Acadia Realty Trust (AKR) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Acadia Realty Trust third quarter 2007 earnings conference call. My name is Michelle and I will be with your coordinator for today. (OPERATORS INSTRUCTIONS)

The company would like to inform its listeners that in addition to historical information, this conference call contains forward-looking statements under the Federal Securities Law. These statements are based on current expectations, estimates and projections about the industry and markets in which Acadia operates and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties as discussed from time to time in the company's filing with the SEC.

Included those discussed under the heading risk factors and management discussions and analysis of financial conditions and results of operations. These factors can actually 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 operating report supplement posted on its website for reconciliation of these non-GAAP financial measures with the most direct comparable financial measures calculated and presented in accordance with GAAP. Following management discussion, there will be an opportunity for participants to ask questions.

At this time, I'd 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 results and update our key initiatives. Our third quarter was very strong and we'll delve into the details shortly, but given the significant turmoil in the credit markets and its impact on commercial real estate, I'm going to spend a few minutes reviewing the key components of our business and how these components are potentially impacted by market changes. Over the past year, we've discussed our concern with respect to historicically now our risk premiums. Prior to the correction, this was evidenced among other ways by the narrow spreads on debt financing for all types and of quality of assets. Now, what we saw in the third quarter was a significant correction in loan spreads with many lenders pushed to the sidelines and a much more modest correction, at least so far, in terms of cap rates. What does this mean to our business? Well, it has both positive and negative implications.

In terms of our core portfolio, rising cap rates will impact all portfolios but our expectation has been that weaker assets will experience greater devaluation. So far, that seems to be the case and in anticipation of some type of correction over the past few years we've been aggressively adjusting our portfolio by selling off non-core or higher risk assets and rotating into higher quality properties in more supply constrained markets. So if cap rates go up, the NAV of our core portfolio might be impacted but not as much as if we had not been aggressive asset recyclers. Second, in terms of our balance sheet, while borrowing costs, in general, have gone up, as Mike will discuss, we've been careful not to be overly reliant on short-term debt and we've been maintaining plenty of dry powder. Third, and finally, with respect to our investment activity, we have maintained plenty of growth capital and that's best evidenced through the recent launching of our latest fund and the pending acqusitions in that fund. In the second quarter, we announced the launching of AKR Fund III, which is a $500 million fund. That will enable to us acquire or develop approximately $1.5 billion of assets on a leveraged basis over the next several years and that's a significant growth profile relative to our current size.

In the third quarter, we entered into agreements for the anticipated acqusition of two additional properties, Sheepshead Bay, Brooklyn and Main Street in West Port, Connecticut. Given the current volatility in the marketplace, 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. So today, after we review our earnings and our portfolio performance, we will walk through the progress we made in the third quarter with respect to these key components, our core portfolio, our balance sheet, our external growth platform and we'll discuss how we're positioning ourselves going forward. So, with that, I'll turn the call over to Jon who will discuss our third quarter results.

Good afternoon. I'd like to review our third quarter earnings and then tie this result into our full 2007 annual guidance. Specifically, I'll walk you through the key variables from the second quarter to the third and then from the third quarter to our expectations for the fourth. In comparing the third quarter to the second, we experienced positive trends in all five major areas of revenue in our business model. As a reminder, these areas are, one, core portfolio income; two, transactional or redevelopment fee income which includes leasing, construction, development and legal fees; three, asset-based fee income which includes asset management and property management fee income; four, promote income, and then lastly our pro rata share of fund income. FFO for the third quarter was $0.39, as reported, which represents a 30% increase over the second quarter of $0.26.

The key drivers for the increase in the third quarter are as follows: One, related to our core portfolio the CAM-related adjustments that we discussed last quarter were substantially resolved during the second quarter and, as a result, third quarter compares favorably by about half a million dollars or $0.02 of income. Two, transactional and redevelopment fee income was $3.4 million for the third quarter. This compares to 1.9 million for the second quarter. The additional $0.04 of FFO between the two quarters is clearly the result of the timing of transactions and redevelopment activity. Three, asset-based fee income increased from 1.7 million in the second quarter to 2.4 million in the third quarter, or $0.02, which is a result of a full quarter of Fund III asset and management fees in the current quarter. Turning now to promote income from our opportunity funds. In addition to the Brandywine promote income of about a million dollars during the third quarter, we also recognized an additional 1.2 million, or $0.04 of promote income, from Fund I in the third quarter. And then, lastly, our pro rata share of fund income includes income from our RCP investments, and during the quarter we recognized pro rata income of about half a million dollars, or $0.02 net of taxes, from our investment in Albertsons. As we've not returned all of the Fund II investors capital and accumulated press, we have not recognized any promote income on the [Opertson's] investment today.

Turning now to 2007 annual guidance. The key variables which we anticipate impacting the fourth quarter are as follows: One, related to the core portfolio, we expect approximately $0.02 of increased expenses in the fourth quarter from a combination of seasonal property operating expenses and G&A. Two, and this is again based on the timing of transactions and redevelopment activity, we anticipate that fee income from these sources will decline about 600,000, or $0.02, during the fourth quarter as compared to the third. Third, in the third quarter we received asset-based fees of about 2.4 million which is recurring fourth quarter and beyond. Number four, through the third quarter we've now fullly recognized all of the $7.2 million of Brandywine promote income.

As a result, the $1 million of Brandywine promote recognized in the third quarter, which I discussed previously, will not recur going forward. Combined with the additional 1.2 million of promote, as discussed, total promote income for the third quarter was 2.2 million. For the fourth quarter we expect promote income to be about 1.4 million, which will result from the sale of two Fund I properties located in Ohio, the Amherst Marketplace and Sheffield Crossing. This net $800,000 decrease to promote expense represents about $0.03. Then, finally, we are not projecting any additional RCP income during the fourth quarter which represents a $0.02 decline. So, based on these expectations for the fourth quarter, we're expecting it will be about $0.09 less than third quarter, or $0.30. So, as such, we're maintaining our guidance at about $1.30 for the full year. Now, I'll turn the call over to Mike.

Good afternoon. Before turning to the balance sheet, I would like to reiterate some of the points Jon just made. Over the last several years, we've built a solid business model which provides income from various sources. Our solid core portfolio has provided and continues to provide stable growth. In addition, both our asset-based fees and pro rata share of fund income have also contributed to our stable growth. While transaction-based fee income has varied on a quarterly basis, it has provided significant year-over-year growth. Lastly, while the timing of promote income is less certain, it has provided approximately $4 million of income in 2006 and is projected to provide $5 million in 2007.

Now, turning to our balance sheet. We have continued our success in maintaining a strong balance sheet as evidenced by our fixed charge coverage of 3.4 times, our debt-to-market cap of 34% and year-to-date FFO and AFFO payout ratios of 59% and 66% respectively. During the quarter, we continue to maintain a low exposure to floating rate interest risk as evidenced by the fact that our portfolio is still 95% fixed rate. While the volatility in the debt markets continues, we have found that for quality collateral and good sponsorship have reasonable levels of leverage, rationally priced debt is still available.

This is evidenced by the following transactions: First, at our 216th Street project, during the quarter we closed on a $25 million 10 year interest-only mortgage at a rate of 6%. Two, we're currently finalizing a $9.8 million three-year fixed rate loan at an all-in rate of 6.1% at a Fund I property. Lastly, during the fourth quarter, we anticipate closing on the two 12-year combined construction and permanent loans that we announced last quarter at two of our ongoing developments in the New York Irving infield platform. The current term of these loans provide for interest at a rate of less than 6%. In addition to our financing strategy, we also focus on maximizing our capital resources. Currently, our credit line availability together with cash on hand, excluding the fund level amounts, provides us with an excess of $200 million of available dry powder to fund our growth strategies. Now, I'd like to turn the call back to Ken.

Thank you, Mike. Thank you, Jon. First, I'm going to review our core portfolio performance. Our third quarter occupancy growth increased by 60 basis points over the previous quarter. This was driven by the key retenanting initiatives that we've discussed on previous calls, most notably Circuit City at our Bloomfield Town Square property, Christmas Tree Shops in Wilmington, Delaware. The Circuit City lease alone represented 50 basis points of occupancy gain. Given that the rent for Circuit City did not commence until the end of the third quarter, the 2.2% (inaudible) growth that we posted this quarter appears consistent with our goals since the occupancy uptick has not yet been reflected in our same-store NOI.

For the third quarter or new lease rent spreads were up 71% primarily due to Circuit City renewals. We're at 9% on a cash basis and 15% on a GAAP basis. All of these are obviously healthy ratios. In terms of tenant default and collection trends within our portfolio, while we have not seen any material issues, with respect to collections to cause us immediate concern, for the first time in a while we have seen three bankruptcies; Movie Gallery, which is the operator of Hollywood Video, Tweeters Electronics and Bombay Company. We have one of each store in our portfolio and each of these stores are in solid locations with below market leases, but it does show that those retailers in tough business segments are no longer immune to bankruptcy.

Turning now to external growth. In the second quarter, we announced the successful launching of our third discretionary fund, AKR Fund III at $500 million, and in the third quarter we made important progress both on our external growth initiatives, in terms of existing investments as well as new investments. With respect to our New York Urban/Infill program with our partners P/A Associates, in the third quarter we made continued progress with our nine existing redevelopments and have signed a contract for what we expect to be our 10th redevelopment project in New York. And while this portfolio is still in relatively early stages of development, we are making steady progress, both in terms of keeping the projects on track and expanding our footprint. As of the end of the third quarter of the nine properties, two are now complete, two are currently under construction. When completed, this portfolio will be in excess of 2 million square feet with total acqusition and redevelopment costs of the nine projects currently estimated to be approximately $745 million and with NOI currently estimated to be between $60 and $65 million.

Included on page 33 of our quarterly supplement is a schedule of estimated timing, costs, square footage, anchor tenants in our pipeline, and we'll continue to update quarterly this as we progress. The projects are proceeding according to plan and while the scope of one or two of the projects may change as they progress, the returns and timing remain consistent with our previous discussions. On our second quarter call, we announced that we closed on the 1.5 million square foot redevelopment of Albee Square in downtown Brooklyn. We have recently renamed this project City Point. More importantly and as anticipated, our partners at McFarland, who are the owners of the residential component, have brought in Rose Associates as their development partner for the residential component of the project. Rose Associates is a first-class New York development company. It operates throughout the East Coast as a developer and manager of more than 30 million square feet of major real estate projects, and we're pleased to be working in partnership with such an esteemed organization on this important project.

Along with these nine redevelopments, we're working on additional projects that while at more preliminary stages hopefully are going tone able us to continue to grow our pipeline. In the third quarter, we signed a contract for what we expect to be our 10th Urban/Infill redevelopment project. This will be one of the first in Fund III and this project is currently anticipated to be developed into a 240,000 square foot retail center in Sheepshead Bay, Brooklyn. Sheepshead Bay is a [hybrid] entry, established community with significant retailer demand, especially for new store formats with larger footprints where parking is available and parking will be available at this project. We'll provide much more detail on this after we close. We anticipate closing this this year in the fourth quarter.

On the last call, we discussed that we were awarded by the Port Authority the right to pursue a redevelopment of the property that's on both sides of Broadway in Northern Manhattan, between 178th and 179th street. We continue to productively negotiate with the Port Authority and are hopeful to complete this process either in the fourth quarter of this year or the first quarter of next year. However, we do continue to have certain important development issues that need to be resolved before we can definitively proceed. We'll keep you posted as this process progresses. In the third quarter, we also signed a contract for what, along with Sheepshead Bay, will be another early Fund III acqusition. This is at 125 Main Street in West Port, Connecticut.

We've partnered with a local West Port development team called David Adam Realty, Inc. to purchase a 30,000 square foot building that we anticipate to perform a significant renovation of. This project's consistent with our other Main Street acqusitions and developments, including what we did in Greenwich Avenue in Greenwich, Connecticut; Chestnut Hill, Philadelphia; Lincoln Park, Chicago and although these are hard to come by, we continue to like the main street attributes and will continue to build a portfolio and expertise in these types of projects. Another key component of our growth strategy is our retailer controlled property or RCP venture. As we previously discussed in detail, the venture is with the Klaff Organization, its long-term partner Lubert-Adler.

While we completed several transactions, the two most significant were Mervyns and Albertsons and in the third quarter we received another distribution, this in the amount of $4 million to our fund, bringing our total distributions this year to $52 million representing two times our equity investment of approximately $25 million at the fund level. Mervyns has also been a two times equity investment to date and both of these deals should have additional distributions down the line, but it's still premature to discuss them or the timing. In terms of additional fund dispositions, we continue to focus on opportunistically harvesting fund assets as they achieve stabilization. As Jon mentioned, we have two properties in Ohio that are currently being held for sale. We expect those transactions to close in the fourth quarter based on firm contracts that are in place.

So to conclude, all components of our business plan are on track. Given the existing shifts in the credit markets and the potential ramifications from that, we're continually upgrading and strengthening our core portfolio and its tendencies. Our balance sheet is solid as we continue to keep our ratio strong and our floating rate debt to a minimum of plenty of dry powder to fund our external growth platform and, third, our acqusition initiatives funded through our discretionary investment funds position us to take advantage of any unique opportunities that may arise while continuing to expand on our existing platforms. With funds relaunched, 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. So, with that, I'd like to thank the members of Acadia for their hard work this last quarter, and we'd be happy to take any questions.

(OPERATORS INSTRUCTIONS) And your first question comes from the line of Christine McElroy from Banc of America Securities. Please proceed.

Hey, guys, good afternoon. Sorry if I missed this in your comments earlier. Have you seen any incremental investment opportunities as a result of what's happening in the credit markets or are you just kind of waiting on the sidelines positioning yourselves at this point for potential opportunities?

We have not seen any significant changes in cap rates to make us shift our focus towards buying existing cash flow. That being said, here's the changes we've seen. We've seen fewer bidders for the value-added properties that we have been acquiring. There's been price adjustments in several of the transactions that we have announced. We have seen increased interest in some of our mezzanine loan activity and we'll see where that translates through, but there clearly is a gap that the higher leverage entrepreneurs were used to getting traditional debt and now they need that accomplished through mezzanine. So we are seeing some increase on that side, but our expectation is given how much debt spreads have widened that that will translate through into increased volatility over the next year or so.

Now that Kimco has started a fund to invest in Urban/Infill redevelopment projects in New York City are you starting to see or do you expect to see more competition for these types of potential projects?

Well, I'm really not that up to speed on what Kimco's plans are, but what I'd say are a few things. One, is competition has been a constant in terms of Urban/Infill in New York and whether it's some of the existing public companies, the [vornados] of the world in the far cities, or the very well capitalized private companies like the related and some of the smaller entrepreneurs out there, while we would love to think that there is a lack of competition, that just hasn't been the case and it certainly would be nice, but that's not the context that we've been operating in.

What it is interesting and where we see a positive from this is, one, I think it indicates the increasing investor interest in urban retail and urban mixed use. When we raised our $500 million fund, the inquiries were so strong we probably could have doubled it and chose not to for what I think are some very important reasons, but the fact that investors are waking up and recognizing this as a highly valuable asset class we view as a positive. And then, finally, we certainly love the validation of a fabulous company like Kimco stepping up and recognizing this as an important space to play in, yet I have to admit we're just competitive enough that anyone who wants to come and try to do what we're doing, we certainly welcome them. As I think all of you have seen, this is a lot of hard work, but the rewards can be there.

Okay. And then, lastly, given the 4 million of promote income in '06 and the 5 million in '07, I know a portion of that is the recurring Brandywine stuff, but how should we be thinking of the one-time promotes from a forecasting standpoint?

Well, I mean, Christy, just to step back and look at what we spoke about last year in terms of total promote income from Fund I, we talked about a range of 20 to 24 million of total promote income. So, looking at what we realize to date, we now have the 7.2 million of Brandywine and we have give or take another 3 million between the third quarter and what we expect fourth quarter '07. So we've got about $10 million in hand as it's related to the Fund I promote income. As to the exact timing of the remaining 10 to 14 million, very hard to predict in terms of exactly when it hits, but we think we've created value and that promote income is -- will be harvested obviously at some point over the next couple years. Long-term, we think we've exhibited the fact that we're able to generate promote income at the fund level and although Fund II is obviously not in the promote at this point, our goal is certainly to get it there and we think there will be hopefully promote income down the road as it relates to future funds. So that portion of our model is lumpy, but we think it's a fantastic business and a profitable business and we look forward to creating a lot more of it.

All right. Thank you.

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

Hi. This is [Ambika] with Jon. Just continuing on Christy's question about the promotes, if you think about the Brandywine promote that was about a million a quarter. Now, if we look forward in '08, could we expect the lack of the brandy wine to promotes to cause a deceleration of FFO growth or should we expect additional promotes to come in to kind of replace the Brandywine promote?

I'll take a stab at this, [Ambika]. Without giving unnecessary or too much guidance and I realize that to build models it's important. I think Jon walked through the several different buckets that we have, some that are growing, for instance, the asset management fees that we're going to now -- we've been collecting on Fund III and then some that will be lumpier, the lumpiest is the promote income. So as a Brandywine promote goes away, what we have seen over the past several years is that other forms of revenues kick in, and what we're going to try to do now is provide better clarity as to the different buckets so that you can see what's coming in as those that are going out, but as Jon pointed out, we haven't recognized and we won't recognize until we're in the promote phase for Fund II the promote portion of the process associated with the Albertsons transaction, which has obviously been a very profitable transaction. So it makes it real hard to quantify on a quarter-over-quarter basis the precise amount of promote income.

The other buckets I think will be a lot clearer and we've been showing the growth in them and we recognize for those people who need to measure quarter to quarter, this is difficult. Year-over-year we've been able to post very strong growth and our goal is to continue to do this, but we recognize that there may be some years that are more about planting seeds for future growth, that next year may be more about getting our New York Urban/Infill properties up, running and online whether it's late '08 or '09 that those start kicking in. You then have to do the math on that cash flow even before promotes, in terms of what that will contribute.

Okay. That makes sense. And then for the two new projects that you made investments on during the quarter, can you give an update on costs and yields for those projects?

The yields we expect to be consistent with our overall redevelopment goals which are between 8 and 10%, depending on the risks that we perceive and the exit values that we see. We're not announcing size or other things. We'll do that once we close in the fourth quarter.

Okay. And then the Tweeter, Bombay Company, Movie Gallery space, all together, is that anything meaningful? Could we see a drop in the occupancy? Could you give some more color on that?

Tweeters, both Tweeters and Bombay we are investing in through joint ventures, so we're 22% of those amounts. So from an overall financial standpoint it's not a big number and then the Hollywood Video, that's also in a joint venture that we're 60% of, obviously not a huge tenant. So the long answer to your question, [Ambika], is it's not going to significantly impact our portfolio metrics.

But I do think it is interesting to see because it's been a while since we've seen tenant bankruptcies and these three tenants have all been in tough space from a business segment perspective, the electronics industry, home furnishings and I do think we may start seeing more of these. Our goal has always been let's own the best properties whether it's Wilmington, Delaware where we have Bombay and Tweeters, where there's a long list of tenants lining up to move back. In let's make sure we own those because part of what we expect with this increased volatility in the marketplace is a separation from high quality real estate to less high quality and what we have proven over the past several years, whether it was our retenanting in Bloomfield Hills, is the positive spreads that we're able to get as we recapture these spaces and we want to continue to be able to do that.

So are these rents right now below market?

Yes. We think so.

Okay. And then just moving to the G&A OpEx, you gave some guidance for the fourth quarter. Are all those items that are causing the quarterly, I guess, dip from quarter to quarter, is that all seasonal items or is that partially part of the run rate that we should assume going forward?

It's primarily seasonal, a small component -- I know I said a couple of pennies, maybe half a penny is in the G&A line item and that's more recurring, but the remainder is truly seasonal.

Okay. And the same for management income. It's down 600,000 quarter-over-quarter is that more of a clean number going forward? That's -- you're talking about transactional-based income, right? Oh, okay. I thought that was management income that included the transactional.

No. Asset-based income which is asset management and property management, we expect to be recurring going forward. The $2.4 million that we experienced in the third quarter.

Okay. Right. Sorry about that. Okay. Thank you.

Okay.

Your next question comes from the line of Michael Mueller of JP Morgan.

Hi. I think you answered most questions, but can you just talk about outer borough cap rates for retail, basically are you seeing things now basically where they were at the beginning of the year?

Outer burrow cap rates have not budged an inch, Mike, and I'm very upset about it because we'd love to buy more. In general, the type of owners of these assets have -- are multigenerational in many instances. They do not use a lot of leverage and so they're the least likely sellers to be highly motivated to shift pricing. So what we saw when the debt markets fluctuated this summer was most of them just went on vacation, and until we reclarify for them where over time where cap rates have shifted I think that those will be the last to shift in terms of cap rates on existing stabilized income. The flip side is if someone owns land or what we consider to be near land assets that (inaudible) used as a redevelopment, they have recognized that it is more expensive for people to step in and redevelop. They have started adjusting their prices and while that's not a cap rate base, it's a total return based focus, we are seeing some nice movement on that side which we're going to continue to aggressively pursue.

Okay. Great. That's. It thanks.

Sure.

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

Hi. Good afternoon. Ken, you talked about some issues that need to be worked out with the Port Authority at the GW Bridge project. I was wondering if you could elaborate on that.

If any of you who have traveled over the George Washington Bridge and then under Broadway and 178th to 179th Street, there's obviously a bunch of structural issues that we all want to make sure are handled correctly and so the discussions, negotiations, evaluations that have been going on with the Port Authority have been very productive, have moved in the right direction. Any time you're dealing with an agency you need to be patient and we are not generally considered patient people, but we've learned to become patient as it relates to these type of processes. So we want to make sure we get it right, Paul. We don't want to make the front pages of any newspapers for getting it wrong and we won't do a deal unless we are comfortable that all the components are thought through and that's really all I meant and while I would have loved to say it's done right now, my guess is we've got a few more months of working through this, making sure all the engineers are on board, and hopefully we can then announce something that will be exciting for next year because it is a fabulous location and the tenant interest remains very strong.

Okay. Thanks. And looking at City Point, do you know if the developer is planning condos or rentals for their residential portion?

This is rental. It's 80/20 which means it has an affordable housing component, and I think it will be very well received in that community which is going through a major resurgence both in terms of condominium development and now rental housing.

And at this point what's your delta in the residential portion, that is what's your exposure one way or the other as to the success of the residential?

The simple short answer is we do not own any of the residential component. McFarland owns that and we did that on purpose so that they will be the owners and have all of the cash flow delta, if you will, but it would be overly simplistic for me to pretend that we don't need to make sure that all the components work. That's why we're so excited about Rose joining us because they are a top notch New York development team and we've worked very well together with them so that we can ensure that it is a successful project and while we won't get any percentage of the cash flow over any hurdle and while the exact numbers probably don't matter to us, we need to make sure that the residential component of this mixed use project succeeds and so that's probably where our exposure begins and ends.

Okay. And in terms of the retail tenant dates, any changes to report or any tenants in the lineup?

Lots of tenants in the lineup, strong interest and this is a neat project because it's on Fulton Street. There's a strong retail experience already. Fulton Street is the number one retail corridor in Brooklyn. It has about 100,000 shoppers a day on it. So tenants who understand Fulton Street from that perspective want to be there, but what's probably more interesting are those tenants that aren't currently represented in that type of an urban market who really want to be here and because we're providing a new product with the potential for larger footprint, the interest from those tenants also seem strong. So we're very pleased with the interest at this level.

My hope is over the next six months or so we convert that into a real list of tenants that we can talk to you about. The last point about that is while some tenants have expressed a clear goal of slowing down their expansion, in terms of nationwide opening of stores, we've not seen any fall off in interest from those tenants as it relates to them being able to secure positions in our urban portfolio and at least at this point we'll need to see how year-end plays out for them, but at this point that's very gratifying.

And, finally, Sheepshead Bay is very close to Coney Island which is now being redeveloped by Thor which of course you bought Albee Square from, so was wondering if you made the trip down to Coney recently?

Haven't been there in a while. Nathan's was always fun to visit. Sheepshead Bay, while it is relatively close, you need to understand every few blocks in Brooklyn the dynamics change and this is a, I think at this point, Paul, a much more established residential community where the demand for retailers is immediate and is not going to be as long term as what Thor's goals, in terms of a major transformation of Coney Island. This is a simpler, more straight forward process.

Okay. Thank you.

Thanks, Paul.

And your next call comes from the line of Rich Moore of RBC Capital Markets. Please proceed.

Hi, good afternoon, guys.

Hi.

Going back to [Ambika's] question real quick, Tweeter, Bombay and Hollywood, all three of those stores are closing. Is that correct?

No. All three have -- and I apologize for not being clear about that, Rich. All three have filed bankruptcy. In fact, I don't believe we have indication of store closings for any of them at this point. I would expect if you think about the video business, Rich, what we see in Blockbuster in most instances is either them downsizing in locations or leaving, and we would encourage either of those two because we think that that business is going through a transformation and is not likely that 10 years from now end cap locations are going to be video stores. So we would expect sooner or later that evolution to occur, but we don't really get to control that process. It's in the tenant's hands given that the leases are below market and given that I believe in most of these locations these are considered upper core tile locations. We probably don't get them back, but if we do, we're certainly prepared.

Okay. So have you already started looking, Ken, for replacement tenants?

Absolutely. You know, it's not -- what we try to do in leasing in general is have a long list of tenants and whether it's for the Hollywood Video space or for the RadioShack space or for a dry cleaner, you can kind of mix and match and move them around so that as tenants roll, we can get new tenants in and keep the positive rent spreads that we enjoy so much in place.

Sure. That sounds great. Thanks. And then on percentage (inaudible) for this third quarter you were substantially below the previously third quarter and you've been running typically 100,000 to 200,000 a quarter but last third quarter was 700,000 but this quarter was only about 100,000 again. Is there anything in particular in there? I'm assuming our percentage rents for the third quarter have kind of disappeared?

Third quarter has always historically been the lightest of the fewer quarters during the year and fourth quarter obviously the heaviest, given the local holiday sales. So we have -- I'm trying to think, we sold a couple of properties but it should be comparable to fourth quarter last year, in general.

Okay. All right. That's fair. And then these might sound a little bit crazy but I just got to ask so I can try to understand here. When you look at some of your -- when you look at the joint venture models, the joint venture income statements that you guys have, when we look at first of all Brandywine, does that change dramatically now because the promote has disappeared?

The promote is really not relates to Brandywine specifically or the current Brandywine joint venture. It's really a transaction between Acadia and Fund I. So it's really -- if you look, and we lay this out in a supplement, you'll see where we capture the investor's share of Fund I income until that Brandywine promote is repaid and, in fact, as I mentioned before, we've now -- they've effectively repaid it all in terms of our share of income and so going forward, our FFO will not include any more Brandywine promote.

Right. I got you. So the brandy wine stays --

Stays stable.

Right. And same kind of thing when you look at Mervyns and you see the equity in earnings of unconsolidated properties, it's -- for this year it's been, the Mervyns 2 venture has been substantially higher than last year and I realize the first quarter was the big one, but going forward I guess I'm trying to figure out is there any operational income in there or is that all transactional sort of sale income?

It's -- at this point it's transactional income. The only income in the future that will impact that line meaningfully will be transactional income.

Okay. So really that goes back essentially to zero, is that right?

That's right.

Okay. And I think you guys covered them. All right. Very good. Thank you, guys.

Thanks.

This does conclude the question-and-answer session. We'll now turn it back to management for closing remarks.

I'd like to thank everybody for joining us today and we look forward to speaking with you again soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.