of anticipated return as a general matter, we anticipate our unleveraged returns on total cost to be in the 9 to 11% range, from an earnings perspective, as we stated in the last recall, the seven redevelopments, while providing little accretion 2006 upon stabilization, these projects should start contributing between $0.08 and $0.16 of FFO depending on the ultimate size and scope of the development. With these earnings phasing in between 2007 and 2009, they're helping us build a nice pipeline for future growth.

In terms of additional deals we're working on several potentially exciting redevelopment opportunities in the five boroughs. We see this as continuing to be an important source of our growth with a deal flow in our niche being good and tenant interest remaining as high as ever. While we're pursuing and evaluating redevelopment opportunities in other urban markets, we believe the barriers to entry and other attributes unique to New York continue to make New York a compelling opportunity as that may also create some interesting platform potential in the future.

Turning now to our RCP Venture, which is the second key component of our growth strategy, 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 Retailer Controlled Property investment with our participation in the acquisition of Mervyns as we previously discussed in detail to date, we've nearly doubled our equity investment of $24.5 million while still retaining a majority of our original investment. In the second quarter we invested just over of $21 million, in the consortium acquisition of Albertsons. That investment is proceeding quite well and we should be in a position to discuss the progress on our next call. During the third quarter, we made four additional investments of approximately $3.6 million in RCP Venture with the acquisitions in ShopKo, Marsh, and two add-on investments related to the Albertsons acquisition. And while ShopKo and Marsh investments are small and both are remaining as operating companies with real estate role being just one component of the overall transaction, they continue to enhance our RCP platform, along with our RCP partners, these two transactions also include Sun Capital, who is also a key partner in the Mervyns investment. While clearly not traditional real estate turnarounds, these transactions have the potential to be highly profitable and continue to give us worthwhile insights and exposure into the private equity and LBO world.

Turning now to our fund status, in terms of Fund I, all the capital has been returned. As a result of our Wilmington, Delaware, transaction, with IRRs projected to be in excess of 30% to our investors and significantly higher to AKR as general partner.

With respect to Fund II, over half of the $300 million of equity has been committed on deals we've already announced and based on our current deal flow, we hope to complete this investment phase at Fund II at some point next year, Fund III should be formed next year as well, hopefully by mid-year. While we have not decided the exact size and scope of Fund III, if it were the same size as Fund II, asset management fees would contribute an additional $3.5 million or $0.10 to the fund.

So, to conclude, we continue to be pleased with our third quarter performance and our business model. All components of our business plan are on track, our core portfolio performance remains strong, with the short-term costs of retenants opportunities being outweighed by the long-term upside. Our balance sheet is solid as we continue to keep our ratio strong and our floating rate debt to a minimum, and third and finally, our acquisition initiatives are laying the foundation for strong future growth. I'd like to thank the members of the Acadia for their hard work and accomplishments last quarter and at this point, we'd be happy to take any questions.

[OPERATOR INSTRUCTIONS] And please stand by for your first question. And your first question comes from the line of Jonathan Litt with Citigroup. Please proceed.

This is Ambika Goel with Jon. My first question is, given that you expect that Fund II will be fully invested by mid-next year, that's 150 million of investment. Do you expect them to be small deals? Or big ones?

We're looking at both Ambika, there's several larger deals that look very interesting to us. But we'll only do them if the pricing and redevelopment components make sense. And we're in a position where we can either do some smaller deals and get the capital invested or one or two larger ones and then start off with Fund III.

And what kind of pricing are you seeing in the acquisition market for Urban/In-fill? Given the pricing that you had on the deal that you just closed this quarter in your core portfolio, are you seeing cap rate compressed?

For stabilized urban retail, the cap rates are as low as we've ever seen, especially if you're trying to do any level of volume. So if our focus was to buy 300, 400 million of stabilized retail in the five boroughs, we'd be looking in the sub-six cap range. Fortunately, or at least our focus right now is on the value-add side. The bad news is as you see, are going in yields for the redevelopments, are zero, or often we're taking them to zero. But our goal is to then bring them up to nine. And that way, our view is, if we can redevelop to a nine, ten, or 11, whether cap rates stay sticky at the five, six range or move up 100 basis points, we still think that on a risk-adjusted basis, that's a more attractive return than simply acquiring stabilized on any meaningful basis. That's different than when you'll see us periodically and the one we did on Third Avenue is approximately a seven cap. There's deals here and there that we can acquire through our deal-flow at what we think are attractive returns and we'll always add those in, but that's not the core focus of our value-added investment.

Okay. And then can you talk a little bit about the financing for the Urban/In-fill projects that you're planning on completing next year?

I think Mike, you want to?

We believe that we can arrange through existing availability that we have now the required construction and development financing that would turn into the, you know, the permanent financing when they are completed and stabilized. We have, as I said, we have sufficient, we have sufficient fuel for the fire to get these things started with equity and supplemented by the availability of construction financing. So at this point, we see being able to get them done relatively quickly and with a little downside.

Because the yield curve is so flat and we'll pick and choose when we do this, but there's very little cost to convert to fixed rate up front. And whether it's the step forward that Mike and Jon just did and discussed very briefly, or construction forward, we don't have to pay a lot if we believe it's in our investors and Shareholders' interest to maintain fixed rate. Conversely, if we want more exposure or continued exposure to a declining LIBOR market, then we would just stay unhedged on those redevelopments. But one of the many benefits of a flat curve is that optionality.

It's Jon. What's happening with your construction redevelopment cost the past six months or a year?

They have moved just like everybody else's, Jon, especially steel. Cement, labor, my guess is from a year-ago, probably up 20%-plus. In some cases, we were fortunate and we were able to go ahead and buy our steel ahead of time and lock in. In other cases, we've been fortunate and the way we structured our leases with Home Depot, for instance, is we deliver a pad. So we get to cry on each other's shoulders about the cost of steel, et cetera. We're there incurring a decent chunk of it. But construction costs are absolutely something that we had to watch very closely if our performance of our 20 million increase in our overall project from 350 to 370. Half of it's because we anticipate buying the land under one of the ground leases. The other half was just pure construction cost increases.

Do you think that's cutting into at all the ability to make these deals pencil?

I think for current deals that we're negotiating, it is a little bit because sellers still haven't moved off of their FAR or land prices. And so there's some reality check. Counterbalancing that is there has been some level of plateauing in construction costs and I think everybody's getting more comfortable here in the New York area as to what we can lock in our costs now going forward, and so far, as it relates to new acquisitions, we think we can make them pencil out. But we've got to watch it very carefully and it's a huge variable.

You had mentioned the beginning of the call that you were trying to get sell out of your noncore markets over time and move into your core markets. And then I listened to the call and listened to the deals and looked over your supplemental -- the deals you're doing, seems like New York is the only core market. And I guess I was just wondering what you would define at your core markets?

No, what we did say is over the past 12 months you've seen us rotate out of Pennsylvania into Staten Island which is most days of the week, part of New York. But also into Lincoln Park, Chicago, Chestnut Hill, Philadelphia. We like the D.C. market. And are looking at things there. So there are other good core markets. The thing that's so attractive about New York City is just the retail per capita ratio which is about a quarter of where it is nationwide. And what we're finding that translates to consistently is just more favorable market rent increases in negotiations with the tenants. So, if we have to reach, I'd rather reach in New York City.

Right, thank you.

Your next question comes from the line of Christy McElroy from Banc of America.

Good afternoon, guys, I'm here with Ross Nussbaum, as well. Just to clarify one point, Ken, you were talking before about the estimated completion dates on the New York Urban/In-fill program. You said that for 216th Street and Pelham Manor, you talked about first half '07 and first half '08 but your supplemental says second half '07 and second half '08, I just wanted to see if that was correct.

Go with what my supplement says.

So then I guess my next question is why were those pushed back?

I'm just looking at the timing is probably as it relates to Pelham Manor, just had to do slightly with the approval. And we're really talking about a couple months at the most one way or the other, but we're balancing them on six-month slots so that's why.

So not talking about a six-month delay?

No.

And I assume that had no impact on your estimated yield assumption?

No.

And then five properties that you're under contract to sell, I know you don't really disclose specific cap rates before they've close, but if you could just us a general kind of range or the type of assets that they are, that would be helpful.

These for the most part are supermarket or other anchored strip centers in northeast Pennsylvania that were part of what we call the Mark Center Trust Legacy portfolio. And they are generally fairly stabilized, and have occupancies ranging from mid-80s to 90%. But that, in our view, is about where you'll achieve market stabilization in those markets. We're trading them in the seven to eight cap range with cap rates really being in the eye of the buyer and their lenders. So it gets real truck tricky in terms of what kind of reserves, but we're selling at, in those cases, higher cap rates than we're buying, we think, with a minor delusion in the tradeoff, it's a much better trade in terms of asset quality.

Okay. And then I know I asked about this last quarter, but in terms of our occupancy and retenants, are you still talking about bottoming around 92% towards year-end and then ticking it up another couple of quarters again?

Yep.

And then a follow-up to that, with regards to the retenanting, what types of tenants are you moving out and who are you moving in?

Primarily we're talking about local, regional or in the case of Bloomfield Hills, a couple of undersized tenants that we're combining to put in one of the national electronics retailers and you could narrow it down to two.

And when is the plan to move in?

We're hoping to have at lease -- that lease signed this year. And then we'll start the construction process and deliver the space first half of next year. Still a little early to pick the rent commencement date. But somewhere mid next year, I'm hoping.

Okay, thank you.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of Paul Adornato from BMO Capital Markets.

Hi, thanks. Just a quick accounting question. Jon, you mentioned that there was reclassification on some construction fee income with offsetting G&A. I was wondering if you could tell us what gave rise to that change? Was it a change in accounting policy, or a change in underlying economics?

It's based on the fact that we've actually billed the costs out during through the third quarter. Through the first two quarters we capitalized construction related overhead as a component of real estate. And that has the effect of reducing G&A. During the third quarter, we billed all of those construction costs out to our JD operations. That puts it into fee income and obviously takes it out of G&A. So that's what gave rise to the reclassification.

Okay. Thank you.

Okay.

And, ladies and gentlemen, this does conclude your question and answer session. I would now like to turn it back over to Mr.Ken Bernstein for any closing remarks.

I'd like to thank everybody for listening. Look forward to seeing hopefully as many of you as possible in [inaudible].

Ladies and gentlemen, thank you for your participation in today's event. This does conclude the presentation and you may now disconnect. Have a great day.