Acadia Realty Trust (AKR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to year-end 2009 Acadia Realty Trust earnings conference call. My name is Stacey and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating the question-and-answer session toward the end of the conference. (Operator Instructions). 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 the Company's 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 the call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Arcadia's earnings press release posted on its website for reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures.

Participating in today's call will be Kenneth Bernstein, President and Chief Executive Officer; Michael Nelsen, Chief Financial Officer; and Jon Grisham, Chief Accounting Officer. Following management discussions there will be an opportunity for all participants to ask questions. At this time I would like to turn call over to Mr. Bernstein. Please proceed

Thank you, good afternoon. For those of you in the Northeast I hope you're weathering the storm safely and soundly. I think you'd all agree compared to the financial storm that we faced a year ago, this is a walk on the beach, and for those of you who live on a beach, well we're jealous and maybe we'll schedule our next earnings call for 8:00 AM Eastern time just to retaliate. But for that, as we did on our last call we're going to shorten somewhat our prepared comments and leave more time for Q&A, so we'll start with a brief overview of the progress we made in the fourth quarter and the trends we're seeing. Then Jon will review our earnings, our guidance for 2010 and the key drivers. And then, finally, Mike, Jon and I will be available to take questions.

As a general overview, in the fourth quarter and then continuing into January of this year, we saw continued signs of stabilization, both in the financial markets, as well as at the operating level. As it relates to the three key components of our business, which is our core portfolio, our balance sheet metrics and and our external growth platform, this early stage recovery's played out as follows. In terms of our portfolio performance, in the fourth quarter and, more significantly, for the year overall, the portfolio performed consistent to probably ahead of our expectations. In general, in fourth quarter the leasing environment even improved further and our team was successful in signing leases with tenants ranging from hhgregg to Bed Bath & Beyond. And as we look at our leasing pipeline and our performance for 2010 and 2011, while this recovery is still in its early stages and we suspect it to be somewhat fragile, and fragmented, we are seeing signs of stability and barring any unforeseen setbacks. We see our portfolio occupancy declining for the next one or two more quarters this year, but probably ending the year flat to, in fact, higher. And while NOI growth will lag occupancy increases by a couple quarters, we see the declines bottoming out this year, as well, and probably reversing themselves in 2011.

Second, in terms of our balance sheet, if you review the financial ratios and data that's set forth in our earnings release and 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 are happy to answer any questions with respect to that, as well as our outlook, during the Q&A.

Third and finally is our external growth initiatives. First in terms of our existing investments, in the fourth quarter we continues to make progress in most areas of our pipeline. And working through in a reverse order, in terms of Fund III, Cortlandt Town Center, which was our most recent acquisition last year, as you'll recall it's a 640,000 square foot, Wal-Mart anchored, A&P, Marshall's, Best Buy anchored center. It was 85% occupied at acquisition as a result of the bankruptcy of Linens 'n Things. In the fourth quarter we we signed an important lease with Bed Bath & Beyond for the Linens vacancy. We acquired the asset at an unleveraged deal of about 9% and leveraged deal in the low teens, and now that -- once Bed Bath & Beyond opens this spring, and once we complete a few other smaller leases, the in-place unleveraged deal should be in excess of 10%, and the leverage deals in the high teens. Also in Fund III we continue to make progress on our Westport and Sheepshead Bay redevelopments and I hope to discuss those in more detail on future calls.

In terms of our self storage portfolio, the blended occupancy for the overall portfolio increased about 100-basis points over the previous quarter, but probably more significantly, and as broken out on Page 37 of our supplement, we break out our portfolio into three components. And on a year-over-year comparison, first in terms of the five stabilized properties, their occupancy increased to 85.7% up from 81.8% in the fourth quarter of 2008, and equally importantly, the year-over-year same-store NOI increased about 5%, which is pretty significant given how challenging a year last year was. There's three properties that are in the process of repositioning with various types of upgrades. The occupancy of those three assets increased to 71%, up from 67% a year ago. And then finally, there are six of what we call self-developed assets that we built by either our joint venture partner, and in those assets we have a blended occupancy of just over 50%,and the occupancies there range from about 20% for a property that recently opened to up to 80% for one that is getting closer to stabilization. We don't have relevant year-over-year data for those, but obviously that's where most of the growth potential lies.So as it related to self storage we'll keep you posted as these properties head toward stabilization.

Turning to Fund II, our retailer-controlled property, or RCP venture, in the fourth quarter we had a distribution from our Albertsons investment to Fund II of $3 million, and that adds to an already very successful investment platform that's already a 2X on our equity investment to date. In terms of our 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 redevelopments, the construction of six are now complete with the retail being 85% leased and the office at approximately 77% leased. The seventh project is now under construction, that's Canarsie Plaza, where in the fourth quarter we signed a lease with the New York Police Department. They'll occupy 100% of the office component of this BJs-anchored mixed use property and that property is now 80% preleased. So along with completing the construction and the lease up of Canarsie Plaza, the two other key moving pieces in this portion of the portfolio is the lease-up of the retail at Pelham, which is currently about 75% leased, and the lease-up of the office component at Fordham Road in the Bronx, which is at about 35% leased, and both of those components are gaining nice traction.

With respect to the final two projects in Fund II that are in what we call design phase, City Point in downtown Brooklyn, in the fourth quarter we were awarded $20 million of economic stimulus bonds, which we will utilize to commence this spring, a 40,000 to 50,000 square foot first phase. We're simultaneously working on a plan for the full retail development, but more likely than not with a more simplified plan, and we're very encouraged by the re-emergence of tenant interest as the national tenants that we work with continue to work to penetrate into the high barrier-to-entry markets, such as downtown Brooklyn. Finally, Sherman Plaza in northern Manhattan, we have significant preleasing interests and will commence that project once we have successfully and sufficiently preleased it. Quickly, turning to Fund I, we'll continue to profitably liquidate the remaining assets, and that's listed on Page 36 of the supplement. With the re-emergence of the capital markets we expect this process to be much more productive than appeared to be the case even a few months ago.

In terms of our preferred equity in mezzanine investments, on page 16 of our supplement you'll see a schedule of the status of our preferred equity investments. We continue to thoughtfully monitor and evaluate each investment to make sure that we're comfortable owning the assets at our basis and fortunately, in the last quarter it's been very supportive of valuations for high-quality assets and that's what dominates this portfolio, making us that much more comfortable, as to their status, and we'll continue to update you as these investments evolve.

In terms of new acquisition activity, we're entering what I suspect is a fascinating period for real estate investment. One way or another we're facing a multi-year deleveraging process, yet to date there's been far fewer exciting acquisition opportunities than might have been anticipated given the financial distress that our system experienced over the past year. More recently we're seeing high-quality retail assets beginning to trade at precrash cap rates with bidding wars actually occurring in some assets. In a few instances we're seeing high-quality retail assets trading at cap rates well below the implied cap rates for our sector in the REIT world, which also raises some interesting questions about the perceived premiums in the public markets. In any event, this bodes quite well for our existing inventory, especially because the most Intense competition seems to be for stabilized assets in high barrier-to-entry supply constrained markets. While we were fortunate to have the opportunity to acquire Portland Manor last year at prices that now appear to be extremely attractive pricing, it also now appears that the flood gates may not open in the way that they did in the early 1990s. And those companies that need to put significant dollars to work may be frustrated or forced to stretch beyond rational parameters.

Fortunately for us, given our size, where even a moderate amount of opportunities enables us to significantly move the needle and the structure of our discretionary funds, where with we're not overly dependent on the public markets to fuel our growth, we can afford to be patient, disciplined and deliberate. Furthermore, given our skill set and focus, both from a value-added perspective and an opportunistic perspective we can take advantage of the inefficiencies that are going to be an inevitable part of this deleveraging process.

So, today to conclude, while 2009 had and 2010 is likely to have their fair share of challenges, both in terms of the capital markets and the property level fundamentals, the severity of the past year's financial crisis seems to have eased. While we need to be prepared for a bumpy road ahead before we have anything close to a full recovery, we feel strongly that we're well positioned to respond to the difficulties and more so to capitalize on them. With that I'd like to thank the team at Acadia for their hard work in the fourth quarter and even more so for successfully navigating through a very difficult year. I'd also like to congratulate the team on their performance over the past decade, which certainly had more than its fair share of challenges for all of us but was nevertheless a successful or Acadia and its stakeholders.

So with that, Jon, I'd like you to continue.

Good afternoon. 2009 was a challenging year for our sector, but in general our core portfolio performance and earnings were at the higher end of our expectations. To briefly recap earnings, which we discussed in detail the press release, FFO for the quarter was $0.25 per share and for the full-year 2009 was $1.28 per share. And from an earnings perspective, the fourth quarter was relatively straight forward and with little earnings noise.

Turning to our core portfolio, on a relative basis our portfolio held up well during last year. Same-store net operating income for 2009 was down 2.6%, which was at the favorable end of our 2009 guidance. Recall that that was minus 2% to minus 5%. And about two-thirds of this NOI decline was from two tenants; one, the bankruptcy of Circuit City, which we've since retenanted with Best Buy at our Bloomfield Hills property; and then secondly our termination of the former Acme Supermarket lease at our Absecon, New Jersey property. Our core portfolio occupancy for 2009 was down 300-basis points, from 95.6% to 92.6%, which was also consistent with our 2009 guidance. Keep in mind that 300-basis points of occupancy for us represents just a little over 100,000 square feet.

Looking forward to 2010, we've detailed on Page 13 in the supplement our projected 2010 FFO is expected to range from $0.95 to $1 per share. And consistent with prior years, we've broken this out to categories; core portfolio and joint venture income, asset-based fee income, transactional fee income, general and administrative expense, and then lastly other income. And as mentioned in our press release, our 2010 earnings projection is before any earnings from potential acquisitions and it's also before other potential income, which could include promote income from our funds, income from our RCP investments, or other potential income, such as lease termination. And it's possible that there will be some amount of earnings contribution in one or more of these area, but given the inherent variability as to the timing and amount of these types of transactions we've opted to keep the guidance clean and not include earnings from these activities in our estimates.

Turning to our expectations, for our core portfolio for 2010 we anticipate occupancy will be flat to slightly up by the end of the year, and as Ken mentioned, the trend during the year will be slightly down in the first half, and then barring any unforeseen events, back up in a second. And given this trend, year-over-year, net operating income gains will lag reported occupancy by a few quarters, so we'll continue to see net operating income declines in 2010, but they'll bottom out this year and then most likely return to positive growth in 2011. So given this pattern, for 2010 we're forecasting a minus 2% to minus 4% NOI trend, but it's worth noting that about half of this decline is from two locations; our Absecon, New Jersey property, and our property at Chestnut Hill outside of Philadelphia, Pennsylvania.

At the Marketplace of Absecon, New Jersey, recall that we terminated an Acme Supermarket lease, collected $2.5 million of lease termination income and since then we've reanchored about 50% of this space, primarily to Dollar Tree. We're working with potential replacements for the other half of this space, but until we're receiving rent on the remaining space there will be about 80-basis points of drag on our 2010 income. And then the second location, Chestnut Hill, Borders bookstore did not renew their lease upon expiration last month and we're working with several retenanting prospects, but in all events we anticipate that there will be downtime for most, if not all of 2010, so that will create about 120-basis points of decline in income. So, giving effect to these two specific situations, which represent about 200-basis points of income, we're projecting for the balance of the portfolio that it will be flat to down 2% for 2010.

So to conclude, we're seeing signs of improvement in our sector. That being said it will take time for this translate to the bottom line. Given the quality of our core portfolio, the stability of our balance sheet, we're well positioned for 2010 and thereafter. With that, at this time we'll be happy to take any questions.

(Operator Instructions). Your first question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed.

Hi, good afternoon. I'm on with Jordan Sadler, as well. Looking at your 2010 FFO guidance have you contemplated any changes to the preferred mezzanine investment portfolio in terms of the interest income for the year?

In general, it's quite comparable to 2009. We have a couple of options that are available to the borrowers for some of the bigger loans and our presumption is that they exercise those options.

Okay. So on some of the smaller mortgage loans or notes there's no major changes in the assumptions in the repayment of any of those either?

Yes, no major changes. There might be some redemptions, but not large amounts, so, we think, again, that it should generate about the same amount of interest income in 2010.

Okay. And then, with regard to the new $8.5 million loan investment that was made in the quarter, can you provide some detail about that loan and talk about the collateral a little bit?

Sure, and I don't want to make too much of it. It was an existing investment in one of the ventures that we have. It was a very safe first mortgage loan, extremely well collateralized. I'm being a little vague about it because this was done -- while very mutually beneficial, it's a mid-teens returns to us, it's done as much as an accommodation to deal with a illiquidity issue as anything else and one of the benefits of having good partners and being a good partner is we can do things like that. I don't see this as an expanding part of our core business. I do think it does speak so some trends that we might see in terms of additional acquisition activity because there is, in the private market, illiquidity issues, but, again, it was something that we did into investments that we've already made and other than that I'm going to remain relatively confidential because it's just not that big an issue.

Okay. And then also looking at your shop portfolio -- your shop tenant, occupancy increased about 150-basis from the third quarter overall, but a couple of the properties lost some occupancy. Looking across I see A&P Plaza in New Jersey, Village Commons in New York, and a few others are -- what are you seeing there with regard to some of the smaller tenants in your portfolio? Was there any additional fall out post year end?

Yes. No, it's very property-specific and in some cases, regional or sub-regional specific, but I really have not -- we've not been able to glean any unique observations from it other than our small shop tenants, weathered 2009 better than we anticipated. A year ago, we thought that the New York area was in for a lot of pain and that the echo effect from the fall out of Wall Street would severely impact the less well-capitalized mom and pop tenants, and we saw some fall off, and there were a host of tenants that I know have struggled and probably are continuing to struggle. But for the most part, we're seeing them hold up. And while we have not seen a huge resurgence in local entrepreneurs stepping up and taking new space, overall the satellite space seems to be holding up.

Okay. All right, thank you.

Sure.

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

Thank you. Good afternoon, guys. Ken, you touched on the acquisition, the environment at this point. I presume you guys are considering to speak with banks, special services and the like. How are they viewing their troubled loan portfolios at this point in time, and is there any indication that maybe foreclosures may start to accelerate in 2010?

Yes, but this is not playing out the way that I originally thought. In other words, there's a host of regulatory and institutional pressure not to accelerate the process nearly as quickly as we had either hoped or feared, depending on which day of the week it was. So I think that will be a source of acquisitions and we are seeing special services get far more active in the process, but amend and extend will still be prevalent in 2010. So I think we're going to have to continue to be very flexible and creative, which I think our Company is in terms of how we access opportunities.

Okay. And then can you talk about some of the markets that you're looking in at this point in time that are different from your core markets?

Well, we will look at, and only at the United States in general, and historically, our main activity has been in the eastern seaboard and after we pulled out of the southeast, really Washington DC through to Boston, and we understand that market and have that very well covered.. When we start with -- we understand the Midwest, and there's certain parts of it we know we do not want to increase our exposure to unless the pricing was so compelling to justify it and I don't see that being the case. And we like Chicago, but I'm not sure there's going to be a huge amount of growth opportunities there. As we go beyond those markets we have often entertained growth opportunities in them, but it has to meet some pretty high hurdles for us and thus, over the past 12 years that we've been a public company you haven't seen us go there and those hurdles, I guess, are as follows.

One, we believe as it relates to retail that there's going to be a continued separation between the high-quality, high barrier-to-entry supply constrained markets and those that are more generic and we fear that the more generic markets are just simply over retailed and so we would need to be very thoughtful before we stepped into those kind of markets. And then it's not only a matter of acquiring assets that are in the right supply-constrained markets, we need to be in at the right pricing. We need to be in, as importantly, with the right team on the ground because any time you go into another market there's a learning curve or what fear is a dumb tax and we hate paying dumb tax. So, it is always possible and certainly a year ago, six months ago, when the markets looked very frozen and there was the possibility of significant illiquidity immediately, we certainly looked around. We will have good data because we're investors in and active in the ownership in Mervyn's on the West Coast, Albertsons, et cetera. We have good data, but our stakeholders need to get well paid for us to move outside of these core markets. We are not talking about an insignificant amount of potential acquisition activity in the DC through New England corridor. So that's a long answer to a short question.

Okay. So I guess given, the lack of volume at this point, or potential volume that you're witnessing, are you more open to taking on developments at this point, either with redevelopments within your own portfolio, or taking over distressed development opportunities?

The latter, especially. There are a few markets that are underdeveloped and we have a few assets in our pipeline, is that downtown Brooklyn or in some other areas who we think will be right for new development, but as a general rule the opportunities for new development have got to be compelling in order to justify us doing that and in general when we undertake them they are. That being said, there are a bunch of assets out there that are very broken right now that need not just money, but expertise and we have hope. So we are looking at and working on a variety of those kind of opportunities that require not just the potential reanchoring, not just the potential deleveraging, but a combination of all of those and we think we're well suited for those and so I suspect you'll see some of those. You'll also see straight acquisitions because this deleveraging process, even though, as I just said before, the bangs may be slow to start the foreclosure process, there's other $1 trillion of debt out there and I know I'm tired of keep pounding the table about it. Sooner or later that has to get delevered and that $1 trillion plus of debt is probably at the 100% loan to value, if not beyond that. In the public markets the deleveraging process, has been relatively straightforward and you've seen that through equity offerings and that's one of the benefits in the public market. The private markets are not going to have the availability of deleveraging in a simpler way, and so we'll play as part of that, as well.

Finally, can you maybe talk a little bit about the variance in performance between your assets in high barrier-to-entry markets and go-to-markets within your portfolio?

Yes, the -- fortunately, over the past probably five years or so we've sold off the bottom half of the portfolio and we tend not to the track that portfolio too closely, but we know factually that it has significantly underperformed the remaining assets. We have seen in some of the markets, whether it be Michigan or Ohio, where we still have some remaining assets that were required as part of portfolios, primarily in our fund business, those assets we're having a very hard time getting those leased up. Thankfully they are profitable portfolio investments, so we won't incur much pain, but what we see there is if you've lost your shop tenant, it's going to take a long time before you're going to replace it. The occupancy differential is not as simple as saying -- and if we were a larger portfolio maybe we could say, look, our core portfolio dropped from 95% to 92% and our noncore dropped from 90% to 86%, when some of these weak assets drop, they go from 90% to 30% occupancy and they stay there for a very long time. So we see a differentiation, I think it'll continue. It is going to take a couple of years for had to play out but it will play out.

How many assets have fallen from 90% to 30% occupancy?

Fortunately in our portfolio only a couple, but there are a couple of out there. And I may be exaggerating a little bit, but let's move on to the next question.

Thank you.

Your next question comes from the line of Quentin Velleley with Citi. Please proceed.

Good afternoon. In terms of guidance, which excludes lease termination fees and promotes, and Jon, I know you mentioned that there might be some coming and I think on our estimates, which includes them, it's anywhere up to [$0.10] or thereabouts. What is the potential for other promote or termination income this year that could come in, obviously, over and above guidance?

We still have in Fund 1 up to six -- give or take $6 million of potential promote that will come in as we liquidate the fund and that's primarily related to the Kroger/Safeway portfolio. So that's a possibility, it's just hard to determine , obviously, when that

Yes.

And then termination income, for 2009 we had a little over $4 million of termination income and the year before that some, as well, so that was a little more difficult to quantify and to forecast, but based on history I wouldn't be surprised to see something in that area.

Yes. In terms of potential acquisitions you've obviously got a lot of liquidity available on your own balance sheet, and also in Fund III, and by the looks of where G&A is relative to your asset base there's extra slack in the platform, which ideally you put to work. Is there some point if we see the transaction markets are extremely slow, things keep getting pushed out [in processing them] than what you expect, your cost of capital doesn't allow you to make acquisitions on own balance sheet that makes sense, is there a point that you start thinking about reducing G&A more toward the size of your asset base?

I think there's a few decisions that we would be -- have the luxury of making. G&A reduction's probably the most painful of them, but if we see this trend continue where volumes of transactions may be down, but cap rates have been at -- gosh in some cases sub seven, we have a bunch of assets we can profitably sell into and capitalize off of that process. So that would be point in -- point number one and in fact, there's some assets right now, and Jon in Fund I, that three months ago we say, geez, probably have to wait a little bit longer, to get best pricing, that best pricing may be in 2010. So there's -- one, we have the ability to monetize, and I'll point out that as and if cap rates continue to compress because of our fund structure, while we're approximately of the 20% of the co-investment economics, as you get into profitability our economics, we get 35% to 40% of the profit, so that starts becoming pretty compelling.

Secondly is, we get well paid by our fund investors to look for deals, and so our G&A is large but the funding commensurate with it is large. If we ever got to the point, where we turned to our fund investors and said we don't think we can competitively find opportunities for our joint benefit and decided to stop the fund business, sure then there would be a material downsizing of the Company and its structure and I guess that's theoretically possible. It's very hard, I understand, for people on Wall Street to be patient because your perspective on timing is a lot different than ours needs to be when we're investing in real estate for the long term and our real estate is highly illiquid. If we see the market overheating for a month and then cooling off we can't capitalize that on the same way that you guys are very successful in being able capitalize on it. So we take pride in the fact that we are relatively, patient, relatively disciplined, but if you look over the past ten years we've also been very active. It's not that we just stand on the sideline. And we will stay on the sidelines when we're convinced our stakeholders are not rewarded for our allocating capital into the market, but when we see opportunities, and more often than not we think can find good opportunities, we'll put them to work. So, I -- for those of the Acadia employees listening I don't think you have to worry about imminent G&A cuts but, guys, plan on working real hard this year so that Quentin stops asking this question.

I think it's (inaudible), isn't it? But I will ask ano -- a question that I've asked previously and that is in terms of establishing additional funds. Is there anything you're working on at the moment, are you still waiting to deploy more of the Fund III capital before you really start looking at an additional fund?

Here's where we stand and it's interesting and it's flattering that we are receiving a pleasant amount of reverse increase because in the public market you guys can track our one, three, five, ten and now 12-year performance history and it's pretty darn good and we're proud of it and it's fairly transparent. In the private it's less so, but Acadia has a nice reputation and from what I can glean, because, as I said, we don't see the relative performance, we perform quite well. So we are receiving reverse increase and we're wondering what's the best execution on behalf of Acadia for something like that. The bottom line is, right now we have until 2012, so we have plenty of time to put what I view as roughly $350 million of our $500 million of Fund III to work and at times when we thought the flood gates would open,, setting up a co-investment fund sounded very compelling and then other times -- think about your previous question and say what if there's nothing to buy between now and 2012, certainly setting up another fund along side that that doesn't. But we're always talking to the investors because that world is fluid and it's having those conversations.

Okay, perfect. Thank you very much.

Thanks.

Your next question comes from the line of Craig Schmidt with Banc of America-Merrill Lynch. Please proceed.

Thanks, good afternoon.

Hi.

There seems to be -- and you sort of outlined it in this call -- countervailing influences on cap rates, wonder where you think cap rates might go from here, particularly for the high barrier-to-entry. shopping center assets?

Gosh. So let me preface this by whatever I say take with a grain of salt and just like when you talk to the buy side and you want to know what stocks they own before they tell you who they like, here ' where we stand. Obviously we're going to have a couple million square feet of high barrier-to-entry urban retail that's going to be ripe, for sale or recapitalization over the next couple of years and we believe that those assets will trade below a six cap, but I'm joking. I don't really know where it goes, what I know is that we are seeing high levels of interest. Again, a lot of supply and there's more buyers than sellers for the [limited amount]. There are high levels of interest with those kind of assets and so, depending on where, at the fundamentals level the economy and the job market goes, and depending on -- then in the capital where the ten-year treasury goes and capital bonds spreads, et cetera, if shopping centers in high quality markets where the NOI looks like it has more prospect of going up rather than down is trading between a 6.5 and a 7.5, which is kind of where we see it right now, I'd be pleasantly surprised to see those cap rates hold. I suspect there's going to be a lot of volatility along the way, but sooner or liter I'd like to see it return to those levels if the capital markets and the debt markets can support positive spread at that level. But I think it's going to be a bumpy road, so I really don't want to forecast where it is other than to say where we see the pricing today.

Okay. And then just how much more upside is there at Cortlandt given the (inaudible)?

Yes. We do not expect to lease it to 110% occupancy although our leasing team has thought about that. We bought it at 85% occupied because of the Linens vacancy and the Levitz vacancy and we've addressed the Linens. There's the Levitz and a few other small spaces along the way. It could be from unleveraged yield perspective another -- up to another 100-basis points, so it's not insignificant, but given what we're seeing in the marketplace in demand we have been known in the past, to capitalize on opportunities like that, so we're considering a lot of opportunities.

Okay, thanks a lot.

Sure, thank you.

Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Hi, good afternoon, I guess a few questions. First of all, on the completed Fund II investments, where is the yield penciling out on those today and how far off from stabilized is it?

Still a couple of years from stabilize because of the moving pieces that I mentioned, which is leading up the Fordham road office building and getting Pelham Manor to full stabilization. So we see it stabilizing in the eights, but we're probably 100 to 200-basis points away from it on looking at it on that blended basis. The individual asset piece then is on a case by case, because some are fully stabilized and then are at those levels.

Mike, another tool to look at is to go to supplement on page 14. We showed a current NOI for the quarter and then we also show which of the development asset's costs have been placed in service and you can certainly use that to figure out what the current NOI is and see what's remaining to get to the return that Ken's talking about.

Got it, okay. The second thing in terms of City Point, there was a plan at one point to have a large retail anchor in there and Target was obviously it, but considering you're doing a phase now, number one can you talk about any preleasing activity that's going on just where it stands, and secondly, the next phase, could that still hold a anchor tenant?

Yes. The -- there's nothing about this first phase, which will be just on the main Fulcrum entrance. There's nothing about this first phase that would preclude, or in our view will preclude the obvious two or three anchors and junior anchors from coming into this location. And the interest today to 2010 remains very strong fortunately because what we saw happen was last year, when we decided to put things on hold, fortunately, there was this perception from our retailers that they would just simply wait for the next Circuit City to occur and then they would just bac fill into those locations and that really hasn't played out. And especially in the markets like downtown Brooklyn, where a retailer would much rather have its own newly-built footprint, they're recognizing that that is probably best execution for them. So, while we're going to be very careful about how we phase this, we're not going shut out the prospects and, in my view, the likelihood that this remains a somewhat simplified -- meaning it probably will have one less floor, it'll probably have a major anchor on levels three and four, another anchor on level two and then shop space on the first level, so it'll be a simplified process, but we still think it has real potential in that area.

Okay. Switching gear for a second to Canarsie, can you talk about the decision to add the police department to that project and where they go, and is income from a tenant such as that versus traditional retail?

Right. This always was contemplated as a mixed-use asset, meaning there was an office component and in New York City there a host of zoning hurdles and vertical hurdles as to what debt and highest use is and that's why we tried to remain flexible and that was one of the reasons that self storage where it fits in is a nice addition in some instances, so there was always this office component. And New York City is a good credit tenant, New York Police are there. This is going be detective offices, primarily, although we're going to save space for sell-side analysts who ask too many questions. So we're going to have a long-term lease with New York Police department as the tenant. BJ's Wholesale Club will be the dominant retail on the mail level and then we'll have some out parcels, then we'll be done.

Okay, and last question. Jon, I think you mentioned when you were talking about guidance, and in particular the mezz book or the preferred book, you mentioned a portion of that could be paid off this year. How significant is that and what's the timing on it?

No, my response before was we were talking about the rather small mezz piece, not the two big loans or the first mortgage loans, and I mentioned that there might be one or two smaller loans paid off this year, but that it wouldn't be a material impact in terms of interest income 2010 versus 2009.

Okay. So you said it wasn't the larger, it was the smaller, okay.

Correct.

Okay, that's it. Thank you.

Thanks.

Your next question comes from the line of Sheila McGrath with KBW. Please proceed.

Yes. Ken, on Canarsie you mentioned that you got new construction financing, I was wondering if you could tell us how the terms on that financing compared to construction financing you got on earlier urban projects?

Yes, Mike, the spread was?

The spread was 350.

Yes.

So it --

But unfortunately they couldn't afford it so it's effectively a 5% yield. This is a 1.5% floor, which we didn't have before and that's about it. Otherwise it was pretty consistent.

But was the u -- was the proceeds that you were able to get out of it similar to what you got on earlier projects?

Yes.

Okay.

We're fortunate that -- Shiela, there's enough regional banks who we enjoy doing business with. Just like we all sit there and complain there's not enough deal activity on the acquisition (inaudible) to our term, believe it or not there's not enough high-quality projects that can utilize what we'll consider conservative leverage with high-quality borrowers. so we have been fortunate that we've been able to avail ourselves of what I think is relatively attractive debt.

Okay. Switching to the tenants real quick, on the tenant watch list there haven't been as many bankruptcies as many had expected, I'm just wondering how your tenant watch list looks and what your expectations are as you look through 2010?

Yes, and that's a good question. I guess this is how we'd break it out and I really want to try to avoid taking on any particular tenants, because we love most of them. There's those that are in what we call the secular decline and whether that;s video or some other areas they're certainly on our watch list and fortunately we don't have too many of those tenants. We stopped signing video stores ten years ago, so I think we have maybe two or three. Bookstores are coming under pressure but Jon talked about our only Borders books that, again, is gone. And those will remain on our watch list because sooner or later those in secular decline will go away. In terms of those that are solid operators but perhaps have too much debt the analysis is going to be a little trickier because what we saw in 2010 -- excuse me, 2009 was fewer bankruptcies than we expected and I have a feeling that their lenders, their factors were kicking those cans down the road, as well, so there's probably more debt in our retailers, both private and public, than we would ideally want.

That being said, our focus has always been on owning the right asset so that if a retailer goes out, or goes into Chapter 11 we are more likely to have that lease affirmed, or if we get the space back more likely to have leasing upside. So there are a host of tenants that are over levered but are otherwise good operators. We would expect in 2010 to see more of them survive than go through the Circuit City-like Chapter 7, and so we think we're pretty well situated, even that occurs, but it's too early at this point to say the recession has passed and any retainer who's made it to 2010 is destined to survive. So we're watching all of those retailers relatively closely and we see the same data for those that are public that you do.

Okay, thank you.

Sure.

Your next question comes from [Mark Zutinski] with BMO Capital Markets. Please proceed.

Hi guys. I was just wondering if you could speak a little bit about downtown Brooklyn. There's been a lot of residential units moving into the area, have you seen uptick in retail interest?

Yes, although I don't think it is driven by the units because those units are still being absorbed. What we have seen or what we've heard from our friends on the residential side is that they're pleasantly surprised by the absorption. And then what we're hearing from our retailers is those that have multi-year vision, they recognize that there are a host of residents, I forget the number of new units in the downtown Brooklyn, but it's measured in the thousands and that are going be their shoppers in the not too distant future. And unlike other parts of the country it's not a question of if the downtown units lease up and/or sell, it's just a matter of at what price. So, that downtown market for retailers will become a far more dominant 24-hour shopping experience and they're beginning to recognize that. But counter balancing that is our retailers are very disciplined right now, many of them felt a lot of pain going into the so-called growth markets of the housing bubble and so no one really wants to run to committee and say that they're willing to predict five years from now XY and Z, so they're being very careful on how they analyze.

Okay. And for Fund III, are your seeing any of the Fund III investors who are chomping at the bit, as well, in terms of why you deploy the capital?

The tone has definitely changed, so I would never say chomping at the bit because those investors encourage us to remain disciplined and they recognize that these investments are highly illiquid and unlike shareholders, they can't change their mind and get out if they see a shift in a quarter or so. So the shift is a year ago, when we closed in Cortlandt and I did an investor call just to make sure everyone was alive and well before we did even though our funds are fully discretionary. A year ago people were visibly scared and now everyone is feeling better and they are curious, they're supportive, but I wouldn't expect them to be chomping at the bit and even if they did, we run our business based on when we see opportunities. We're in this for the different promotes not just for assets under management.

Okay. And sort of bookkeeping thing here, what was the reason for the uptick in TI spending for the quarter?

Primarily at our Absecon, New Jersey property. It's the retenanting of the Acme space.

Thank you.

Yes, sure.

Your next question comes from the line of Nick Vedder with Green Street Advisors. Please proceed.

Hey, guys, I just have one quick question for you.Ken, you spoke a little bit about the secular decline with some tenants and, Jon, you referenced in your prepared remarks the vacancy of the former Borders store and I'm just curious, I know that's a pretty odd shape and that when you get two-story Borders it can be pretty difficult to release. What are your backfill opportunities at this point and what do you do with a box like that?

Yes. And where two-level retail doesn't work you're forced to consider other alternatives and we've done that and you know we have multiple mixed use, so if that were the case, thankfully we're in a nice suburb of Philadelphia where there are medical uses, hospital interests, other potential office interests and it would have to then go through that process and we're more than capable of doing it, although it's a lot more fun just to sign one lease.

Got it. And then in terms of the rental rate on that Borders, is that above market, below, where does that stand?

It's above, yes, it's above.

Okay, thank you.

Your next question comes from Andrew DiZio with Janney Montgomery Scott. Please proceed.

Thank you. Looking at your storage space portfolio you guys have repaid about half the debt that was once associated with that, do you have an interest or an ability to relever any portion of that?

Yes. I had rather get -- one is, in 2009 putting debt on anything that wasn't stabilized was not something that we were really desirous of doing. Also, keep in mind that in Fund III our line cost is at about 1%, so there's a real disincentive to put too much debt, especially on nonstabilized assets. As the list of stabilized assets increases, and we have some in lease-up, as I mentioned, that are in the low 80s, so as those become more stable and as the debt markets now become r more reopen we would certainly consider doing that.

Okay, thank you. And then just looking at the -- your New York City office, the office portion of your portfolio there, you've obviously signed a lot of leases with New York City Government and city service tenants, do you feel like you have an advantage with those types of tenants versus other users?

Yes. It is a niche that we've developed because in the outer boroughs there's a bunch of agencies that have to be in the Bronx, have to be on 160st to 170th Street, need to provide services to the community. There is a skill set associated with understand how to structure these leases, whether we -- the school that we put in on Fordham Road or the built-to-suit that we did on 216th Street, so one way or another it's a learning curve that we've developed. We like doing business with the city and we're going to continue to do that. I don't see it as a separate business, I see it as a nice compliment to urban mixed use.

Thank you.

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

Hello, guys. Hey, Ken, you -- or rather I was going to tell you that Chemo had mentioned on their call that they were looking at the possibility of finding distressed retailers and you mentioned that you're seeing some retailers out on the edge, as well. Would you add the RCP, do you think?

Sure. We need to be careful about, though, what we mean by that. Retailers who own real estate and have not yet monetized it are absolutely on our radar screen, and there can be real value creation there. So those retailers that are on the edge as you say, or may be over levered and simply have leases, unless they're long-term leases it's hard to create a lot of real estate value. So the selection may not be as broad as it was when we did Mervyn's or (inaudible), who's also a partner in that Albertsons, but I think there'ill be opportunities.

Okay. And would you do that with partners, do you think, or out of the fund structure like you have historically?

It wouldn't -- it would be in the fund structure. Our partnership with Klaff and Lubert-Adler has been a very successful one. As I mentioned, we've already gone over 2X on the equity there, we like having them as partners, they're very talented. The distinction, if any, this time is that I'd be a lot more careful about club -- large club deals, but I think everyone is. We want to make sure that we would carefully understand ahead of time the financing markets because they're more difficult. That being said, as I said we're very fortunate that those deals worked out quite well and that the risks that we would now perceive today have already been greatly mitigated.

Okay, I got you. Good, thanks. And then looking at RCP still, what exactly what was $3 million from RCP?

It was distributions from a couple of RCP investments and of the $3 million about $1.3 million was return of capital, so when you look at the income for the quarter the $1.7 million is what shows up in terms of income. And then when you boil it down to the Acadia level it's obviously our 20% net of taxes.

Right, okay, Jon. And why did you get that? How did that come about exactly?

I think it was primarily -- yes, from working capital, from operations. There wasn't, to my knowledge, a capital transaction.

Okay. So what I'm trying to figure out, I guess, is would we see more of this in the next few quarters. or is it sort of a one-time catch up thing, or how actually should we look at that?

The majority -- as it relates to Albertsons the majority of future capital probably comes from capital transactions although we're pleased with the operations overall, and so there may be -- depending on the duration investment there may be both. As it relates to Mervyn's it will be from capital transactions. There are -- we've replaced the vast majority of that portion of Mervyn's that we still own, because remember, we sold off the majority of Mervyn's. Those that we still own, the tenancies for the most part have been replaced with Kohl's and other tenants. So there is cash flow, but we expect that to stay retained at the entity level and then when capital transactions occur in the Mervyn's that's where that would come from.

Okay. So we couldn't see much of what we saw in the fourth quarter typically, is that right, Ken?

I'm being very hesitant to provide guidance other than it'll be lumpy, Rich, and it could show up in any quarter next year or it may show up in the future. We feel very good that there is real value left in all of those investments, I just -- the reason we gave the guidance the way we did was we really don't want to disappoint you if it doesn't show up in a given quarter next year, et cetera.

Okay, I got you. And then would you walk through for us the -- how that, that stimulus bond financing works? Does that all come in one chunk, or is there a timing related to it, are there strings attached, that kind of thing?

It is complicated. Given that it's the top of the hour I could spend the next entire hour but I have a feeling we'd lose most of the listening audience walking through a bunch of the intricacies. It does come substantially all at once. It then stays in escrow and then we draw it down as our construction proceeds. ANd it is -- it's attractive, that's why we took it. It is not the key driving force in this transaction, but when we're offered stimulus financing, we'll avail ourselves of it.

And has it already occurred, have the bonds been issued already?

No, that'll be this spring. Yes, April, Mike says.

Okay, great. Thanks, guys.

Thanks, Rich.

Your final question comes from the line of Steven Boyd with Cowen and Company. Please proceed.

Hi, will you provide some additional color on the lease-up at Fordham Place?

Sure. The retail is 100% leased and doing extremely well and so far anyone who visits it is extremely impressed with that; Best Buy, Walgreens, a host of other tenants. On the offices the vast, vast majority is going to be various different city, state and federal agencies and we're working with a wide variety of them. And if you spent any time up there in the Fordham Road Bronx area, if you're a user office space, your choices for relatively new space are extremely limited and for new space you're limited to our building. So there's a lot of interest, it's just if you've worked with these agencies you know it takes time. So my expectation would be, while it's always possible that Fordham University, which is right across the street street from us, takes a floor or two -- and if any of your are graduates I encourage you to urge them to do that. I suspect you're going to see, and we're working with a variety of federal agencies that must be based somewhere in that portion of the Bronx. We are working with two or three other city agencies and that's how that will lease up.

Okay, but are you close to signing a lease or any closer this quarter?

Yes, we are. It is a lengthy process. The good news is -- and that's probably going to be your next question -- is are the rents holding and the rents are holding. The good news is the interest is there but you go through a relatively rigorous RFP, request request for proposal, process when you deal with these agencies. They don't necessarily work with the same urgency as that our retail tenants or that we would like, but eventually they get there as evidenced by the NYPD lease that we signed in the fourth quarter. Remember we started -- in Canarsie we started construction several quarters before that, so it took NYPD some time to get there but they get there.

Okay, last question. When will that enter the same-store pool, that property?

Typically when we give same-store it's for the core portfolio,.

Okay.

And we're not quoting it for the funds just given the nature of the investment strategy for the funds.

Okay. Okay, thank you.

Great.

Thank you.

At this time, I would like to turn the call back over to Mr. Bernstein for closing remarks.

Great. Thank you, everybody, good luck with the snowstorm, and we look forward to seeing you all again soon.

We thank you for your participation in today's conference. This does conclude your presentation, you may now disconnect and have a great day.