Acadia Realty Trust (AKR) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session at which time you may key *1 to register your question.

If at any time during today's conference you require Operator assistance, please key * followed by a 0 and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

And now I would like to turn the conference over to your initial host for today's event, Ms. Debra Miley, Director of Marketing and Communications. Please proceed ma'am.

Good afternoon and welcome to Acadia's First Quarter 2008 Earnings Conference Call. Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties which are disclosed in our most recent Form 10-K and other periodic filings with the SEC. Forward-looking statements speak only as of the date of this call and we undertake no duty to update them.

During this call, management may refer to certain non-GAAP financial measures including funds from operations and net operating income. Please see Acadia's earnings press release posted on its Web site for a reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures.

Please note that the FFO numbers for calendar year 2007 have been adjusted as set forth in the reconciliation.

Participating in today's call will be Kenneth Bernstein, President and Chief Executive Officer, Michael Nelson, Chief Financial Officer, and Jon Grisham, Chief Accounting Officer.

At this time I'd like to turn the call over to Mr. Bernstein.

Thank you, Deb. Good afternoon. Thank you for joining us. Before we discuss our quarterly results I'd like to comment briefly on where we see the current market environment and how we have been positioning Acadia accordingly.

The most significant factors that are currently impacting our industry are first, the credit crisis in the capital markets both in its direct impact on real estate debt financing as well as the indirect impact of the credit crisis on real estate both in terms of transactional volume and in values. Second component is the slowing down of the economy and its impact on retail tenants and properties.

First with respect to the capital markets, the credit crisis has clearly made it much more difficult to finance all kinds of real estate especially accessing the type of debt that was until recently provided through the securitization market and Wall Street. That included large loans over say, $100 million in size as well as high leverage transactions but notwithstanding this debt crisis, there is debt available outside of the securitization markets from balance sheet lenders and Mike will discuss this further on our call but in short, sponsorship matters. The leverage is at lower levels. Spreads are somewhat wider. Supply is somewhat fragile and in all instances, lenders can now be very selective as to both who they lend to and the quality of assets that they lend on. So what we're seeing so far and we expect to see continuing going forward is first, a deleveraging of the economy including real estate capital structures as borrowers are beginning to recognize and lenders are demanding, that more equity is needed for all projects especially those that are harder to finance. And second, we expect to see a further differentiation between higher quality assets that are currently generally financeable and so far generally holding onto their 2007 values as opposed to secondary or more commodity type properties that seem to be having more difficulty obtaining financing and pricing seems to have declined more significantly.

While transactional volume is down significantly, cap rates for quality retail projects in higher barrier entry markets have moved perhaps 25 basis points, maybe 50 basis points, off of their highs. Based on two sale transactions that we're currently involved with, we still see quality stabilized properties in the metro New York suburban area trading at low six-cap range and in the mid-Atlantic region in the 6.5 cap range. In short, patient sellers are still able to achieve strong pricing for high quality financeable assets.

In terms of the economy, while we have not yet seen the impact of the weakening economy either with respect to our core portfolio or our redevelopments, if the economy continues to weaken, our experience is that it must have some impact on our tenants which then leads to impact on the real estate. However, the impact is generally not evenly spread out and depends on the quality as well as the location of the property. While we are seeing some tenants putting on hold new stores, they seem to be more often in projects that were dependent on new housing growth or were in secondary markets and in general, tenants still want the Infill locations like those that we either currently own or are in the process of developing. So thus, as now is the case in the debt markets, from a tenancy perspective we will also expect even more differentiation than in the past few years between high quality, high barrier to entry locations versus secondary properties.

So in light of the capital markets issues and the slowing down in the economy, here's what we've been doing and will continue to do with respect to these events. First of all, this debt crisis was not created overnight. The signs began over a year ago with the clear breakdown in the securitization markets by last summer and in response, first of all with respect to our core portfolio, we sold off higher risk assets where we thought that an economic slowdown or further capital market correction might more significantly impact those assets and we rotated into higher quality assets. In the first quarter of this year for example, we continued this process by entering into an agreement to sell one of our few remaining non-core assets as well as then rotating into another Manhattan retail property. This rotation ultimately positions us with a core portfolio that is better situated to withstand the debt and economic headwinds than if we had simply aggregated and held those assets.

Second, with respect to our balance sheet and liquidity, we used sale proceeds to pay down our corporate lines. We also refinanced those assets that were ripe for refinancing and thus we're now in a position where we have no debt in our core portfolio maturing before 2011. We have enough capital to internally fund our external growth initiatives for the next several years.

And then third and finally with respect to our external growth platform, last year we launched our third fund which gives us an additional $500 million of discretionary equity or $1.5 billion of purchasing power and while we are remaining disciplined and patient in general in terms of how we put that money to work, in the first quarter we completed our third Fund Three transaction and to date we've put approximately 20% of the equity to work through three transactions which is consistent with the timing of our capital investment plan for Fund Three.

As for the opportunities we see going forward, I'll discuss them later on the call but to conclude, even though the capital markets and economy are presenting challenges, they're also creating opportunities and with this perspective in mind, today we'll review our first quarter results and the status of our core portfolio, our balance sheet and liquidity, and on the external growth side, both our existing projects as well as our future investment opportunities.

With that, I'd like to turn the call over to Jon who will discuss our first quarter earnings. Jon?

Good afternoon. First I'd like to turn to our earnings and guidance. As we reported, FFO for the first quarter was $0.38 which included $2.2 million or $0.07 of income from our RCP investment as a result of our share of the Mervyn's gain on the sale of 43 locations.

Our earnings guidance for the full year includes RCP and promote income of three to $4 million. We anticipate another $1.5 million during the second quarter of 2008 which will bring us to a total of $3.7 million of RCP and promote income by mid year and at this point we don't anticipate any additional RCP or promote income in the second half of 2008.

During the quarter, we earned transactional fee income of $3.6 million which is consistent with our annual guidance of $14.5 million to $15.5 million. We expect that transactional fee income may dip in the second quarter and then be more heavily weighted to the second half of 2008 as a result of the anticipated timing of construction and leasing activities.

Turning to same store NOI, first quarter '08 was up 7.2% over the year ago quarter. As we previously discussed, CAM reimbursement income for 2007 was impacted by the resolution of outstanding tenant CAM billing issues and after stripping out this effect, our same store NOI growth for 2008 was 2.1% which is in line with our annual forecast of 1% to 3%.

So to summarize, our first quarter results reflect the fact that all of our business components are contributing to our bottom line as expected. As we've discussed before, our earnings model is dynamic and will vary quarter to quarter. While first quarter '08 exceeded consensus street expectations due to the timing of the RCP transaction, second quarter '08 will likely trend the opposite direction and for that matter, any quarter can be up or down. These quarterly timing considerations aside, we are reaffirming our full year guidance of $1.25 to $1.35.

Now I'll turn the call over to Mike.

Thanks, Jon. Good afternoon. As I discussed on our year end call, given the uncertainty in the current state of the financial markets, liquidity and access to capital are of paramount importance. We continue to be focused on maintaining high levels of liquidity as evidenced by the fact that our cash on hand and availability under existing facilities aggregates $176 million at March 31st. This is sufficient to meet all of our capital needs to fund our growth initiatives over the next two to three years. While maintaining high levels of cash balances is earnings dilutive which could adversely impact the balance of 2008 by as much as $0.01 to $0.015 per quarter over Q1, we believe this to be a prudent position and will allow us to be able to take advantage of accretive investment opportunities as they arise.

While the volatility in the debt markets continues, we currently have the ability to borrow five year money swathed in an all in fixed rate of 5.1% on an existing facility. We have also found that for quality collateral and sponsorship at reasonable levels of leverage, rationally priced debt is still available.

During the first quarter, in connection with the acquisition of our Storage Post portfolio, we obtained a three year, 5.3% fixed rate loan of $41.5 million, representing over 70% of loan to value. Since our core portfolio was all fixed rate, we haven't been able to benefit from the current floating rate environment. We believe that over the long run, fixing rates and managing maturities is the more prudent approach to financing long term real estate investments. Accordingly, we have no scheduled maturities in the portfolio over the next three years.

In summary, while the capital environment remains unstable, we believe this uncertainty can be an asset for a real estate enterprise with a strong balance sheet and access to capital to take advantage of opportunities as they arise.

Now I'd like to turn the discussion back to Ken.

Thanks, Mike. First I'd like to review our core portfolio performance. As Jon discussed, our adjusted same store NOI increased by just over 2% which is consistent with our expectations. In terms of our first quarter occupancy, it dropped down 30 basis points. The primary driver of this, and we briefly discussed this on our last call, was a vacancy that was created in our downtown Smithtown, Long Island location that equated to about 30 basis points. We're in the process of re-tenanting the space and we anticipate strong, positive lease spreads with tenants in place by year end. This vacancy in RB was not driven by the economy but was really tenant driven.

Similarly, in our Westchester, New York Crossroads property, we recently recaptured two spaces and we are consolidating them and anticipate re-tenanting them with a strong national tenant which should be in place by year end. As is the case in Smithtown, this vacancy will also have a short term negative impact of occupancy of about 25 basis points but it's clearly a long term positive.

Looking forward with respect to our portfolio, so far we don't yet see any material impact on our properties from a clearly weakening economy. However, the length and depth of the economic slowdown will determine the ultimate impact on our sector. When we look at our core portfolio performance, first of all, all scheduled anchor maturities for 2008 have been renewed. Our collection and delinquency rates have not moved materially from last year and when we look at our core portfolio in terms of breaking it out by type of retail, based on base rent, over 80% of our core portfolio is either necessity based, supermarket and drug anchored, or value discounter anchored. Over 50% of our core portfolio has a supermarket as one of its anchors and the balance, approximately 20%, is either urban or street retail such as our Greenwich Avenue in Greenwich, Connecticut property, 54th Street in Manhattan, or Lincoln Park in Chicago, and our view is that the defensive nature of necessity and value assets especially in supply constrained markets as well as urban and street retail should prove more resilient in this market.

Turning now to asset and recycling, asset recycling and capital recycling, over the past several years we've focused on opportunistically disposing of assets that are inconsistent with our long term growth strategy and in the first quarter we continued this recycling process. We entered into an agreement for the sale of our Winston-Salem, North Carolina residential properties which was our last remaining residential asset, 40 year old project with 600 units. It closed earlier this week for $23.3 million or just over a six cap on NOI in place over normal reserves. And then also in the first quarter and in conjunction with completing a 1031 Like-Kind Exchange for our fourth quarter sale of the residential apartments in Columbia, Missouri, we entered into an agreement and recently purchased a 20,000 square foot retail property located in Manhattan for $9.7 million. The property is a retail condominium unit located between 17th and 18th streets, just off Fifth Avenue. It's located between the Flatiron District and Union Square. It's fully occupied by Barnes & Noble and Barnes & Noble's lease is at about 50% of market rent and the lease goes to market in 2013. Thus our going in yield is about 5.5% but it grows to between 8% and 9% when it comes to market in 2013. While it's a relatively small transaction, it is consistent with our asset recycling goals of reducing exposure from non-core assets, in this case, apartments, and acquiring high quality, high barrier to entry real estate, in this case, another New York City property, with a significantly below market lease and while it's not short term accretive, it is the type of real estate that we want to continue to recycle into for our core portfolio.

Turning now to our external growth platform, the key driver of our platform is our investment fund business. In 2007 we launched our third fund which will enable us to acquire or redevelop 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.

We always had two main focus areas for our investing. First is opportunistic which includes purchases of distressed assets, debt purchases, restructurings. Examples include our Wilmington, Delaware transaction, Kroger, Safeway investment, as well as highly profitable RCP initiatives. And then the second component is our value add platform where our main focus most recently has been our mixed use Urban/Infill projects in New York.

In terms of our first quarter activity, on the opportunistic side as Jon discussed before, in connection with our Retailer Controlled Property, or RCP venture, in the first quarter we recognized $2.2 million after taxes from the sale transaction of 43 Mervyn assets, and then on the value add side, with respect to our Urban/Infill platform, in the first quarter we closed on the 11 property self storage portfolio that we discussed on our previous call where we bought out the previous institutional capital partners of our existing self storage partner, Store Post.

The occupancy levels of the portfolio when we agreed to the purchase were approximately 70%. Currently, occupancy is just north of 73% and we expect full lease up by 2011. Our going in yield was between 5% and 6% and we expect the unleveraged deal upon stabilization to be between 9% and 10%. Our key rationale for acquiring this portfolio was both strategic and opportunistic and we discussed this in detail on our previous call but in a nutshell, the ability to opportunistically acquire an existing portfolio at 70% occupancy and at a discount to replacement cost with an existing operating partner in place made this a compelling opportunity. As Mike mentioned, post closing we financed the balance of the unencumbered assets with 70% loan to value financing at 5.3%. We're pleased with the financing and we're quite pleased with our early stage progress. We'll keep you posted as to the continued progress.

With respect to the balance of our existing New York Urban/Infill asset, as of the end of the first quarter we now have ten projects, just under 2.5 million square feet. Two are now complete -- that's 216th Street -- as well as our Liberty Avenue project. Our 161st Street redevelopment continues to be cash flowing and its full redevelopment will occur upon the relocation or expiration of certain leases. Then four of our projects are currently in the development phase or under construction. Pelham Manor and Fordham Road, the construction of both of those will be completed by year end. Canarsie, Brooklyn and Atlantic Avenue, Brooklyn should be completed by the end of 2009.

Finally, three of the projects are in different stages of design. Those are our City Point project in downtown Brooklyn, our Broadway and Sherman project in Manhattan, and our recently acquired Sheepshead Bay project in Brooklyn.

I'll touch briefly on the status of City Point. We're in the process of finalizing our schematics and our layout and the pieces are coming into place for construction to commence at some point in 2009. With respect to the retail and commercial component which is the portion that we have our ownership stake in and are the developers of, tenant interest remains very strong and the project is penciling out consistent with our goals. With respect to the residential component which is owned and developed by McFarland Partners and Rose Associates, it's an 80/20 affordable housing rental project with 421a Tax Abatements in place and unlike other pure market rate rental or condominium developments, the affordable housing segment continues to be active. However, the financing for it is predicated on the appropriate allocation of tax exempt bonds and those are currently being pursued so we hope to have all of these issues finalized in terms of financing by year end so that the components could begin at some point in 2009.

Turning now to Fund Three, as I mentioned before we currently have three acquisitions in Fund Three, our Westport, Connecticut, Sheepshead Bay, Brooklyn, and our Storage Post acquisition and as I mentioned before, those constitute about 20% of our fund capacity.

In terms of future transactions in our pipeline and looking forward, first briefly on George Washington Bridge project that we've discussed in the past, we're continuing to work with the Port Authority to finalize plans for our redevelopment of the Broadway Marketplace at the George Washington Bridge. Our redevelopment plans include renovating the bus terminal and developing approximately 115,000 square feet of retail and while we are making steady progress, we will not proceed with that transaction until we are fully comfortable with the confirmation of the costs associated with it and it is a structurally complicated redevelopment. So we'll keep you posted as our progress continues.

In terms of our general acquisition outlook going forward, since we're still in the early stages of this deleveraging and differentiation process, we're seeing most of the initial compelling opportunities in the form of either opportunistic debt purchases or recapitalizations of projects. These are both areas that we've spent a lot of time in over the past several years and with important caveats, are quite comfortable participating in. We're beginning to see interesting discount to debt purchases but they're still on a very limited basis. However, we do expect these opportunities continue to grow as lenders begin to move more debt off of their balance sheets. We're also seeing the opportunity to provide capital and expertise to developers who may be midway through a development project and can't complete the job because of either changes in circumstances or because they don't have sufficient capital to finance the project. In any case, it's pretty clear to us that highly levered or thinly capitalized owners and developers are going to feel the brunt of the impact from the capital market issues as well as the slowing economy and conversely, well capitalized projects and companies may be able to ride out the current storm as well as capitalize on the opportunities ahead.

Our view has always been to be flexible enough as a company, both in terms of capital and talent, to be able to pursue both opportunistic investing when it makes sense and value added redevelopments when those make sense and in whatever form the opportunities present themselves, we believe that having a discretionary equity fund platform should be especially potent in illiquid markets where increased volatility can create inefficiencies and opportunities that can then result in outsize returns for our investors and shareholders.

Turning now briefly to our management team, in the first quarter we were fortunate to have Chris Conlon who formerly was a Principal at Ripco which is a very well regarded retail brokerage firm based here in New York, join us as a Senior Vice President in Acquisitions. Chris is already making important contributions to Joel Braun's investment team and we are pleased to have him on board. And then this month we appointed Rockie Gajwani to the position of Senior Vice President where he will oversee both Redevelopment and Leasing for our portfolio. Rockie comes to us with extensive redevelopment and leasing experience, both from Vornado and then prior to that, Forest City Ratner. We are very pleased to have Rockie on board as well.

So today to conclude, notwithstanding a difficult capital market environment and a softening economy, we are well positioned not to just respond to these difficulties but to capitalize on them as well. Our core portfolio is strong. Our balance sheet is solid and our acquisition initiatives position us to take advantage of any unique opportunities that may arise.

I'd like to thank the members of Acadia for their hard work this past quarter and at this point we'd be happy to take any questions.

Ladies and gentlemen, if you wish to ask a question please press * followed by 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press * followed by 2.

And your first question comes from Ambika Goel. You may proceed.

Hi, it's Ambika with Michael. Could you review for the in process development, redevelopment projects, how pre-leased you are for those projects just so we can understand the potential risks associated with them?

Sure, on the retail component of the New York Urban, we're just over 75% pre-leased which is where we want to be with respect to developments that are in place and under construction. There is actually an ideal balance where if you do too much pre-leasing, we're often fearful that we're leaving money on the table but conversely, just as you said in terms of risks associated with it, the pre-leasing certainly helps both from a financing perspective and risk perspective, but we feel 75% is a good position and we're comfortable with that.

Okay and then if we think about that 75% pre-leasing, what yield does that get you to?

We don't have the calculation right now.

Okay.

Our expectation is, for instance in Fordham Road which is fairly far along, we're 95% leased and in general, these projects will lease up to north of 90% so the 75% is probably not a great number to look at other than in terms of cash flow coverage.

Okay great, and then on the development fees that you received in the quarter from Albee and Sheepshead, could you go over kind of what exactly the fees were related to and what color could that give us on the potential timing of the projects launching?

In terms of the fees, as you mentioned it was about $1 million from Fund Three related to the Sheepshead Bay development and then another $1 million recognized from the Albee development. Our agreement with Fund Three is that along with our construction and leasing and legal fees and asset management, we also get a development fee so we will be earning that fee on all of our Fund Three redevelopments and the timing of that fee is basically from the point of inception of the project until construction commences. In both of those cases as Ken mentioned, we expect with Albee, that construction will commence at some point in 2009 which at that point obviously, the development fee will cease and then Sheepshead Bay is also I think a 2009 construction commencement.

So can you just go over the calculation of the fees or should we -- what part is recurring and what part is not?

The fee itself, for example for Fund Three, the fee is calculated on a base of total project costs and it's 3% of total project costs so we again take that total fee and it's recognized over the period that I just spoke about. In the case of Albee, that's specifically related to Albee. There's a specific agreement in place and that again, that amount is being recognized over the period that I just discussed.

And for the Albee fee that you recognized, is that related to the retail portion of the asset or --?

That's correct. It's the retail and a piece of the office. It's based on our ownership percentage.

And then I guess to collect the fee, that means that there's a specific amount of visibility that you have in the project. At this time, how far pre-leased are you or do you have potential anchors signed up for that deal?

We're not yet Ambika, ready to discuss the tenanting of it. We have to, some final municipal art commission approvals, etcetera. We want to get those in place by year end. Then we'll discuss the tenancy and other pieces of it. We wouldn't start the construction of something like this unless we had substantial pre-leasing in place.

And just from an accounting standpoint, you're effectively saying, okay, we're going to earn a 3% or whatever the number is, development fee for the total construction cost. We're going to account for that over prior to actual starting construction rather than trying to push it over the life of the asset or the fund.

After the development fee, then comes the construction fees, then after that hopefully the tenants open and come the leasing fees and then what you really expect and what we're really in this business for ultimately then is the cash flows that start once the tenants open.

So this is just another premium on top of -- it's not even a construction fee. It's just another fee that you're getting?

Correct, absolutely.

Alright, thank you.

And your next question comes from Christy McElroy. You may proceed.

Hi, good afternoon guys. Ken, just following up on your comments, as you look to put capital to work opportunistically, it sounds like you're not seeing any real distress out there yet but that you expect to over the next 12 months or so. Can you just provide some additional color on what you're seeing?

Sure, and we are seeing distress but we're seeing it in the capital structure in the debt side of things and to take it to a real extreme and obviously if you look in the CMBS market, you're seeing huge distress, we don't and are not buyers of CMBS junior pieces of paper. What we are seeing are opportunities in terms of debt being sold at a discount. That's occurring today, right now. It's just beginning but it's occurring at compelling levels. We're seeing development projects and developers currently undercapitalized and in need of additional capital today, right now, to complete their projects. What we are not seeing is the opportunity to buy well located projects that are stabilized at discounts that would get us excited to become buyers and in fact as we've been doing, we're selling into that market. So there's still somewhat of a disconnect between the debt structures and capital structures where there's clearly distress and the values for high quality stabilized real estate. We thus expect to be first most active in restructuring and then let's see what happens over the next few quarters in terms of where the next level of opportunities arise. And it could even be a combination of restructuring and the need to bring redevelopment expertise in.

Have you considered partnering with some of those developers in distress on their projects, on some of the ground up stuff?

Absolutely. The hard part right now is a lot of the selling community and development community is still just beginning to digest the realities of the new capital structures and for a long time, they were hesitant to reach out to new capital at equity pricing. We're now seeing that shift and we expect to be active in it.

Okay and then as you look toward potentially monetizing or liquidating assets in your funds or selling non-core assets, are you pushing out expected timing assumptions at all given the dislocation in the transaction markets?

No, but I think it's really more due to the circumstances of the timing of our projects. In other words, we have one or two properties that are stabilized and ready to disposition and Jon alluded to them and they're achieving the pricing we want. We'll sell them this year and recognize the promotes on it. Then, when you look at Fund One which is the most stabilized, Kroger, Safeway is the next bucket of assets, that doesn't come available for sale because of the debt constraints, really until 2009 and we bought it at under $50.00 a foot. We could recognize our promote values almost irrespective of where the capital markets are. Obviously we would be patient and we're not going to rush the sale of it unnecessarily but we wouldn't push it from that perspective and then finally with respect to our New York assets, they're really coming on line 2009, 2010, 2011. We couldn't pre-sell them into this market even if we wanted to so I think it's really more of a situation of the characteristics of the timing of our portfolios and the fact that we did aggressively monetize over the past two years so we're not sitting around waiting for much.

Okay and then just really quick lastly, are you forecasting any lease termination fees in your guidance?

No.

Okay, thank you.

And your next question comes from Paul Adornato. You may proceed.

Yes, good afternoon, thanks. Just to follow up on the prior question, could you provide -- I realize you didn't provide 2009 guidance yet but any visibility on 2009 season promotes, that component of FFO?

Paul, you're right. We have not provided any guidance to date and we're not prepared to provide guidance at this point in time either.

Okay, and Ken, in your remarks you said that there is still a lot of retailer interest especially in Infill locations like New York City. Could you maybe point to third party transactions or any other market activity that supports that view?

I don't have it handy right now. If we find some good information, we could certainly try to post it to our supplement or something and we tend not to have as good data on third party. What I can tell you is when we talk to tenants like Best Buy and they recognize the economic slowdown but they also recognize that getting locations in the Five Boroughs is not something that you can start and stop and start and stop and so they remain committed irrespective of the current economy, to projects that are slated for 2009, 2010, and beyond because they are committed to the long term growth in these urban markets. I think that's true for a host of our other tenants as well. Certainly those tenants that have struggled during good times are going to struggle even further during bad times but in almost every one of our projects we have tenants saying if there is an opening, or a reopening for a box, please call us because we'd love to come in. So it's really more on that anecdotal level Paul, than specific lease transactions that I could point to.

Right, okay, fair enough and with regards to City Point, is the project located in any special districts or are there community arts concessions or kind of other non-market uses of the space that you're required to provide? I'm talking just of the retail and office component really.

Not of the retail and office component. It is subject, as I mentioned before, to the Municipal Art Commission who has approval rights on the exterior with a host of limitations. So this is an as-of-right development but they do have input and say and we don't expect any material issues from that. The only other impediment then, and it's not really an impediment because there's a lot of benefits that go with it, is on the residential side it is an 80/20 affordable housing project which means that 20% of the project needs to be available for affordable housing and then counterbalancing that is very attractive financing. Those are the only issues and those don't run to the commercial piece.

Okay great, thank you.

Thanks.

And your next question comes from Michael Mueller. You may proceed.

Hi. Ken, you talked about debt purchases as an investment. A couple questions about that -- number one, is it all real estate debt or can it be corporate debt and on the real estate side, any property types?

Not only does it have to be in my view, real estate debt, it has to be real estate debt that we can, if need be, seize ownership of and that we're prepared to own and so that excludes not only corporate debt, that excludes our buying CMBS B-pieces which very well may be a very profitable business. It's not what we do. This is simply looking at the capital structure and we've done a lot of this in the past where we say look, we're at the 80% loan to value and if we needed to seize control, we can do so legally and we'd be happy to either complete the project or own the project. And then in some cases you may be at 100% loan to value in which case then we need to make darn sure that we're getting paid for those risks. The issue here and the opportunity here is, as you're well aware, there are a host of institutions who need to get debt, subordinate debt pieces that they were not able to sell otherwise, off their books and they are incentivized to liquidate those pieces at a discount to their value. It's not a question of whether or not those loans will be worth their maturity value. It's a question of getting them off their books. In the residential side, we read about it in the front page all the time. In the commercial side, it's only beginning and we're just starting to see it but we do expect to be able to transact on it. The full size of it within those somewhat narrow framework, the full size is yet to be determined.

Okay, and is the pricing attractive today or do you think it's heading toward being attractive down the road?

The pricing is attractive today. The volume has yet to get to the level that I'd like to see it get to.

Okay and then last question, is this an investment that would ultimately make its way into the funds or more for your own balance sheet?

It really depends. If they're smaller transactions or they are lower risk, lower return, really more of treasury function, those we may do on our own and we go to our investors and explain it's not consistent with the fund return. As you start investing in paper that looks, feels, and should be priced like equity and needs to receive equity returns, then those should go into the fund.

Okay great, thank you.

And your next question comes from Rich Moore. You may proceed.

Hello, good afternoon guys.

Good afternoon.

On the big box tenants that you guys are, that you're putting in a number of your developments, are you seeing them look for lower rents than you had previously? I've been hearing some talk that especially the big box guys are pressing for a drop in rents as they go into new developments.

I think that many tenants Rich, are looking for rent concessions where they can get them and tenants are coming under pressure in terms of weakening sales in general and so the CEOs of a lot of the tenants are saying see if you can push it through to either your vendors or to your developers. In the properties that we are currently involved with here in New York City, we have not yet seen that because there's enough other tenants waiting in the sidelines. There's just not enough retail GLA available for tenants to achieve those demands, at least that we've seen so far. It doesn't mean it won't happen and it doesn't mean the tenants won't try and they're certainly achieving it elsewhere in the country and whether when we look into some of our CT investments, etcetera, we see tenants successfully achieving attractive rents from their perspective but in the New York market, if you pass on the ability to come onto Fordham Road in the Bronx, you're not going to get that opportunity again next year. That could be a five year waiting period to then get a new box of any substantial size so tenants are weighing that and in general, because the sales productivity can be so strong, because of the supply constraint, we have not seen them push through rent concessions as opposed to where they were a year or two ago.

Okay Ken, and then does that hold true as well for the smaller tenants? Do they follow with the big guys and if the big guys are going in, they just pay the rents too?

There are some tenants who are not expanding anywhere including New York City and there are some tenants who are going to shrink but what we have seen so far is there are enough tenants that while the list may not be as long as it was a year or two ago, that they are willing to come into these properties and we have not -- that has not been the issue. The issues we struggle with are the usual development headaches that any developer deals with but so far it hasn't been on the tenancy side as much as just the usual approval process, construction, etcetera.

Okay, very good, thanks and then on the storage side, how is the lease up of the handful of Storage Posts that are in lease up? How's that going and what's your anticipation for that?

It's going quite well. As I mentioned, when we agreed to buy it, it was a 70% occupied portfolio. We've owned it for just over a month so in terms of our ownership period, it's relatively short but we're now north of 73% occupancy and we are seeing what we expected to see out of the lease up assets as well as out of the stabilized assets. New York region I think remains generally fairly productive for self storage in terms of when I'm reading how the other companies are performing on the publicly traded side and we're very pleased with how these stores are comping off of last year's numbers, albeit it we weren't in ownership last year.

Okay, so you think you could hit a stabilized occupancy in the ones that aren't stabilized yet later in the year kind of thing or over the next year? Is that --

No, no, no -- wait. It does take longer. What we have slated was a three year lease up so what we said was 2011. Beginning of 2011 we ought to get there. If we get there sooner, great. We can afford to be somewhat patient but I want to make sure we get this right.

Okay, very good. Thank you.

Thanks.

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