Acadia Realty Trust (AKR) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Acadia Realty Trust earnings conference call. My name is James, and I'll be your operator for today. At this time, all participants are in listen-only mode. [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. The 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 guaranteed. 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 condition and results of operations. 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 web site for a reconciliation of these non-GAAP financial measures with the most directly comparable financial measures calculated and presented in accordance with GAAP. Following management's discussion, there will be an opportunity for all participants to ask questions.

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

Thank you. Good afternoon. Joining me are Mike Nelson and Jon Grisham. Today we're going to review our fourth quarter and year end 2006 results.

As evidenced by our fourth quarter and year-over-year results in 2006, we were able to maintain solid earnings growth during a year where our main focus has been building for the future. In 2006, all of the key components of our business remained on track and performed as we anticipated. So, today, along with a review of our earnings and preliminary forecast of 2007, we'll walk through the key components of our business. First, our core portfolio, second our balance sheet, and third our external growth platform.

With respect to our core portfolio, we made important progress on two fronts, first on a noncore disposition front in the fourth quarter, we sold five noncore properties, further refining our portfolio. I'll discuss the positive impact of these dispositions later.

Second, on the leasing front, we executed several important leases in connection with space that we have previously recaptured, and while these recaptures temporarily reduced our same-store NOI growth last year, now with these leases signed and at rents that will provide strong incremental returns, the re-tenantings will provide additional stability and growth to our portfolio.

With respect to our balance sheet, we've remained highly disciplined and continue to maintain very strong financial ratios, limit interest rate exposure and plenty of dry powder. Mike will walk you through our fourth quarter transactions and financings that further bolstered our balance sheet.

Third and finally, with respect to our external growth platform, in the fourth quarter and for the year as a whole, we continued to plant the seeds for future growth focusing our resources and energy on our fund investment platform with which we execute our key external growth initiatives. First our New York Urban/ In-fill Venture and second our Retailer Controlled Property or our RCP Venture.

So, in short, the continued refinement of our core portfolio, the maintenance of a strong and flexible balance sheet and the value added components of our investment platform are adding to our long-term growth and stability. And while some of these initiatives are clearly more about long-term growth than short-term performance, our solid year-over-year earnings performance is another strong indicator that our business model is working.

After Mike and Jon discuss our earnings and balance sheet, I'll update the status of these initiatives as well as the status of Funds I, II and the launching of our Fund III. So, now I would like to turn over the call to Jon who will discuss our fourth quarter results.

Good afternoon. I would like to briefly review our earnings and then discuss guidance for 2007.

Once again, and I promise this is the last time I'll dwell on this, in 2006, we started consolidating our investments in Funds I and II and account for our Brandywine investment on an unconsolidated basis. To assist in the analysis 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 web site.

FFO for the current quarter of $0.31 and year-to-date of $1.19 is consistent with the high end of our 2006 guidance. We had previously directed to the midrange of our guidance during our third quarter call. This increase for the fourth quarter was primarily result of several factors that occurred during the fourth quarter including a gain received on the termination of swaps and additional construction fee income both of which were partially offset by additional CAM collection reserves.

Now, turning to our 2007 earnings forecast, as we reported last night, we are forecasting FFO for the year between $1.24 and $1.32 per share. We direct you to page 9 of our year-end supplement, which reflects the pro rata presentation of operating results for the year. We feel this is the best starting point for constructing a 2007 model. Looking at this page, 2006 FFO of $40 million includes 3.3 million related to the 5 properties which we sold during the year. This leaves 36.7 million attributable to continuing operations. In using this as a base for 2007, the following are the key'sssumptions in our '07 guidance.

The positive drivers are, One, same store NOI is projected to increase from 1.2 to $2.4 million or 2 to 4%. 2006 interest income of 8.3 million is anticipated to increase by $2.2 million, primarily as a result of increased invested funds. Three, fee income of 11.6 million in 2006 is budgeted to increase by 5.4 million for a total of 17 million in 2007. This is primarily a result of projected Fund III asset management fees which assumes a midyear launch of a 400 to $500 million fund, as well as additional fees related to our Urban/In-fill activities. Lastly, on the positive side, projected FFO from our external initiatives, including acquisitions, additional mezzanine investments, income from our RCP investments and promote income, in total is anticipated to range between 2 to $4 million. Given our size and the high level of expected profitability of our fund investments, this portion of our guidance can vary significantly, based on any single potential transaction.

Counter balancing these positive variables are the two following items. One, 2006 G&A of 19.7 million is forecasted to increase 3.5 million for a total of 23.2 million in 2007. This is primarily a result of increased head count as well as a corresponding increase in our main office occupancy costs. Secondly, interest expense of 22.7 million is expected to increase 2.1 million resulting in total interest expense for 2007 of 24.8 million. This is primarily result of increased levels of indebitness.

In summary, although we continue to focus on value-added opportunities that are less about immediate accretion and more about future growth, we believe that our business model will continue to generate above average year-over-year growth as reflected in our current 2007 guidance. We will continue to keep you updated as to our progress during the year and its effect on this guidance.

Now, I'll turn the discussion over to Mike.

Good afternoon. In 2006, we continued to accomplish one of our major business goals in maintaining a strong balance sheet. This is evidenced by a strong coverage, debt to market cap and payout ratios. Consistent with our policy to minimize our exposure to interest rate risk, we are currently 94% fixed rate after giving effect to the January paydown of 21.3 million of floating rate debt at a weighted average interest rate of 5.4%.

As previously reported, during the fourth quarter, we completed $115 million convertible debt offering at a 3.75% coupon with a 20% conversion premium. A portion of the proceeds from this offering was used to pay down existing lines with a balance available for our remaining capital commitments to Fund II and other acquisition initiatives. In connection with the pay down of our lines, we terminated interest rates swap agreements totaling $71 million, resulting in a gain of approximately a $.5 million recognized in the fourth quarter. In addition, we completed a consolidation of two of our lines into a $75 million revolving credit facility with a 10 basis point interest rate reduction.

During 2007 and 2008, a total of 81.2 million of our debt matures. The majority of this debt relates to our Urban/In-fill developments which we anticipate refinancing with either permanent financing or construction loans. We continue to focus on opportunities to minimize our interest rate exposure and maintain a balanced debt maturity schedule. As we've discussed, we currently have $75 million of availability under our revolving line of credit. With an additional 13 million of potential availability in the future. We are also in the process of finalizing a $30 million revolving line of credit with another bank.

Given our size, and the Fund structure, this availability, together with approximately $112 million of cash on hand, provides us with enough capital to fund our future growth initiatives.

I'll now turn the call back to Ken.

Thanks, Mike. First, I'm going to review our portfolio performance. The portfolio performed consistent with our expectations. Our same-store NOI growth for the quarter of 1.3% in the year, 1.6% was impacted by our recapture and retenanting activities at a few of our properties, most specifically Bloomfield Hills. Additionally, in the fourth quarter, we took a reserve of $200,000 in connection with a can dispute with one of our tenants. Excluding this reserve and Bloomfield's retenanting, same-store NOI would have been approximately 3% for the year which is more consistent with our past years' results.

With respect to Bloomfield, during the fourth quarter, Panera Bread and Drexel Heritage Furniture both opened and we finalized a lease with Circuit City for 26,000 square feet. These leases have base rents that are more than twice the previous rents. We're currently building out the Circuit City space and anticipate rent commencing in the fourth quarter of this year. As a result, we now have retenanted the majority of the center, we're 97% leased at this location and anticipate achieving approximately a 20% return on all of our incremental costs there.

Equally noisy in the fourth quarter, rent spreads were up 44% for new leases, primarily as a result of Bloomfield Hills, while for renewals, they were negative 6% due to the contractual and fully-anticipated exercise of a lease option at a declining rent by one of our anchor tenants in our Fund II portfolio. For the year, new leased spreads were at an above average 37% and renewal spreads were at a more normal 12%.

Turning now to asset recycling. As part of maintaining a strong core portfolio, we continue to focus on the opportunistic upgrading of our core properties. In the fourth quarter, we successfully completed the sale of 5 properties for $60 million. Four of the five were in northeast Pennsylvania and were among the few remaining [Mark] Center Trust legacy assets. These five properties totaled [770,000] square feet or 14% of the square footage of our core portfolio and were sold for approximately a 7% yield after appropriate reserves.

While there will be some short term dilution associated with these dispositions, prior to redeployment, this short-term impact is more than offset by the continual repositioning of our portfolio. If the continuation of our initiatives of selling noncore or secondary assets and replacing them with assets located in higher quality, In-fill, supply constraint markets such as our recent core acquisitions and properties in the Bronx, Statin Island, northern New Jersey, [Chetside] Hill Philadelphia, Lincoln Park, Chicago. The 5 properties we sold had a three mile population averaging 44,000 people and 5 miles averaging 100,000. While this density is close to industry average for more shopping centers, it contrasts with our current core portfolio which has more than doubled it's population at over 100,000 people in a 3 mile radius and 250,000 people in a 5 mile radius. Thus our core portfolio's demographics are another strong indicator of our multi-year focus to shift our ownership into dense, high barrier entry properties that now make up the vast majority of our holdings.

Since we commenced our turnaround five years ago, we have either redeveloped or disposed of the vast majority of our noncore assets. Taking our exposure to secondary markets from 50% of our NOI down to less than 5%. Today, the New York region represents over 1/3 of our core NOI, almost 85% of our core NOI is from the northeast extending from the Mid-Atlantic through to the New England regions. The balance comes from the Midwest region which properties are primarily high quality assets in and around Chicago as well as affluent Bloomfield Hills.

From a current asset value perspective, we see high barrier to entry assets like those in our core portfolio trading at astonishingly low cap rates. Which, while at times, frustrating from an acquisition perspective is quite encouraging with respect to the value of our existing inventory. More importantly, above and beyond the current value of these properties, we think these type of assets over the longer term, will experience stronger tenant demand, stronger market rent growth and thus stronger NOI growth.

Turning now to our external growth, along with continually driving our core portfolio and maintaining a strong balance sheet, in the fourth quarter we made important progress on our external growth initiatives both, in terms of our existing investments and new investments, which also brings us closer to completing the investment phase of our Fund II and launching our Fund III. In the fourth quarter, we continue to focus our fund investment effort on the two key drivers of our external growth platform.

First, with respect to our New York Urban/In-fill program, we continue to see interesting opportunities in the urban retail and mixed use redevelopment arena, especially in the New York metro area. As of the fourth quarter, we had 7 New York redevelopment projects announced, 4 of which are under construction. They totaled 1.5 million square feet. Total acquisition and redevelopment costs are currently estimated to be $375 million. Included on page 38 of our quarterly supplement is a schedule of the estimated timing and cost of this pipeline which we will update quarterly as we progress.

Here's a brief update of the moving pieces since our last call. Liberty Avenue, in Ozone Park, Queens, construction is complete. CVS is open and is now started contributing to earnings this quarter. With the satellite leasing and the lease up of the self-storage phasing in over 2007 and 2008. Total cost will come in as anticipated at $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 is nearing completion. New York City will take occupancy and rent will begin in the third quarter of this year. Total cost of this project will be approximately 25 million. [Palamanor] Westchester, we've begun demolition of the existing warehouse and expect the construction of this Home Depot anchored center to begin shortly and to be completed in the second half of 2008 with a cost currently estimated to be $40 million.

Fordham Road in the Bronx in the fourth quarter, we successfully negotiated the early termination and recapture of the Sears lease which will slightly improve our timing and upon completion, Sears will return to the concourse level of this project. Sears will join Walgreen's Drugs who will occupy a portion of the main level. We're also close to executing a lease with one of the two national electronic retailers for the second level and have several tenants interested in the third level. We also recently entered into agreement to acquire a small, adjacent parcel which will slightly increase the scope of the project. We're commencing construction shortly and anticipate completing in the first half of 2009 with cost estimated to be approximately $115 million.

Terms of Kenarsy, Brookland, this property will also be redeveloped into a Home Depot anchored property. It is going through the zoning approval process right now. And our closing of the contract is conditioned on receiving the necessary approvals. This process is proceeding but may take a few months longer than originally anticipated pushing our delivery date into the first half of 2009 with an estimated cost of $60 million. 161st Street and the Bronx remains as planned with cost estimates coming in slightly less than previously anticipated but this can shift as the scope of work is further refined. Broadway at Sherman and northern Manhattan remains in pre-redevelopment awaiting the relocation of New York City HRA as a tenant to our 216th Street location with the timing and cost of that project consistent with our previous discussion.

So, from an earnings perspective, these 7 redevelopments, while having provided a little accretion in 2006, upon stabilization, they should start contributing up to $0.16 of FFO depending on the precise size and development returns that are achieved, and this is before accounting for any potential profit promote from the Fund structure. These earnings should phase in between 2007 and 2009 and thus they're helping us build a nice pipeline for future growth.

In terms of additional fields in our New York Urban/In-fill portfolio, along with various midsized potential opportunities that we're pursuing in the 5 boroughs, there are 2 larger transactions that we have been working on for the past several months and hope to provide additional information and color shortly. If either one of these two deals are finalized, they would substantially complete the investment commitment of our current Fund II, and if the second were also to be finalized, it would most likely go into our anticipated Fund III.

The second key component of our growth strategy is our Retailer Controlled Property, or RCP Venture, as we discussed in detail in the past ventures with the Klaff organization and it's long term partner Lubert-Adler. In 2004 we commenced RCP with our highly profitable investment in Mervyns. Last year we invested approximately $25 million in the consortium acquisitions of Albertson's as well as smaller investments in ShopKo and Marsh Supermarkets. Those investments are exceeding quite well and there are several important transactions which we should be in a position to discuss shortly.

In terms of our Fund status, the investment community is beginning to recognize the potential power of the fund management and promote or sometimes turn private equity financial structure which has been a key component of our business model. In terms of Fund I, all of our capital has been returned to our investors with IRRs projected to be in excess of 30% to the investors and significantly higher to Acadia as a general partner.

In terms of Fund II, as I mentioned earlier, assuming we finalize one of the two larger transactions we're working on, we'll have completed the investment phase of Fund II, and be in a position to launch Fund III by middle of this year as was previously anticipated.

With respect to Fund III, we expect it to be between 400 and $500 million of capital of which Acadia would be 20% or 80 to $100 million of the equity. Existing in new investor interest remains very strong and we expect the fees and structure to be similar to our previous funds. A $400 million fund would enable us to acquire or develop over $1 billion of assets on a leverage basis over the next several years which is a significant growth profile relative to our current size. This will help assure our strong but rational growth without having to be overly dependent on raising capital in the public markets nor demanding us to change our focus or our discipline.

So, to conclude, we continue to be quite pleased with our fourth quarter performance and our business model. All components of our business plan remain on track. We're continually upgrading and strengthening our core portfolio and rotating into extremely dense and supply constrained properties. The short term cost of asset recycling and retenanting being far 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 with plenty of dry powder to fund our external growth platform.

Third, finally, our acquisition initiatives through our highly profitable investment fund business are laying the foundation for strong future growth. With the anticipated completion of the investment phase of Fund II, and the launching of Fund III, we should be able to continue to drive growth while remaining disciplined as to our investment activity and focused on the value-added niches that have become a key part of our franchise and have driven our company growth over the past several years.

I would like to thank the members of Acadia for their hard work and accomplishments last year. We would be happy to take any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Christy McElroy from Banc of America. Please proceed.

Good afternoon. I'm here with Ross Nussbaum as well. Ken, with regards to your decision to sign a new lease with Sears at Fordham Road, when we [inaudible] the asset last summer, and on the last few calls, you seem pretty that adamant you would like to recapture the space and get another tenant in there. Can you comment on the rationale for re-signing?

Yes. And you're right. To reanchor that center with just Sears was something we were reluctant to do. This was an opportunity for us to get back the space earlier than this summer. And put Sears only in about 30,000 square feet of the concourse or otherwise known as the basement area. At what we think would be a very attractive rent. If Sears were ever to choose not to be there, it would be very easy to retenant and this expedites the process without, I think, negatively impacting the integrity of the deal. If you think about the main level is where we'll be capturing most of the income value, but then also on the second level, as I said, putting in one of the two national electronic retailers and you could guess which of the two would be, the center could have several midsized anchors that I think will drive the property value.

Okay, great. And then with regard to the retenanting activities, when are you targeting getting back to that kind of adjusted 95.4 level a year ago?

Well, Bloomfield alone, if it everything else stood still, gets us about halfway there. And we have other things that could get us all the way there, but we have been somewhat notorious for recapturing space and there's nothing right now that we have a deal cut for. But if we can recapture space, Christy, and make 20% incremental returns for our shareholders, even if it drives our occupancy down to 92, 93 and then back up, long-term, it is absolutely in the shareholder's best interest. That's a long way of saying, probably, by the end of this year, once Circuit City takes occupancy and a few other things hit, but stay tuned.

I'm guessing that's the reason for the wide range on the same-store NOI growth assumption, the 2% to 4%?

Yes.

Then given the CAM collection reserve in Q4, should we expect the average recovery rate in '07 to be more in line with the first three quarters of '06 or should we assume a similar reserve in Q4 '07?

It is more similar to the first three quarters. That's exactly right. First three quarters would be quite representative of '07. Absolutely, I would use that.

Okay, great. Thank you.

Your next question comes from the line of Jonathan Litt of Citigroup. Please proceed.

Hi, this is Ambika with John. My first question is, what types of investors are you seeing in Fund III? Are they similar to the ones that you had in Fund II?

Yes. In general, we've been fortunate that every investor from Fund I becomes an investor in Fund II and then we add a few more names similar endowments, foundations and pension funds. And so for our Fund III, it should be all of the same names and then a few others.

Okay. And on dispositions, should we be expecting additional dispositions in 2007?

We'll always sell one or two assets every year. I think it is an important discipline to constantly call the portfolio. Last year was more significant because we looked at the spread differential between secondary assets and what we consider to be the solid core. We felt risk adjusted, let's clear out. So, there's really not a lot left of that. But it wouldn't be unexpected to see one or two assets every year get traded as we see other opportunities to do that.

Okay. And then given the increased competition in the market for Urban/In-fill redevelopment projects, what kind of yields would you be expecting on these two new projects if you embarked upon them?

The competition just means it is harder to win the deal. We try to stay pretty disciplined and realistic about what kind of yields we're willing to do for the risk associated with it and the heavy lifting. I would say that originally, we were shooting for 9s to 11s. A combination of increased construction costs and competition, maybe push it to 8 to 10 but I really want to hold to that. At some point, you would say either it is time to find something else to do or time to really sharpen our pencils. But, at least in New York, the combination of skills that's required and the amount of work necessary to do in advance eliminates a lot of the more typical developers from playing in that. It has been less about simple competition than it has about putting all of the pieces together to get some of these mixed use deals in place.

Okay. And then just on your long-term goal, once these properties in the Urban redevelopment program are stabilized, what's Acadia's long-term plans for these assets?

Great question. In general, we maintain enough flexibility to say if it makes sense to sell assets on a one off basis, fine. If that's what's most profitable to our investors, we could do that. But, as I said before, we think we can create certainly north of $1 billion of these type of assets, Home Depot anchored, Best Buy, Circuit City and those type of assets in the five boroughs, we think when you couple them together as a group, could demand an even more significant valuation, and so we'll keep a wide variety of exit strategies available, and our investors understand that and we have the time and financial flexibility to do that. So, it will be interesting to see how it plays out as it grows and as investor's demand increases.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Paul Adornato of BMO Capital Markets. Please proceed.

Hi, good afternoon. Just wanted to double check on the guidance with respect to the fee income. I think you said there is an incremental $5.4 million included in '07 guidance, is that right?

That's right.

How much of that is coming from Fund III?

About $3 million.

And what are the assumptions behind that in terms of timing and volumes, et cetera?

That assumes a mid-year launch of a 4 to 500 million fund. So, at the 150 basis point asset management fee, that gets you give or take $3 million. The remaining component of the 5.4, about 2.5 million is additional fees related to our Urban/In-fill activities, a significant chunk of which are construction and development fees.

Okay. Thank you.

Okay.

Your next question comes from the line of Rich Moore of RBC Capital Markets. Please proceed.

Hi, good afternoon, guys. Do you remember when the asset sales closed in the fourth quarter?

Mid to late fourth quarter. Early November -- no -- [multiple speakers]

Into December also.

Right.

Okay, good, thanks. Then with the cash that's sitting on the balance sheet, how quickly are you going to redeploy that, do you think? I mean, you've got a lot of capacity here with your lines of credit and your cash. I mean, how quickly do you think that all goes out?

A lot of it is transactionally dependent but, a significant portion goes into fulfilling our pro rata investment into Fund II. We also have some 1031 acquisitions that are lined up and assuming they close, that will take a portion of the cash as well. If they don't close, then we would have a tax gain that we would then look at a special dividend or other situations. And then the balance, Rich, will be there for funding of Fund III and other opportunities that we may come across.

Okay, Ken, so the 1031 property, I think you said in the press release that was maybe $20 million of that. Is that about right?

Yes.

Okay. So you could actually have this cash on the -- or some of it anyway through June or July when you start Fund III?

Yes.

Okay. Okay, good. And then looking at your guidance, too, G&A for the quarter was a little bit lower than usual. Should we go back through -- I know you gave a total for the year, Jon, but should we go back sort of to the run rate of like 1, 2 or 3Q? Something like that, or are there some more spikes to G&A?

G&A does fluctuate to some degree between the quarters, but for 2007, our projection of 23 million, we think that's a fairly good estimate. I would just take that and spread it over the quarters.

Okay, good, perfect. And then the promote from Fund I, does that seem to sort of stay at this level, do you think, as you go forward? That doesn't really fluctuate, does it?

It does fluctuate quite a bit, actually. Keep in mind during the current year, we're still in the process of earning this Brandywine or recapturing this Brandywine promote.

Okay.

And that's about, probably about $3.5 million for the year. Then going forward, as there are additional capital events within Fund I, that will give rise to additional promote income, and those transactions by their very nature can be lumpy.

Okay. So, Jon, the Brandywine promote begins to wear off, is that --?

That's right. In 2008, end of 2007, beginning 2008 it's worn off.

The nice thing about the Fund structure, Rich, especially when you start at a relatively small base as we did in Fund I, and then have, fortunately, high returns and multiples on equity is that while some of the promotes burn off, others start to kick in. And if we can continue to drive our business correctly, that should be the overall evolution.

Okay. Good. And then, thank you, Ken. And then on the S FAS income, that was lower this year than last year. Is that -- actually, it was negative, as I recall. What happens with that? On the 141, 142?

I'm sorry, Rich, which income was that --?

The 141, 142 income.

The FAS 141 income?

Yes.

Again -- again, that can vary depending on acquisition activity, and probably the prudent thing to do is to take 2006 as a whole, and I would average that and use that as a basis for '07.

Okay.

Does that answer the question?

That does, yes. It seemed like it was kind of low in '06, Jon, but you're thinking that's kind of okay. That's a good number.

We'll take a look at it.

Okay. And then you guys don't talk very often about the multi-family stuff. What is -- can you tell us a little bit about that and what's going on in there?

It certainly could rise to the level of assets that might get disposed of. We are in the process of rebuilding the Clubhouse down in Winston-Salem that had gotten destroyed last year, and once we do that, we'll be able to lease up that asset and that asset will then be stabilized. We will have a host of choices, albeit be with a low tax basis. And then in Columbia, Missouri, the properties around it, the retail properties have developed and we're going to decide this year, either, to look into redeveloping a portion of those properties into retail or else those also would be dispositioned candidates.

Ken, is some of that student housing?

Yes.

Okay.

Universities there and -- it has been -- they've all been good, profitable assets but they're not core to what we do. And so, you're absolutely right, at some point they go.

Okay. Then last thing, would you look at all outside your core markets for some of these urban -- well, may not be urban, I guess, but some of the redevelopment opportunities?

Yes. Probably though they would be urban. Just in general -- what we have found is on a risk adjusted basis, the returns we can get in high barrier to entry markets are more exciting, from our view, so we're more likely to stick with those kind of markets and there's probably anywhere between a half a dozen to a dozen different markets that would qualify for that, and we're spending a fair amount of time looking at those markets and figuring out what is our best way to do it. That being said, every time we look around, we keep finding better deal flow in New York City and risk adjusted, we find is more worthwhile to do it here, but I would be surprised that at some point we don't end up going into more of those markets.

Okay. Very good. Thank you, guys.

Good talking to you.

Your next question comes from the line of Jay [Loop] of [Alesco]. Please proceed.

Good afternoon, gentlemen. Ken, a lot of talk on the conference calls this quarter about cap rate compression, particularly in your industry. Can you talk a little bit about the cap rate compression that you're seeing and how it relates to the credit underwriting that you and your competitors are doing on centers you're looking to acquire? And if you're taking any steps to upgrade the credit quality of tenants, if you're seeing additional demand by higher quality tenants that you can roll over and upgrade the quality of the income in the centers?Then I have a follow-up after that.

Okay. Absolutely we have seen cap rate compression. We thought that for the high barrier to entry assets, Jay, that when the yields got to about the cost of debt, call it 5.5%, we thought it was over and it certainly isn't. We see some of the properties we have, we see them trading sub 5 cap, 4.5 cap. But it is a lot less about tenant credit than you might think. First of all, from our philosophy, Jay, I much prefer having great locations and dealing with the rotating tenantcies than having strong credit in the middle of nowhere. That's just always been our philosophy and having lived through the bankruptcies in the late '90s, early 2000, I think, played out very well for us through visa vie our [Caldoors] and our [inaudible] et cetera.

That being said, the one area where credit makes a difference is the debt markets do not seem to differentiate between high quality locations and low quality. And to the extent that the debt markets are 80% of the average capital structure, not here in the public, but on the private side, and there's limited differentiation, if it is a great location, same credit quality, you might borrow it 5 basis points less but no more. Given that, you're seeing that drive a lot of the credit decisions, and so some people who are looking for either credit or leverage deals might go to the middle of nowhere just because credit is there and because they can borrow against it. That's not our strategy. We would rather buy low credit in great locations and then recapture the space.

Okay. And then on the subject of just -- you touched on it a little bit on it in your comments. Institutional investor demand for your property type, how deep do you assess this demand to be? How long do you think it stays? And in terms of cap rate compression, where do you see cap rates bottoming out in your property class going forward?

I've been wrong for two years so don't go by me, but the investor interest that we talked about is less, saying, oh, I want to own shopping centers, than it is, I want to invest with value-added managers. I'm hearing and this is purely anecdotal, that there is some level of investor fatigue for just pure core at markets, and maybe we saw some indications of that on some of the recent transactions but again, it is purely anecdotal. So, for purely stable, there seems to be a long enough queue for transactions to get done but perhaps the line is not as long as it was a couple of years ago, especially at these 5 to 6 cap rates.

In your own experience in the industry, what moves these cap rates in the other direction? What macro factors in the space will do that?

Prior times, it had been some shock to the system, like long-term capital, combined with a few bankruptcies that scared people, and yet, Jay, this time around, we've seen shocks larger than what was experienced in '98 and the capital markets keep humming along. So, it is really hard to predict when they'll be sufficient, multiple shocks to take what, I guess, they're referring to as a Goldilocks economy and turn it upside down. And our view is, we've got to be able to play successfully and I think we're doing a good job of that. At this point in the cycle, where cap rates continue to compress and may stay low for a long time, we're still making money now, although, if you look at our balance sheet and fund structures, say wow, if cap rates backed up 100 or 200 bips, Acadia will be in great shape. Well, we're not going to wish for it because there's a lot of disruption in that process and wishing for it isn't going to make it happen. I really don't know, but when it hits, we'll all see it, and those of us who, hopefully, took care of our balance sheets and our capital structure and picked the right properties will be net beneficiaries.

Very good. Thanks, Ken.

Good talking with you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Michael Mueller of JPMC. Please proceed.

Hi. First question for Jon. Jon, can you clarify your comments going back to prior question on the promote burning off, because isn't the promote on Fund I essentially a stepped up ownership interest in the fund going forward?

There's two components really, two ways -- two things to look at. First of all, as recalled back -- going back to the January transaction where we recapitalized Brandywine, we earned, if you will, a $7 million promote from that transaction, but that promote is to be paid out of future Fund I cash flows, so we've recognized about $3.5 million during 2006 with the balance of the 7 million being recognized or will be recognized this year. And then the stepped up ownership percentage that you mentioned, that relates to all of the other Fund I assets going forward.

Okay, got it. Got it. Second question, any new promotes in the '07 guidance or any other one-time type items that we should know of?

As I mentioned, when I was discussing guidance, the 2 to 4 million of earnings from external initiatives, there may be some promote income that contributes to that 2 to $4 million. It is obviously difficult to predict exactly how much in the timing, but quite possible that there will be some promote activity during the year.

Okay. And last question here, looking at Fund II, 300 million of committed capital, almost 100 million has been funded. How much is remaining to be funded, once you put aside the spending that's going to be earmarked for the Fund II redevelopment projects? I guess basically trying to back into -- you mentioned one or two -- if one of the project hits. One of the transactions you're looking at. That could fill you up on Fund II. So, how much could that be in terms of that equity component if one of those hits?

Got it. About $75 million. But some of that also is -- with respect to these redevelopments, it would be foolish to bet your last dollar, and we may end up putting a little more equity than the 2/3 level, just so that we have the ability, if the opportunity to buy adjacent parcels occurs, and even in our RCP venture, Michael, both in Mervyns and Albertson's, there's been add-on transactions, so we want to keep some dry powder there, too.

Okay, thanks.

That would finish us up.

Great, thanks.

We have no additional questions in the queue. I would like to turn the call back over to Ken for closing remarks.

I would like to thank everybody for listening, and we look forward to speaking to you soon.