Acadia Realty Trust (AKR) 2009 Q3 法說會逐字稿

Good afternoon. This is Jon Grisham. It appears we're having some technical difficulties. I don't hear the music, but I think we're live, so we're going to commence. Ken, I think we should start the call at this point.

Okay.

So, let's proceed and hopefully the operators can get it straightened out.

All right, we'll start. The lawyer in me will advise everybody that there are forward-looking statements and a bunch of other early comments that the operator usually makes, and if you don't know them, we'll email them around.

And in fact, Ken, I'm sorry. I'll read the Safe Harbor Statement, I have it here, so. Please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Actual results may differ materially from those indicated by such forward-looking statements. Due to the 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 the Company undertakes 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 our earnings press release posted on our website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Please note funds from operations for calendar year 2008 have been adjusted as set forth in the reconciliation.

Participating in today's call are Ken, Michael Nelsen, and myself. And with that, Ken, let's proceed now.

Thank you, Jon. You did that so well, maybe we'll have you do it next time. I apologize for the confusion. Good afternoon. Thank you for joining us. At the suggestion of several participants in these calls, we're going to shorten somewhat our prepared comments and then we'll leave more time to address details in our Q&A. So to start with, I'll give a brief overview of our progress that we made in the third quarter, the trends we saw, and then Jon will review our earnings, the key drivers, and our outlook. And then, Mike, Jon, and I will take questions.

As an overview, in the third quarter we began seeing the transition from frozen financial markets and a frozen consumer in the first quarter and second quarter to some level of thawing. In the third quarter, we saw this both in terms of the financial markets where credit spreads began to tighten, secured debt became somewhat more available, and then also at the consumer level and at the tenanting level where we began to see the beginning of positive trends in terms of leasing activity as well as tenant stability.

Now, thawing should not be confused with recovery. And while we're seeing some signs of stability, there remains a real lack of visibility as to its strengths and its timing. So, as it relates to the three components of our business -- our core portfolio, our balance sheet, our external growth platform -- the thawing is playing out as follows.

At the portfolio performance level in the third quarter, the portfolio performed consistent with our expectations with same store NOI and occupancy declines driven primarily by specific and previously discussed re-tenanting issues. Most notably was the loss of Circuit City in Bloomfield Hills, Michigan, which we subsequently replaced with Best Buy and our termination of Acme Supermarkets in Absecon, New Jersey, which we recaptured from Acme for a payment from them of $2.5 million and then simultaneously re-tenanted about half the space.

Circuit City and Acme represented about three-quarters of our NOI decline and Acme represented about 65% of our occupancy loss for the quarter. From a re-tenanting perspective, the new leases we signed for those spaces are being done at discounts to the previous rents. On average, these declines are just above 20%. And while this decline is probably not an indicator industry-wide or even for our portfolio on the whole, it is indicative to us of some of the challenges that even well-leased assets, when they're in transitioning markets like a Bloomfield Hills, Michigan, they can face.

When we look at our tenant default and collections, we're also seeing signs of continued thawing. So far, default rates and rent reductions are not as significant as we initially feared. So overall, our negative 2.5% NOI performance is at the stronger end of our earlier expectations, which were negative 2% to negative 5%.

Next in terms of our balance sheet, if you review the financial ratios and data set forth in our earnings release as well as on page 23 of our supplement, you'll see that we continue to focus on maintaining a strong balance sheet with plenty of flexibility. Mike, Jon, and I would be happy to discuss these ratios and our outlook during the Q&A.

Third and finally then is external growth initiatives. First, with respect to existing investments, we continue to make progress in most areas of our pipeline. With respect to our Fund II Urban Redevelopment portfolio, here's a quick update. As we break out in detail on pages 25 and 26 of our supplement, of the nine Fund II developments, the construction of six are now complete. The seventh is under construction. Retail occupancy is at 84%. Office is up to 77% from 70% the last quarter, and this increase was driven primarily by progress that we made in the leasing of our 161st Street Project.

In the third quarter, we signed two new leases, including one with Walgreens and one additional relocation, and that brings us to 100% lease. But more importantly, with the signing of the Walgreens lease and the relocation lease, we are able to begin the conversion of the ground floor space to more valuable retail. We have a few more moving pieces and then upon completion, we should be able to begin the conversion which we hope to have completed in 2011.

With respect to the two final projects in our Fund II development pipeline that are in the design phase, it's worth updating briefly our Downtown Brooklyn City Point Redevelopment. As had been reported in the press, we have been conditionally awarded $20 million of economic stimulus bonds which we will utilize to commence a 40,000 to 50,000 square foot first phase of the retail project, and that still gives us the ability at a later date to complete the more significant second and third phases of that project.

Also as previously reported, MacFarlane Partners, who had been the manager advisor for CalPERS Pension Fund, who's the owner of the perspective residential component of the development, has resigned as a manager to CalPERS and has been replaced by Stockbridge Associates. We've met with Stockbridge, we know them; we do not envision this change as having any negative impact on the project and we look forward to working with them.

In terms of Fund III, in the third quarter we closed the financing for our Cortlandt Towne Center acquisition and we described that financing on the last call as well as the acquisition in detail. But in short, the current unleveraged yield is at about 9% and with the current financing now in place, our cash and cash yield is in the low teens while we work towards the lease up of the former Linens 'n Things space.

In terms of our mezzanine investments, on page 16 of the supplement, you'll see a schedule of the status of our mezzanine investments and note that $7.8 million, or about 6.5% of our mezzanine balance, was repaid in the quarter. We continued to thoughtfully evaluate each investment to make sure that we're comfortable owning the assets at our bases and will continue to update you as these investments evolve.

In terms of new investment activity, we're at what I suspect is an interesting transition point in working through what will likely be a multi-year deleveraging and acquisition and disposition process. To date, there have been far fewer highly distressed acquisition opportunities than might have been anticipated given the financial distress that our system experienced over the past year.

And while we were fortunate to have had the opportunity to acquire Cortlandt Manor in the first quarter at what in hindsight appears to be very attractive pricing, we've not yet seen a significant number of additional high quality retail properties come to the market or trade hands at similarly opportunistic pricing. And while this may be surprising to many who had predicted, whether they had hoped for or feared, that the flood gates were going to open in 2009, given, in fact, how this process is unfolding, it's probably not that surprising.

More importantly, though, the thought that more exciting investments won't be available as this deleveraging process plays out strikes us as highly unlikely and we'll be happy to discuss our views and the trends that we're beginning to see in the Q&A. But in short, we believe that to profitably capitalize on acquisition opportunities is going to require both patience and discipline combined with the ability to move quickly. And given our balance sheet strength and our fund platform, given our track record and opportunistic capabilities, and then finally, given our size where even a moderate amount of opportunities enables us to significantly move the needle, we feel that we're well positioned.

So, to wrap up, while the third quarter still had its fair share of challenges, both in terms of the capital markets and property level fundamentals, the severity of the past year's financial crisis seems to have eased somewhat. And while we need to remain very prepared for a bumpy road ahead before we're anywhere near a full recovery, we do feel strongly that we're well positioned to respond to the difficulties and more so to capitalize on them.

So with that, Jon, I'll turn it back to you.

Thank you. Before a brief discussion of our earnings and related guidance, I just wanted to point out to everybody that we've gone through our reporting supplements fairly extensively and condensed certain information and in other areas added new material as well, and specifically in the area of valuation data. So, I encourage everyone to take a look. Turning to earnings and guidance. In general, year-to-date earnings and portfolio performance are at the higher end of our expectations, and as a result, we've increased our full year 2009 guidance.

To briefly recap earnings, which we discussed in full detail in our press release, FFO for the quarter was $0.33. On the positive side, we received $2.5 million, or $0.06, of termination income at Absecon and we recognized income of $1.4 million, or $0.03, from the write-off of a below market lease or what's known as a FAS 141 cost pertaining to our Third Avenue property. Partially offsetting these positive was a non-cash charge of $1.4 million related to a Fund I shopping center investment, which after this charge it brings our basis down to zero for this asset.

Turning to guidance and to supplement page 13, we provide detail by our traditional five income buckets in terms of guidance. A few highlights as it relates to this. One, for core portfolio income. As Ken mentioned, same story on why it's down 2.5%. And while we don't view negative NOI performance as anything to get excited about, this decline is actually on the favorable end of our range and as such, we are actually moving guidance in that category up.

G&A, our original forecast the beginning of the year, we were looking at $25.5 million to $26 million and we're now projecting $23.5 million to $24 million, primarily the result of staff reductions earlier in the year. In terms of our pro-rata share of fund income, Cortlandt has been a positive driver throughout the year. And then, the current quarter reserve for the Sterling Heights Shopping Center obviously brought that back down a little bit.

In terms of asset base and transaction fee income, you'll see that we're down $2 million to $3 million from the previous guidance. This is in large part driven by an increase in projected income taxes at the TRS level where these fees were received. Year-to-date, we have TRS income tax of about $1.5 million. That's about $1 million more than we originally projected and in large part, that's due to the fact that in reducing G&A, and part of that G&A is allocated to our TRS entities, that reduces the deductions at that level against the fee income, hence our income tax liability increases.

And then lastly, promote, RCP, and other income, the gains on the buyback of our convert have been the primary driver throughout the year on that. And then, the Acme termination income in 3Q added to that as well. So, as a result of all of this, and as I've mentioned before, we've increased 2009 guidance. It's now at a range of $1.26 to $1.30 for the year.

So at this time, we'd be happy to take any questions.

(Operator Instructions).

Your first question comes from the line of Craig Schmidt of Bank of America/Merrill Lynch. Please proceed.

Thank you. I guess my first question will be what might be the timing when we see some increased quality strip transactions, and what would be the catalyst to kind of make that come to fruition?

Without trying to predict exactly which quarter it hits, because frankly one, we don't know, Craig, and two, I care much more about the value creation than the precise month it hits. Here's what we're seeing. If you look at the amount of existing debt in the system, you only have to look out three, maybe four years to get to about a $1 trillion of debt that is going to mature -- it's about $200 billion to $300 billion a year.

What we've seen over the past year, and it's probably been a good thing for our economy overall, is that most of the lenders have elected where they could to continue to extend and work through the assets. Given that LIBOR is at such a low rate, a property that's yielding 3%, 4%, or 5% is servicing its debt even though the asset may be worth, or the debt may be anywhere from 100% to 150% of value.

These extensions, which people have called amend-and-extend, pray-and-delay, whatever euphemism you want to -- look, we are seeing now that those are finally starting to come to an end and that whether it's the portion that's held in the securitization process or the banks' life insurance companies, that these are starting to become REO.

The first signs of that is you're seeing a pick-up in the number of receivers being put in place. We are starting to see an increase in the number increase of lenders who are looking to begin to get this debt off their books or foreclose, take the assets, and sell the REO. And no matter how you look at it, this $1 trillion of debt needs to be reconciled and that's a fair amount of capital that is going to be required.

Even if a significant portion or the majority of it is converted into longer-term debt, the thought that we're not going to need a significant amount of equity above and beyond the amount of equity that's been raised in the public markets to date, the amount of equity that's on the sidelines, the thought that that's not going to create significant opportunities seems highly unlikely to me. So, we're seeing an increase in conversations and my hunch is over the next six, maybe 12 months at most, you will see these begin to kick in, if not sooner.

Great. And what are the tenants that are replacing half of the Acme space, and when do they and the new Best Buy start actually paying rent?

It's primarily Dollar Tree, which should be no surprise when you think about who's active in these type of markets. Their rent commencement date is the end of this year, November. And Best Buy, Jon, their rent commencement date is the middle of 2010?

Middle of 2010.

Great. Thanks a lot.

Your next question comes from the line of Mark Lutenski of BMO Capital Markets. Please proceed.

Hi, this is Paul Adornato here with Mark. Ken, I was wondering, just given all of the opportunistic capital that seems to be out there, at least gathering at this point, what will be your competitive advantage in pursuing some of these opportunistic deals when they start to come down the pike?

First of all, I caution you, and all of us, to be very thoughtful about just how much so-called opportunistic capital is lining up relative to the amount of deleveraging that needs to occur, Paul, and it takes several years. If we look back at any of the previous cycles, before the activity really kicks in and before asset values start to stabilize, if you think about the real estate financial crisis '89 to '91, it really wasn't until '92, '93 and then '94 when asset values bottomed out.

So first of all, there is some opportunistic capital. But for the most part, it's not nearly as significant as we think the wall of deals that will counterbalance it. With that being said, we welcome plenty of opportunistic capital. If anything, I think it keeps us on our toes and causes more people to consider activity.

Our advantages are what we've done over the past several years, which is we know what we do well, which is focus on high quality retail, and whether it's adding value at the repositioning/re-tenanting/redeveloping level, which is going to be part of the equation because stabilized retail is beginning to feel like an oxymoron.

And then, secondly is being opportunistic. And the fact that we have a fully discretionary fund at our disposal to co-invest with enables us in times like January when Cortlandt came available where we didn't have to ponder our stock price in order to determine whether it was the right time to acquire an asset that had lost its Linens 'n Things, so was 85% occupied, that we could acquire it plus or minus the 9% going in yield with up-side.

So again, I'd say it's our team and our ability to be opportunistic and add value, coupled with our capital structure, and then most importantly is just that I don't think there's all that much opportunistic capital out there. Most of the equity that was raised in the public market was as much to shore up balance sheets and defensive as to play offense. So, I just think that as this inevitable process of deleveraging occurs and the banks are forced to work through their process, there's going to be a lot of product out there.

Okay. With respect to the development pipeline where you have not commenced construction, are there any sort of drop-dead dates or any potential loss of incentives if you don't break ground by a certain time?

In Downtown Brooklyn, and I touched on that we were, as I said, conditionally awarded these bonds, there is a drop-dead date for that $20 million of bond financing. So, I'd say City Point is the one and we expect to be able to meet those goals without any issues because we are protected against any governmental delays that would prevent us being able to start. And then the other project, Northern Manhattan, Sherman Avenue, had no such issues or benefits that go away.

And with respect to City Point, what's the latest thinking on the programming there? Is it going to be all small shop space and will there be any pre-leasing before you start?

No. At the ground level, it will probably be small shop space, but we will build what looks like right now is 40,000 to 50,000 square feet on three levels and the upper and lower, my guess is, will be pre-leased.

Okay. And finally, with respect to G&A, how do you expect that to track as your activities continue to evolve, that is, less development, but perhaps more eyes looking at potential acquisitions?

Well, thankfully we have a great team and the eyes in place to look at acquisitions and close on them. The real question will be what do the acquisitions look like? Very simply, it takes a lot fewer G&A dollars to acquire and lease up a Cortlandt than it does to redevelop a Fordham or a City Point. And our best guess is that's a trend you'll see continue so that the G&A growth line item doesn't grow as significantly as if this were a heavy redevelopment cycle that we were going through.

And keep in mind, Paul, if we do undertake heavy redevelopment, we do get at a minimum reimburse and generally paid plus a profit to do that. It shows up at a different line item. So, it's not as though if we announced a redevelopment, oh, we're losing money, it's just the G&A goes up but so then does the fee revenue.

So, our main focus in any of these is how do we invest our capital and our stakeholders' capital the most profitable way taking into account all the different moving pieces? Our decision to do Cortlandt wasn't driven by G&A; it was just a great opportunity. And we'd much rather buy existing assets at a discount to replacement costs when we can if they're high quality than have to go through the moving pieces of redevelopment, but that a lot of it is dependent on the opportunities as we see them.

And finally, any update on the Fordham Road office?

That's proceeding very nicely. We have no new leases signed, but we're very pleased with the activity from the logical type of users very consistent with those that you've seen take the first third. So, while governmental entities tend to move slower and leases don't get signed nearly as quickly as I might like, we're pleased with the trends we're seeing both in terms of interest and at the rental rates that we expect.

Thank you.

Your next question comes from Todd Thomas of KeyBanc Capital Markets.

Good afternoon. I'm on with Jordan Sadler as well. In your mezzanine investment portfolio, with regard to the West 72nd Street project, there's $185 million first mortgage and then your $40 million mezz investment, 196 rental units and 50,000 square feet of retail. Can you provide some color on the retail rents and also talk about the project itself in more detail and maybe provide some context around the timing of the residential?

Sure. I'm not going to disclose the rents out of respect for the borrower/developers who treat that as somewhat proprietary, but let's just walk through the project overall. Remember, at the retail level we have Trader Joe's and Bank of America that are paying market-level rents for great retail space, and I think Trader Joe's is the ideal tenant to go and they're going in the concourse level, meaning one level down.

The construction overall is nearing completion. The rental units will come on-line next year and the rental office, I think, will open in the next six months. Our sense is that the residential rental rates have dropped and I think there's pretty good market data out there since the inception of this mezzanine loan.

And so, we're watching the rental rate assumptions there as to where we think that this could come on-line, and based on what we're seeing right now, a good chunk of the cushion that was there a couple of years has gone away. But we're still comfortable both at the retail level and at the residential rental level that we are in a safe position and a hold position. That being said, it's not our goal to own either component of this asset and if we were to find ourselves in that position, we would be happy to own the retail and we would bring in a partner and/or owner for the residential piece.

Is 100% of the retail leased right now?

There's one more lease left to do, and that's in the works.

And then also on that project, do you know what the average apartment size might turn out to be?

I don't have that handy right in front of me.

Okay.

They range in size from an efficiency all the way through three bedrooms, but the average probably one bedroom. As far as the square footage, I don't know.

We can get that information and we can publish it if it makes sense. And as soon as the sales office or the rental office opens, that will all become clear.

Sure. And then, I guess following up on the discussion related to capital on the sidelines. We saw a RioCan announce a meaningful investment into the US retail market earlier this week. You have an existing fund platform and I know you want to wait for the right opportunities, but do you worry that money, maybe foreign capital, is going to start pouring into the US against a weak dollar backdrop and support valuations?

Worry, no. I think, in fact, it will be a good thing. And let's be clear, I think we are relatively hedged or objective. In other words, if foreign capital pours in, we think that's very good for our existing inventory, existing assets. We suspect that that foreign capital would be very interested, for instance, in our New York urban development pipeline as that tends to be one of the areas that you keep hearing foreign capital say we would like to own more high barrier to entry urban retail. So, that would inure to our benefit as well as be a competitive force.

The fact is again, and I don't want to keep pounding the table because we'll just have to deliver and show the opportunities as they present themselves, but if you think about the level of complexities that exist in retail in general, the level of complexities of working through this deleveraging process both in terms of existing borrowers or lenders, I think that the advantages we have will put us in a very good position, even if there is foreign capital who's willing to come in at 25 or 50 basis points lower for stabilized retail.

You mentioned RioCan, but if you look at the published cap rates that they're coming in there for stabilized retail, I don't view that in any way as weakening our ability to take advantage of the kind of opportunities we expect to see.

Okay. And then lastly, you have $190 million drawn on the Fund II and III subscription lines, so there's about $100 million of availability there. And on the flip side, you have about $160 million of mortgage debt maturities through 2011. I know your subscription lines are collateralized by unfunded capital commitments, but you're using some of that capital to retire debt. So, I guess how active are you right now in looking for new investments for the funds given that you might need that investor capital?

Well, I think you're combining two different funds. So let's be clear, Fund II is closed out and all of that equity will be used to either retire the line and/or complete the projects that we've been discussing before. As it relates to Fund III, we have $350 million of equity that we view is available for future growth.

And Mike, what is our Fund -- that takes into account our outstanding line, so we still have that $350 million that's going to walk through the line.

What's drawn on the line to date is about $134.5 million. We'll probably be drawing another $5 million liquid to pay off an existing debt that we chose in December. So, you'll have $140 million utilized in the line, which would still leave you with the same $350 million minus the $140 million.

So, the $350 million for Fund III of equity still available is just that. The utilization -- and the amount of debt that we have on assets at the Fund III level is relatively low since both our Westport and our Sheepshead Bay assets are free and clear and Storage Post is underlevered. The utilization of the line is for a wide variety of positive reasons.

But keep in mind, we're borrowing on Fund III, Mike, and I think it's 80 basis points --?

80 basis points.

-- over commercial paper.

80 basis points all in.

Excuse me. 80 basis points in. I can't even count that low. So, there are real incentives with the encouragement of our fund investors to utilize the lines. And I apologize if there's any confusion about it, but that doesn't preclude us having this $350 million and using it.

Okay, thank you.

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

Yes, hi. Most things have been answered. Just maybe two quick ones here. First of all, phase one of City Point, is that going to be office and retail or just retail?

Right now, we envision it to be just retail.

Just retail? Okay. And then any sort of update on Storage Post? I know you brought it up in the last comment, but just talk about leasing and whether or not it seems to be holding the line or getting a little better?

Sure. Yes. First, just a general overview, Mike. Our Storage Post portfolio is really in two parts -- in Fund III, we have 11 assets and in Fund II we had three that we developed. In the last quarter, of the 11 assets, two more were brought to stabilization, so we have six that are stabilized, four that are in lease-up, and one that just opened for business.

From an occupancy perspective on a same store basis, we picked up a little gain in occupancy, about 0.5% of 1%. On a blended basis, the overall occupancy went from 76.9% last quarter up to 77.8%. Rents are holding. We started about six months ago, along with the rest of the market, with increased concessions and that now is stabilizing as well. So, what we are seeing is picking up in occupancy and hopefully we will see over the next year a positive trend in same store NOI. The lease-up assets that we developed are at or ahead of schedule in terms of these occupancy gains as well.

So overall, and this shouldn't be any huge surprise, what we are seeing in the New York area is self storage demand seems to be weaker than we had hoped a couple of years ago, but probably stronger than retail demand. The consumer still had a meaningful impact on self storage, but probably not as direct as in retail, and our focus now is to get this portfolio to stabilization. Six of the assets are already there and so we'll get the other half to mid 80% stabilization and then that will be, in our view, a very strong positive.

Okay. And what's the yield on the six stabilized?

We haven't broken it out that way because it was part of a portfolio. Our goal is to get them overall to the mid -- between 8% and 9% is kind of where it looks like it's tracking right now. So, my hunch is that depending on how we allocated costs, that's probably about where we got in on those.

Okay. Okay, great. Thank you.

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

Hello, guys. Good afternoon.

Hi.

Last quarter, Ken, you were working on the Storage Post loan. I think it was a $34 million loan you were talking to the special servicer about. What happened to that exactly?

Yes, and we need to be very careful about this. One of the negatives of being -- having full disclosure in liquidity is lenders can see that, too. We were simply trying to get the same extension that in the marketplace everyone else was getting of amend and extend, Rich. And if you remember and you've seen there's been a fair amount of commentary about some of the changes to the [Remickclause].

In order -- prior to recently, in order to get any level of extension from a special servicer you had to go into default. So, we noticed that we had a default. And again, we have plenty of cash backing this up, but we figured if we could get an extension, great. The servicer wanted to charge more than we were willing to pay, so we paid that off and we will finance these in due course.

So, the thought that every servicer would be highly accommodative to everyone in terms of extensions turned out not to be the case. We spent a lot of time explaining why this default was not material and eventually we got worn down from it and decided just to pay it off.

Okay, I get you. So, you used the subscription line item to do that?

Yes.

Yes, okay.

For equity. Again, the subscription line is so cheap that to not utilize it would be a shame.

Right. I got you. And then, staying with the ventures for a second, there's a fee in the Mervyns II venture that was about $2.2 million. What is that exactly?

What that is, Rich -- yes. And you know what, that is in the detail of the sup, so I'm encouraged that you guys are combing through it in such detail.

There's a lot of things in there, Jon, but we did comb through it.

Hopefully, though, we made it a little bit easier this time around, but I hear you.

It's good stuff; it's great stuff.

If you look at -- that was basically just taking the asset management fee for Fund II and just allocating part of that to the Mervyns II, which keep in -- recall that Mervyns II and Fund II are really the same investors and they're connected. So, if you look at that fee, Mervyns II in combination with the activity that shows up under Fund II, those net to about $1.3 million for the quarter. And that's just the normal quarter asset management fee for Fund II, so that's -- you're just looking at the gross activity, but if you look at them together, it's the normal quarter asset management fee.

Okay, yes. Good. Thanks. That makes sense. And then in Fund II as well, and I think you may have touched on this in the remarks, but the NOI was higher, it looked like right about $1 million for the quarter sequentially. What is that exactly?

Yes, that's lease-up related to Fordham and Pelham's. If you look at Fordham, the most significant tenant is the Jonas Bronck Academy, the New York Middle School tenant. They commenced -- Mike, the end of --?

June.

Right, June, and that's probably $300,000, $400,000 there. And then at Pelham we had a full quarter for BJ's. They had started in April during the second quarter; in third quarter we have a full year. And then, also Michael's at Pelham commenced during the third quarter as well. So, that's what's driving that $1 million for Fund II.

Okay, good. So, that's all real stuff. That's great. And then --Absecon, it looked like -- obviously very encouraged by the two new anchors -- basically anchors, but the small shop space seemed to be down, too, in terms of occupancy. Is there more work to be done there? And if so, who have you lost and how are you addressing that?

Yes. There are a bunch of what we would call loose teeth, and that was the reason, Rich, we had a dark-but-paying Acme Supermarket. They had gone dark -- gosh, about a year ago. Once it became clear to us that another supermarket was not going to come and take that lease, we decided to step up and re-tenant it. Fortunately, it's the only dark-but-paying supermarket anchor in our portfolio.

Fortunately, we are not burdened with a lot of dark-but-paying tenants, period. So, this was one where we started to see some level of atrophy in the residual shop space and once Dollar Tree opens, we expect to see some increased traffic from that and then we'll continue the backfill there.

Okay. So the backlog, Ken, of interested parties, you think, on the small shop space is reasonable?

Yes, but I don't want to overstate that. Absecon is the lower quartile of our portfolio; it's southern New Jersey. And until we see the economy get better, we ought to not be too bullish about seeing an increase in in-line lease-up. So, we're working with a wide variety of tenants and hopefully they can step up.

And I'm pleased with the activity we're seeing in Absecon and just in our portfolio in general, but this is a tough economic climate and I don't want to make light of it. And until we see a bunch of more significant positive indicators, I think it's going to be a difficult time to lease space and we should be prepared for it. And we have in terms of our guidance for this year and our outlook going forward.

Okay. And then, looking at acquisitions for a minute. You guys have talked about this on previous calls, but curious if you have had a change of heart at all on buying any debt or any mezz positions, that kind of thing. Is there anything interesting that is coming around?

Yes, we certainly spent a fair amount of time talking about mezz, so if we were to buy some really attractive mezz, give us more to talk about. But I suspect we're going to see the opportunity to buy straight real estate more so than having to buy mezz. There may be opportunities to buy debt, and I wouldn't foreclose them out, but we're not a debt player.

So, we would be buying -- if we bought a note, it would be a single note. It's not going to be part of a CMBS pool or something like that. And when I talk to my friends who do buy debt, they're not sitting there with significantly more activity on their side than you're seeing on the fee side. So, my best prediction, Rich, is that you'll see more Cortlandts than you'd see us buying the debt on Cortlandt. But if we were afforded the opportunity to buy the debt on a Cortlandt, we would certainly seriously look at it.

And more likely than not, you'd see us do three-way transactions, which we've done over the past 20 years that we've been in business, and that's how we got into the deal that we still have in Burlington, Vermont, in Merrillville, Indiana, a wide variety of other deals that we bought and sold very profitably and are no longer involved with. So, it's not that we're allergic to it, it's that I think we're going to see the kind of deal flow that is simple and straightforward, so we probably don't have to get too exotic.

Okay, great. Terrific. Thank you, guys.

Your next question comes from the line of David Wigginton of Macquarie. Please proceed.

Good afternoon. Sticking with the acquisition theme, do you anticipate, and I recognize you've got limited visibility at this point, but do you anticipate portfolios being available or is this going to be more one-off types of transactions? And under what conditions would you consider making an acquisition within the core portfolio versus the funds?

Predicting portfolio versus single, I don't think I add a lot of -- shed a lot of light to it. We can do either. We have done either and we're prepared to. I think it really depends on the circumstances. And good news for us, the single asset acquisitions can afford as much of our attention as we need, so I don't worry about them falling between the cracks.

In terms of fund versus on-balance sheet, the way it's set up is our funds in general and historically, in fact, have done the vast majority of our opportunistic and value-add acquisitions. Keep in mind, we co-invest 20% plus get additional incentives over that, so we as shareholders get significant benefits from that acquisition activity and that is the key driver.

The other areas that get done just straight on the core portfolio are either in connection with tax-free 1031 exchanges, corporate transactions, or in other instances where it's not appropriate for the fund. Those are certainly possible, less so the 1031s at this point in the cycle and we shed the bottom half of our portfolio over the past several years, so we're in pretty good shape on that side.

But the chance for corporate transactions certainly exists and that on a stock-for-stock basis or a stock-for-partnership interest basis would be where you'd see it show up in the core portfolio. And I can't gauge which is more likely or not, I just like the fact that we can do either.

Okay, and would you be willing to expand outside of your core markets into other markets if there were attractive opportunities?

Yes, with the following caveats. We have been in many other markets in the past. We were originally, before we shed a host of assets in the early phase of our turnaround 10 years ago, we were all the way down through the Southeast and heavy concentrations in other markets.

In general, we have a strong bias towards high barrier to entry, supply-constrained markets where we have strong on-the-ground capabilities. And that leads us to be more inclined in the Washington, DC up through New England, call it Boston, Corridor. Although we do have very good expertise in the Midwest, it causes us to like the Chicago market and dislike a lot of other markets.

And then, as we start looking at other geographies, we would certainly consider them provided they meet the criteria I just said, which is we need to make sure that these are high barrier to entry, high quality assets, unless we're getting them at what I'll call Kroger/Safeway pricing, which is a transaction we did back in 2004 where it was not high barrier to entry markets, but we were -- our stakeholders were so well rewarded for us going into those assets that we could. And these were Kroger's and Safeway Supermarkets, so the moving pieces were minimal.

So in general, our bias will be towards high dense markets and then we need to make sure we have adequate, or very strong, on-the-ground expertise depending on the scope. Thus, you haven't seen us delve into other secondary and tertiary markets so far.

Okay. So given, obviously, your preference for these high barrier to entry markets, it seems like there will be few-and-far-between opportunities in those types of markets at attractive yields based on the attractiveness of those assets to other players as well. And I recognize you had indicated that there were not as much capital on the sidelines as one would suspect, but I would imagine that properties in those markets would be among the most highly sought after. How do you envision that playing out then, I guess, and from your business perspective?

Yes, don't get me wrong. We wake up every morning very concerned that there's going to be opportunities we miss or that there won't be enough opportunities to meet our pipeline, but we're talking about a relatively modest goal of investing. If you look at our Fund III, for instance, $350 million of equity, and so while we talk about the competition in these markets, there's a fair amount of capital that's needed for any one of these investments or certainly any portfolio of them.

I don't believe that the geographic constraints that I discussed will be a significant limitation. And I do think that our shareholders are going to be rewarded for us being both patient and opportunistic. In January when we closed on Cortlandt, Northern Westchester, high barrier to entry market, and there were very few people willing to step up then. There were very few people congratulating us at the time of the acquisition.

You've got to pick your spots and move deliberately. We can close all cash. I don't want to sound like an advertisement, but we don't need to be dependent on debt. We don't need to be dependent on the public markets. We do substantially all of our due diligence in-house. Our approval process is quick and simple.

So I'm just not that concerned, unless you tell me that this $1 trillion of debt that I see maturing over the next three to four years is going to be met with an equivalent amount of debt and equity capital -- and I realize that a good chunk of the $1 trillion will get written off -- but compared to the amount of capital that has been raised into our system, guys, that's a lot of real estate out there. And it's going to trade hands, it's going to need to.

So, I'm not overly concerned, but I will tell you, we will be patient and we will be disciplined. And so if you do not think that there's going to be meaningful opportunities, then you probably won't see us take them down.

Okay. And just this one final point of clarification. When you say a $1 trillion, you're referring to the entire commercial real estate space, not just shopping centers or retail real estate? Is that correct?

Absolutely. And so, you can divvy it up however you see fit and still the numbers won't match up relative to the amount of equity that's in place. And again, I don't really feel like pounding the table being the one saying, "There's going to be these huge opportunities." I think it will take time. I think you need to pick your spots.

If we needed to acquire $5 billion, $6 billion, $10 billion of real estate to move our needle, I would be that much more cautious and concerned, but a host of shopping center assets over the past 10 years went into hands of people that probably now are not well equipped to own them, operate them, recapitalize them. And I do believe that it's not just Acadia, but companies that are well capitalized and that have strong operating teams to deal with all the moving pieces that occur are going to be in a good position.

Okay, great. Thank you.

Your next question comes from Quentin Velleley from Citi. Please proceed.

Good afternoon, everyone. I'm just sort of following on from some of your comments on acquisitions. Is there a Fund IV that you might be looking at that might sort of pop up unexpectedly?

It's a good question. No. In general, funds, even in the best of times, don't pop up all that quickly. So, I doubt it would be unexpected. But I think what you're getting at is, might there be a co-investment vehicle somewhere along the lines or some other type of opportunity? And the answer is sure, it's possible. It's not something that we're focused on right now.

And, Quentin, you can here there's certainly a lot of resistance as to whether or not they feel there'll be any investment opportunities, so why would we pop up another vehicle prematurely? But there is a fair amount of interest on co-investing with high quality sponsorship. So, we certainly get those inquiries and if the right opportunities presented themselves, we might and you might see something like that.

Ken, it's Michael Bilerman speaking. How would you think about, if you look at opportunities that are out there using -- clearly as a publicly traded Company, you have your stock and your units as currency and you also have, obviously, the currency and the capital that sits in the funds. I guess as your fiduciary duties, how do you, when you look at all these opportunities, decide whether potentially something goes wholly owned into the core versus into a fund?

Right. And I explained it a little bit earlier as well. In general, Michael, the assets go into the fund, unless they fall into very specific carve-outs. For the most part, the opportunities we're seeing right now have so much leverage on them that there's not a lot of stock for stock to trade hands, so to speak. There's a massive amount of cash needed for deleveraging. So, that would afford itself to the fund structure as well.

If we did see stock-for-stock or stock-for-partnership opportunity, that's something we would certainly consider. And that's very possible because we are bullish on the role that the public markets are going to play over the next several years, even though we think on the private side and asset value side things are going to be choppy. But the other good news is while the investments will go to Fund III, if we saw something that was compelling that belonged elsewhere for whatever reason, it's really a handful of investors that we speak to and we speak to them regularly. So, it has not in the past ever been an issue and I wouldn't envision it being an issue in the future.

Just in terms of the NAV disclosure, your additional disclosure, which is very useful and there's obviously a lot in there, could you just maybe point out what some of the things that you've disclosed now, which weren't previously easy to get to, items that people weren't maybe previously including in their NAV calculations?

Sure. And NAV is by far the most significant area that we increase disclosure and add some more material to. And specifically, if you look at the redevelopment pipeline for Funds II and III, what we've done is we've identified out of the total costs those costs that have been placed in service and correspond to the NOI, the current NOI, at the fund level.

So, that you can then take the residual costs and however you want to to build NAV for those residual costs, be it presumed layer and projected costs and come up with a yield that, minus the projected costs or if you just want to evaluate a cost, however. But that's probably the most significant area in terms of additional disclosure. And then, also in the area of the mezzanine portfolio, which people are interested in, we've added some additional information in terms of current quarter activity as it relates to repayment of certain loans. A couple of other areas, but those are probably the two most significant.

And just another modeling question. With the Georgetown notes, which mature next year, there's extension options on there and obviously the effective interest rate is almost [13%]. So from a modeling perspective, it's quite important to assume whether or not those lines will be extended or not? Do you have any idea at the moment of the likelihood of those extension options going ahead?

We think it's highly likely that at least for the larger of the two that they will exercise their option to extend, which we're fine with. But if they decided to pay us off and it was one less item to talk about, we're okay with that, too. There might be short-term dilution, and I guess that's what you're trying to understand from a modeling perspective --

Yes.

High quality problem. And as you see from the low teens yield that we're clipping on Cortlandt, for instance, we think we can fairly quickly redeploy the capital to similar type of yields, although for a quarter or two you may see some drop-off.

Got it. Perfect. Thank you very much.

Sure.

Your next question comes from the line of Andrew DiZio of Janney Montgomery Scott. Please proceed.

Thanks. Good afternoon, guys. Just two quick questions for you. First, following up on some comments that you made with Rich earlier. You talked about your dark-but-not-paying space in your overall portfolio. Can you just give us the delta between the economic and the physical occupancy?

Other than Acme, but -- Jon, do you have the specifics?

Yes. There's, I believe, only one or two other dark anchors in the portfolio. I think it's one --

[Marshals].

Right, at our Bloomfield --?

Bloomfield Hills.

And that's the only one and that's 22,000 square feet.

So the glass half full is there are very few dark-but-paying. Those that leave don't pay us, is the other side of it.

Okay, great. And then my other question relates back to acquisitions. You talked about seeing signs of lenders potentially taking possession of properties and bringing them to market. Do you see any potential for one-off, either off-market or lightly-marketed deals that might be generated through your contacts from being in the market for so long?

Absolutely. My guess is that it's not the majority because depending on who the seller decision maker is, they may need to protect themselves by testing the market. But we would expect to see a fair amount of off-market activity if it had to do with recapitalization of assets.

Great, thank you.

Thank you.

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to Kenneth Bernstein.

Thank you, everybody, for taking the time to listen. Hopefully this new format works. I apologize for the confusion at the very beginning, but hopefully we had a chance to answer your questions and we look forward to speaking to everyone again soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.