Acadia Realty Trust (AKR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Acadia Realty Trust earnings conference call. My name is Candice, and I will be your coordinator for today. At this time, all participants under a listen-only mode. (OPERATOR INSTRUCTIONS)

Before we begin, the company would like to inform its listeners that in addition to historical information, this conference call may contain 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 heading 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 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 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 participants to ask questions. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the call over to Mr. Ken Bernstein, Acadia's President and Chief Executive Officer. Sir, you may proceed.

Thank you, Candice. Good afternoon. Joining me are Mike Nelsen and Jon Grisham. Today we're going to review our second quarter results and update our key initiatives. Given the significant variances in a few components of our second quarter earnings and same-store NOI results, I'm going to ask Jon to walk through these components in greater detail than usual. Notwithstanding these variances, the four key drivers of our business remain on track and should enable us to continue to deliver solid, long-term growth.

On the past several calls, we've discussed our concerns with the potential risks connected to historically narrow risk premiums and have been adjusting our portfolio accordingly by selling off non-core or higher risk assets, locking in our borrowing costs as much as possible. We've also focused on remaining disciplined with respect to our investment activities, our balance sheet ratios and maintaining plenty of dry powder. So today after we review our earnings and portfolio performance, I will walk through the progress we made in the second quarter with respect to these key components. More specifically: our core portfolio, where we continue to reduce risk and upgrade our assets and tendencies; our balance sheet and capital structure where we continue to hedge our exposure to rising borrowing costs and have replenished our dry powder with the completion of our Fund III; our external growth platform, where with the closing of our downtown Brooklyn redevelopment as well as two other second quarter investments, we continue to fill our pipeline with significant future growth opportunities. Fourth, our management team, where in the second quarter we made an important management addition. So now, I will turn the call over to Jon, who will discuss our second quarter results. Jon?

Good afternoon. As Ken mentioned, I would like to review our second quarter earnings and then turn to our full-year 2007 guidance. FFO for the second quarter was $0.26. In evaluating this result, it's important to consider the following two factors. Number one, fee income. Given that a portion of our income comes from transactional-based fee income, timing of these transactions can impact our results quarter-to-quarter. Because of this, we do not give quarterly guidance. When looking at the second quarter fee income of about $3.5 million, it's less than taking our annual fee guidance and dividing it by 4. This is solely the result of timing issues and should not impact our total fee revenues. The second factor is same-store NOI. On last quarter's call, I discussed our review of CAM reconciliation billings throughout our portfolio and the related adjustments during the first quarter. During the second quarter, we substantially completed our multi year review of CAM billings, and resolved the majority of all outstanding CAM billing issues with our tenants. As a result, the second quarter was adversely impacted by charges related to the settlement and related accrual adjustments, totaling about $0.5 million dollars. This represents a 3.8% reduction in same-store NOI for the second quarter. And year-to-date, adjustments totaled about $800,000, which represents about a 3.1% decline in NOI.

To put this whole issue into a proper context, the adjustments we are discussing related to these CAM billings go back as far as 2002 billings, but for the most part relate to the years 2004 through 2006. The total CAM billings for these years aggregated about $20 million. That's for the three years, 2004 through 2006. The $800,000 adjustment in 2007 represents less than 4% of these total billings. And while $500,000 and $800,000 are significant to our 2007 earnings, when compared with the relevant base of total CAM billed of $20 million, this amount is clearly less significant. While the CAM adjustments are a major driver for the quarter, other smaller events, such as anchor tenant rotation, which Ken will discuss later on the call, also impacted our NOI. In summary, I think it's important to understand that these items, albeit significant in terms of second quarter earnings, are not indicative of any weakness in our portfolio or in our tenant base.

Turning now to our guidance. With respect to 2007 annual guidance, as we discussed in our press release, we are now guiding to the lower end of our FFO range of $1.30 to $1.35. The key drivers for this are the CAM adjustments I just spoke about, totaling about $0.02 to $0.03, as well as one-time costs associated with the senior management changes that Ken just mentioned, which we anticipate will total about $0.01 to $0.015 throughout the balance of 2007. Also keep in mind that our forecast includes other potential transactions which are subject to variation based on timing, including those from Fund I, which give rise to promote income for Acadia. Now, I will turn the call over to Mike.

Good afternoon. In turning to our balance sheet, we have continued our success in maintaining a strong balance sheet, as evidenced by our fixed charge coverage of 2.9 times, debt to market cap of 34%, and FFO and AFFO payout ratios of 64 and 71% respectively. Over the past few years, we have -- we have been vigilant in reducing our exposure to floating rate debt, as evidenced by the fact that our portfolio is currently 95% fixed rate. Given the current volatility in the debt markets, we believe this focus has proven to be the right strategy, and we continue to minimize our exposure to a rising treasury rate as well as widening credit spreads.

As such, during the quarter, we have completed the following transactions. In our core portfolio, we closed on a $26 million, 10-year fixed rate interest-only mortgage that we forward rate locked a year ago at a 10-year treasury rate of 4.8%, plus 109 basis point spread for an all-in rate of 5.9%. This refinanced an existing $13 million mortgage that had a 6.5% rate. In connection with our ongoing developments in the New York Urban Infill platform, we entered into a 12-year combined construction and permanent arrangement for up to $36 million on our Pelham Manor project. The agreement provides for an interest rate equal to the 10-year treasury, plus 125 basis points for the permanent financing. During the quarter, we entered into a 24-month forward treasury rate lock at 4.7%, yielding an all-in rate of 5.95%. At our Atlantic Avenue development, we entered into a similar financing agreement for $16 million. The terms are the same as Pelham, except that the spread on the permanent portion of the loan is 115 basis points and the treasury has been locked at 4.6%, resulting in an all-in rate of 5.75%. Finally, at our 216th Street project, in February of 2007 we entered into a commitment to permanently finance the project with a $25 million, 10-year interest only mortgage at a rate equal to the 10-year treasury which we locked at 4.6%, plus 102 basis points. We anticipate closing this loan during the third quarter.

In addition to our financing strategy, we also focused on maximizing our capital resources. Currently, our credit line availability, together with cash on hand excluding fund level amounts provides us with an excess of $175 million of available dry powder to fund our growth strategies. Now, I would like to turn the call back to Ken.

Thanks, Mike. First, I'm going to review our core portfolio performance. With respect to occupancy, the major driver of the 80 basis point decline from 94% to 93.2% was from reanchoring junior anchors at two of our properties. The first is our buying out of a dark Kids "R" Us space at Merrillville Plaza, which we simultaneously released to the Men's Wearhouse, tripling our base rent from $4 to over $12 a foot, and at a 280% positive lease spread net of cost. The second is the recapturing of a junior anchor at our Walnut Hill property in Rhode Island where we expect to sign shortly at a positive lease spread as well. These two spaces represent 90 basis points of occupancy, thus addressing all of 80 basis point decline in occupancy. While revenue for these two leases won't be reflected until the tenants take occupancy in the fourth quarter of this year and the first quarter of next year respectively, both are long-term improvements to these properties. As I said before, we're not going to pass up on pursuing transactions such as our Merrillville Plaza retenanting simply because of its negative term impact.

As Jon discussed, same-store NOI was impacted by common area maintenance accrual issues, and that while significant in their impact to this quarter's earnings, do not seem to reflect any notable long-term trend for the portfolio, other than the obvious law of small numbers. Adjusting for these accruals and the two reanchorings, as well as some other smaller quarterly timing issues, the portfolio operated in line with our expectations. That being said, while these retenantings and CAM accruals explain substantially all of the occupancy decline and the majority of the same store NOI variance, a portfolio of this quality should provide stronger results than we saw this quarter. We have made and will continue to make whatever adjustments are needed to create the solid NOI growth that's representative of this portfolio. And while same-store NOI growth is just one driver of our overall growth, it's an important component of our business plan that should provide steady growth and stability in the future.

For the quarter, new lease rent spreads were up 64%, but this was on a relatively small 17,000 square feet. More importantly, renewals were at 5% on a cash basis, 13% on a GAAP basis. In terms of tenant default and collection trends -- looking within our portfolio, we don't see any material issues to cause us concern.

So turning now to external growth -- in the second quarter, we made important progress on our external growth initiative, both in terms of our existing investments, new investments and launching of our latest fund. With respect to our New York Urban Infill program in the second quarter, we made continued progress with our seven existing redevelopments and also added a significant eighth project to our pipeline, as well as a smaller ninth project. As of the second of the second quarter, of the nine properties, four are now under construction, with two substantially complete. They aggregate over 2 million square feet. Total acquisition and redevelopment costs are currently estimated to be approximately $745 million. Included in our quarterly supplement is a schedule of the estimated timing, costs, square footage and anchor tenants of this pipeline, which we'll update quarterly as we progress. The projects are proceeding according to plan, with no significant changes other than the fine-tuning of cost and scope as construction is bid out and anchor leasing is completed.

Here's a brief update of the second quarter activity. With respect to Fordham Road in the Bronx and Pelham Manor, construction is underway on both of those projects and is going quite well. We expect the cost and timing of completion to remain consistent with our forecast for both of these projects, with Pelham opening in the second half of 2008 and Fordham slated to open in the first half of 2009. Liberty Avenue, Ozone Park Queens, and 216th Street in Manhattan were both substantially completed as of recently. The retail at Liberty avenue should be fully leased shortly and the self-storage component is open and is beginning its lease up according to plan. On 216th Street, the New York City Human Resources Administration, which is our tenant in that building, should take possession shortly, which will give us the opportunity to begin the redevelopment of their existing site, which is our Broadway and Sherman project. And we'll describe that in greater detail on our next call.

In Canarsie, Brooklyn, which was the one deal in our pipeline that was conditioned and contingent on the rezoning of that project, in the second quarter we received all necessary approvals to enable us to close on the redevelopment of the Brooklyn Terminal Market site. We anticipate closing in the fourth quarter of this year. The redevelopment will create just over 320,000 square feet of mixed use anchored by Home Depot and a 94,000 square foot self-storage facility run by our storage partner, Storage Post. Total costs are estimated to be approximately $70 million, and we expect the project to open in the first half of 2009.

Turning now to downtown Brooklyn. In the second quarter, we received the required preapproval and we closed on our previously announced redevelopment of the Albee Square in downtown Brooklyn. The project is a three acre parcel, fronting on both Flatbush Avenue and Fulton Street -- Fulton Street being the number one retail corridor in Brooklyn. The project, when completed, is anticipated to consist of over 1.5 million square feet, of which 475,000 is expected to be retail. And with a retail footprint of up to 120,000 square feet, the project provides a unique opportunity for both larger national anchor tenants and also smaller and local Fulton Street tenants. The total cost of the commercial portion will fluctuate significantly based on the scope, but it's currently slated to be approximately $325 million.

Turning now to our ninth project. In the second quarter, and in connection with our partner Storage Post, we acquired a smaller redevelopment site at the corners of Atlantic and Euclid Avenues in Brooklyn. We intend to build a new self-storage facility of approximately 100,000 square feet and all-in cost of approximately $23 million. We expect to commence construction in the second half of 2008 and complete the project in the second half of 2009. This project will be the first of our redevelopment that is only self-storage but it will join our other storage post redevelopment at Pelham Manor, Canarsie Brooklyn, and Ozone Park Queens. Wile there are certain components of mixed use developments where we are less inclined to take significant exposure in urban supplied straight markets, the self-storage business has a host of attractive and complimentary attributes. We anticipate Storage Post will continue to join us as operators and partners in future redevelopment projects in New York City, where self-storage will be a potential addition an complimentary component to our retail development.

To to recap on these nine projects: they should create a portfolio in excess of 2 million square feet, with costs of approximately $745 million and a valuation potentially in excess of $1 billion at today's valuation. And so this is becoming a sizable portfolio with very interesting optionality.

Along with these nine New York redevelopments, we are working on several additional products, that while at more preliminary stages, hopefully will enable us to continue to grow our pipeline. On the last call, we discussed that -- we are assuming a redevelopment of the George Washington Bridge Terminal. That's on both sides of Broadway between 178th and 179th Street. It's owned by the Port Authority. The project, which is still at a more preliminary stage than we would otherwise normally disclose, was mentioned because we were displaying and marketing the leasing of it at the May ICSC Shopping Center Convention and wanted to avoid any issues of selective disclosure. Brief update. We continue to productively negotiate with the Port Authority, but we have certain critical construction issues to resolve before we can proceed. So we'll keep you posted as that process continues.

The second key component of our growth strategy is our retailer control 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 RPC (sic) venture investment with our participation in the highly profitable acquisition of Mervyns. Last year we invested approximately $25 million in the consortium acquisition of Albertsons as well as smaller investments in ShopKo and Marsh Supermarkets. With respect to Albertsons, in the first quarter we received distributions that brought us to just under 2 times our equity on our fund investment. With respect to Mervyns, we have also had 2 times our equity on that investment to date. Both of those deals should have additional distributions, but it's still premature to discuss them. In the second quarter, we also made a new smaller equity investment through our RCP venture, where our RCP partners joined Coventry Investments in the acquisition of Rex Stores for 1 million square foot, 86 property retail portfolio. The purchase price was $77.3 million, with our share of the equity through Fund II being $2.7 million.

Turning to our fund business, with respect to fund I, all the capital has been returned, with IRRs projected to be in excess of 30% to the investors and significantly higher to Acadia as a general partner. As we stated on the last call, upon the closing of our downtown Brooklyn acquisition, Albee Square, and with the inclusion of the two smaller second quarter transactions, we've now completed the investment phase of Fund II and thus in the Second Quarter we must launch Fund III. In terms of Fund III, given our strong track record and that we limited our fund size to $500 million, investor interest for our value-added retail focus was extremely strong. Thus we are able to continue to achieve attractive terms that are both fair to our investors and recognize Acadia's long-term value creation capabilities. Acadia will co-invest 20% or $100 million of the $500 million fund. And as we disclosed, the structure is similar to our previous fund, but we have adjusted the hurdle rate or preferred return to 6% and have included redevelopment fees to better reflect the cost of executing our Urban Infill program.

A $500 million fund will enable us to acquire or develop approximately $1.5 billion of assets on a leveraged basis over the next several years. This is a significant growth profile relative to our current size. Given some of the current volatility in both the debt and the public equity markets, it feels like a good time to have both an existing pipeline of value-added projects as well as dry powder if greater dislocations in the market occur. At the same time, it also feels good not having to be either overly dependent on raising capital in the public markets, nor having to unnecessarily change our focus, discipline or capital structure in order to continue to execute our business model.

Our fourth and final component of our business is our management team or human capital. We have made it a top priority to insure that we have the right talent to handle our projects at hand, as well as the opportunities for the future. During the second quarter we announced that Numa Jerome was appointed Senior Vice President and Director of Leasing and is the newest member of our Executive Management Committee. Numa brings to Acadia over 14 years of experience in the retail real estate industry. As Director of Leasing, he will be responsible for the design and implementation of leasing strategies that will enable us to sustain and improve both our current portfolio and future acquisitions and redevelopment. While as Jon discussed, there are some one-time costs associated with this change, it is an important and exciting next step for Acadia.

So to conclude, notwithstanding this quarter's earnings noise, all components of our business plan are on track. We are continually upgrading and strengthening our core portfolio and its tenancies. Our balance sheet is solid as we continue to keep our ratios strong and our floating rate debt to a minimum, with plenty of dry powder to fund our external growth platform. Third, our acquisition initiatives through our highly profitable investment fund business are laying the foundation for strong growth future growth. With the 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 opportunistic and value-added areas that have become a key part of our business model. With that, I would like to thank the members of Acadia for their hard work this quarter and be happy to take any questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question will come from the line of Paul Adornato of BMO Capital Markets. Please proceed, sir.

Thank you. I was wondering if you could give us a little bit of background on the CAM issue once again. Why did -- why was there this situation to begin with?

Paul, what created the situation is obviously at year end we reconciled the CAM charges and billed them to the tenants. And there's always some degree of haggling if you will, between the tenants as far as those CAM billings. We -- as we record or as we approve those CAM billings, we do establish a reserve for what we think are the -- is the uncollectible portion of those billings. Early -- I will say early mid-2006, we started to go through and examine all of outstanding CAM issues -- actually going back, as I mentioned, three and four years in some cases -- and set out to resolve all of those issues with the tenants. And as a result, following the resolution of substantially all of those issues, we had to take additional charges in the current year for amounts that the reserves didn't cover. So that's the bottom line of that situation.

Okay. And switching to the self-storage industry, you obviously must like self-storage in New York City. I was wondering if you could give us your view of the supply and demand dynamics. Why is the industry attractive to you?

And this may be somewhat unique to New York City. Certainly it's unique to urban markets where land costs are so expensive in general, that as very hard for operators to gain access on any meaningful basis to enough sites for development. The main focus has been building storage facilities on top of our retail redevelopment, where there's effectively excess FAR, or floor area -- and where the upper levels don't lend them to higher uses such as residential or office. And so in our other projects, that's been the primary driver of it, and it's been very successful because while it's not [close for free], Paul -- it's obviously just supplemental and incremental to the retail redevelopment, whether it's Pelham Manor or Canarsie Brooklyn. Periodically now, as we're getting to know the storage industry and Storage Post and we're looking in New York City, we are seeing opportunities that make sense to us. And so when we come across them, as we get more comfortable with the business, we are going to continue to pursue it.

Okay. And is P/A Associates involved in this latest storage transaction, or now you are dealing with Storage Post separately?

And they are related. So while we are dealing directly with Storage Post, P/A is involved in all of these transactions other than Atlantic. Just because it was just storage, it didn't make sense.

And what are -- what are the funding sources for Storage Post for their broader business?

Their sale capitalized on a one-off basis and that's why it presents a good opportunity for us and our funds to provide the equity capital.

Okay. And on Rex Stores maybe you could give us a little bit more flavor to the attraction there and what might transpire?

1 million square foot portfolio, where the opportunity for both short-term sale leaseback and then mainly retenanting other users. These are about 12,000 square foot stores in general -- it's going to provide a pretty interesting opportunity to take well-located space that was excess to this retailer and Coventry Investments is the one who originated this. And they did a very good underwriting and we think it will fall in line with our other RCP investments.

Any sense as to timing at this point?

Still too soon.

Okay. Thank you.

Our next question will come from the line of Christy McElroy of Banc of America Securities. Please proceed.

Hey, good afternoon, guys.

Good afternoon.

Just following up on Paul's question, given some of the clarifications that you made with tenants as part of the CAM billing settlements on what you are able to bill for. Should we expect any impact in your recovery ratio going forward, and were there any items specifically that tenants were contesting?

In general, Christie, you shouldn't see any significant variances in the recovery percentage. But the phenomenon that's catching us here is because of the multi year review and resolution, all of those adjustments are bunching up and hitting in 2007. So it's obviously material from an earnings standpoint. But from an overall recovery standpoint on a go forward basis, we don't think it's that significant. In terms of specific items, it really is -- it spans the gamut. From certain repair expenses that certain tenants believe they shouldn't pay. And in some cases, it's not even -- we think it's our -- our position is supported in the lease in terms of what we are charging and the tenants take a contrary position and it becomes a negotiation process. So, again, it's a variety of items, but importantly we think, again, looking forward, that this does not significantly impact our NOI.

Okay. Great. And then, Ken, could you just expand on your comments earlier about the changes in the debt market and the impact on the private market and it being a good time to be out there with dry powder? Can you comment on overall deal flow, and maybe what you're seeing in your outlook for cap rates?

Let's start with the debt markets, which -- as volatile as the equity markets are feeling right now, if you talk to your friends on the CMBS and debt side, they are feeling a lot of pain too. Spreads are widening considerably, and it's all directly and indirectly associated with risk premium changes throughout the global capital markets. Commercial real estate is clearly not immune. So a project that six months ago 80% of total acquisition costs would be financed at, in our case probably 100 basis points over the 10-year treasury, and they -- the lenders would be lining up around the block. We are now seeing those risk spreads generally widen, at least 20 to 30 basis points and that's true for any borrower, with fewer lenders also showing up. Now, depending on what day of the week you look at the 10-year treasury, that could be pushing borrowing costs that a year ago were 5.5%, maybe a little less, maybe a little more, and pushing it to certainly north of 6 and some days of the week with the right spreads, people start fearing closer to 7. Oh, and by the way, these interest-only loans are also going away. So private borrowers are having to face amortization. When you put all of that together, what you are seeing is that the high leveraged borrower/buyer is having a harder time acquiring assets with positive leverage, because if their borrowing costs are now 6.5 to 7, you can imagine what kind of assets you need to buy to get to that range. And so what we are seeing only anecdotally is at the higher risk spectrum of the retail centers, that we are hearing that there are fewer bidders. Now that doesn't impact what we buy. It doesn't impact what we are developing, because that's not where our main focus is. It does, I suppose, impact non-core sales, but we have done most of our dispositions. So it doesn't, in our view impact our NAVs materially, although it will affect all of us.

And does that pertain to any specific type of assets or markets?

Well, again, there were -- there were buyers who were able to borrow well in excess of 80% of their purchase. Properties that were trading in the 7 to 8 cap range, and we're able to get positive leverage on it. You have seen some portfolios trade in that range -- other companies recently, and some of our non-core as well. So those buyers are thinning out. But then as you get to the higher quality assets, remember, we went through to negative leverage a long time ago. In other words, when people step up to buy assets at 4.5 caps or 5 caps, they were never counting on positive leverage up front as part of their investment pieces. That segment so far, we haven't seen any material changes, which on the one hand is comforting to our NAV, but on the other hand -- look, we would like to see some more activity out there. We are net buyers and we are sitting on a lot of cash. What we are expecting to see, to put it all together is a much more volatile and difficult debt market. Well, that works for us because we are not a high leveraged buyer. We can use leverage but we're not high leverage buyers. But what we also expect to see is the non-core or subprime retail, is that market get choppier first. And then at some point, we would expect to see the higher quality assets trade, especially those where the income may not be fully in place and there has to be some changes in opportunities. So far, this hasn't translated into frantic calls yet. We have heard some people saying, Ken, you really should reconsider looking at this asset that would previously trade at fabulous prices because we're not sure how it plays out, but we haven't seen any huge change to make me think that we'll announce the closure of a major portfolio next week. Sellers take a while to sort through these changes. So it could be months. That's okay. Because we have plenty of redevelopments in our pipeline while we wait for this to sort out.

That's helpful. Thank you. Lastly, really quick: for the anchor replacements that you discussed earlier, reflected in the releasing spreads in the quarter. Is that why they seemed abnormally high on average.

No. No. Law of small numbers. That was only -- the releasing spread was --

17,000 square feet.

17,000 square feet. So that was just another good lease that we did. These will show up, I guess fourth quarter, Jon, and first quarter next year.

That's right.

Okay. Great. Thank you.

Our next question will come from the line of Jonathan Litt with Citigroup. Please proceed.

Hi, this is Ambika with John. We heard anecdotal evidence that retailers are becoming more cautious on store openings. Can you comment on their reaction to opening stores in more urban areas and how that's affecting your redevelopment pipeline?

Yep. First of all, across the board you are reading and seeing several sectors saying they are slightly more cautious -- home furnishings, some restaurants. What we are seeing in New York City, though, is the main pieces that brought us here. In the United States, there's 20 square feet of retail per person and in New York, the number is like 6. And for locations like our downtown Brooklyn location, that's a once in a decade type opportunity. So when we speak to the major anchors, they are not thinking about what is happening over the next year or two. These are multi year and in many instances multi decade decisions that they are making, that once they made a commitment to come into the five boroughs of New York City, that that's not something that they can sit and second guess quarter to quarter, based on their same store results. So we are not seeing the impact. We are not seeing any concerns on that side. We will watch it closely, because we don't want to get ahead of ourselves, but so far, the bad news that we have heard about -- and it's not been that significant, because even outside of New York City, occupancies have held and new development seems to be going all right. Fundamentals remain pretty solid. The softening certainly has not hit New York City in any way that we've seen within our portfolio.

What is the investment timing for Fund III of when you plan to put out that capital?

We can afford to be as patient as we want to. And returns are more important than exactly timing. But in general, these funds have approximately a three-year investment horizon goal that we find the assets. And if you think about Fund II, that's how it's played out. It's been almost exactly three years since we launched Fund II, and we have completed it in the fact that we have identified all the assets that we are investing and have closed on.

Okay. And given the anchor retenanting, could we expect occupancy to remain flat until the end of the year and then start to pick up when the new tenants come in?

Yes.

Each of these anchors represents about 50 basis points in our portfolio. So fourth quarter, first quarter of 2008, the 80% decline that you just saw this quarter will be replaced.

Okay. And then in the residential properties. I know it's the small component of the whole portfolio, but there appears to be a significant negative same store NOI in those properties, is there anything specifically going on?

Yes, there's been some important retenanting. In one case, we had a fire and we had to entirely rebuild the main offices and club house and I think then we'll see a ramp up there. But these are both assets, as I said on previous calls that not only are small. Not only have very little NAV in them relative to our overall portfolio, but over time you would expect to see those go away.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of Michael Mueller of JPMorgan. Please proceed.

Just a couple of quick things. Can you give us any more clarity in terms of the timing and the magnitude of any promotes to hit in second half of the year?

Terms of the --

Mike, you broke up. Can you just --

Promotes.

Yes, the timing of promotes that may hit the back half of the year?

As you recall in our guidance, at the beginning of the year, we talked about $2 to $4 million of income, not only from promotes but from other sources. Including, other acquisitions or perhaps mezzanine investments. And clearly promotes are a significant piece of that. In terms of the timing, obviously in the second quarter, there was no promote income, as a matter of fact. Although we expect third and fourth quarter that there will most likely be some transactions in Fund I that will generate promote income, as well as we may see income from some of these other sources that we talked about at the beginning of the year.

Okay. So at this point, should we assume more heavily weighted in the fourth quarter?

Third quarter.

Third quarter. It should be consistent with our original goals. That being said, Mike, our main focus on these transactional promotes is to make sure we are maximizing the returns. And it's less about picking which quarter than seeing that we are getting the best execution. So far we have been pretty fortunate about it and it doesn't fit real well through quarter to quarter, but it does look like the balance should come in third and fourth.

Going back to storage one more time, can you just refresh my memory in terms of the structure of the yields? You're owning 100% of it, and the Storage Post partner is operating it for a fee, is that how it's working?

There's a fee, plus a profit participation above various different hurdles. Not dissimilar to how our structure with PA associates. We think it's very important that our partners have interests aligned with our investors and shareholders and they are highly incentivized to perform. And frankly if they outperform, they do quite well.

And how did the economics of this deal or a deal like this, where it's just pure storage compared to some of the other urban deals that you are doing? Why was this the right property type to put at this location versus something else?

You know, some of it depends on how many levels. Storage works well both in terms of -- in connection with retail properties because a storage facility on top of, for instance, our Home Depot and Circuit City in Pelham Manor -- they are going to use three to five parking spaces, period, for 100,000 square feet. And they have virtually no significant impact both on parking or on the amount of ground level retail GLA that they are using because it's all above that. In Atlantic Brooklyn, it's all there is, so there will be ground level. But when we reviewed the different potential uses, it didn't feel as though it would work well to include retail there. And based on our experience -- and more importantly Storage Post's experience in terms of the rent they can drive -- they think they can get returns that are higher than what we can get in terms of our retail developments and work very nicely when you think about all of this in the context of 2 million square feet of primarily retail but mixed use. We have New York City as a tenant on 216th Street for a non-cancelable 15-year lease year. It's a nice blend of New York urban income that at $1 billion portfolio we think will blend nicely and give us a lot of different exit opportunities.

Okay. Thanks.

Thank you.

Our next question will come from the line of Rich Moore of RBC Capital Markets. Please proceed.

Hi, guys.

Hi.

When you look at recurring CapEx, it seems lower in the quarter. Is that just that because leasing volume was lower this quarter?

Yes, that's exactly right. And, again, you will see it vary quarter to quarter. But if you look at 2006 annual, you know that's probably a pretty good baseline.

Okay. Okay. Good. And then, as I sit here and look at the tape for a bit, it looks like everyone is selling their REIT stocks. And I'm curious. You guys, when you filled up Fund III, you seemed to have very good interest from institutional investors. How would you categorize that today? Was it easy to fill the fund? I know you have existing relationships, but if you had to go fill the fund for tomorrow morning, are things changing out there? Is there selling on that side as well or is it just as we sit here and watch the stocks get beat up?

There was a pretty large disconnect between our conversations in the private institutional markets and some of the concerns in the public REIT world, and while we don't talk daily with those investors, I think that is still continuing. Here was one interesting thing that we've seen over the past year in terms of my conversations with institutional investors, there was some level of deal fatigue with core, so very stabilized assets. They felt as though they were achieving their allocation. Less so in retail than in some of the other property types, but in retail, core funds were not getting filled as quickly. Flip side, though, for value-add retail, there seems to be a lack of high quality managers. And these fund investors, they expect strong returns but they also want accountability and great reputation and all of those other kind of factors. There seems to be a lack. So we could have filled that bucket twice if we wanted to. Problem with that is that's too many dollars to have to put to work over a three year period without compromising our focus, and so we didn't want to do that. That may change a little, Rich, in that as the volatility in the REIT market, either creates buying opportunities for some of these institutions, or translates through with the change in pricing. We may hear differences from our investors, but so far they want their real estate allocation. They want value added retail redevelopment and that's where our focus is, so it's worked real well.

So as you go to put debt on the commitments in the fund, Ken, is there any concern there? You know, with the dislocations that are going on with the issues that debt markets are having?

No, it works to our advantage. In general, the private institutional investors really don't want to see more than two-thirds debt and they will tolerate 80% loan to value debt on one given asset because we say, look, in this asset it makes the most sense. But in general, we are low leverage buyers, not as low as in REIT world of let's say one-third debt to market cap, but compared to the higher leverage buyer. So it's more working towards our sweet spot. We can close all cash. We haven't used acquisition debt financing in three years -- meaning usually we closed all cash and then we go ahead and put debt on it and we have lines within our funds. So that tends to work to our advantage. It's just now a matter of picking the right spot for it.

Okay. That's very encouraging. Sounds good. Thanks, guys.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I will turn it back to the speakers for any closing remarks. Gentlemen?

I would like to thank everybody for listening. We look forward to speaking to all of you again soon.

Thank you for your participation, ladies and gentlemen. You may now disconnect. Have a great day.