Acadia Realty Trust (AKR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter Acadia Realty Trust earnings conference call. My name is Alicia and I will be your conference coordinator for today. At this time all participants are in listen-only mode. We will facilitate the question-and-answer session toward the end of this conference. (Operator Instructions).

Please be aware statements made during this conference call that are not historical may be deemed forward-looking statements within the meaning of the Securities Exchange Act of 1934. Actually results may differ materially from those anticipated 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 this call, management may refer to certain non-GAAP financial measures including funds from operations and net operating income.

Please see Acadia's earnings Press Release posted on its web site for a reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Participating in today's call will be Kenneth Bernstein, President and Chief Executive Officer, Michael Nelson, Chief Financial Officer and John Grisham, Chief Accounting Officer. Following management discussion there will be an opportunity for all participants to be ask questions. At this time, I would like to turn the call over to Mr. Bernstein. Please proceed, Sir.

Thank you. Good afternoon. Thanks for joining us. Today I will start with a brief overview of the progress we made in the second quarter and the trends we are seeing. Then John Grisham will review our earnings, operating metrics and key drivers. And finally, Mike Nelson, John and I Jon and I will take questions. As on overview, we have spent time reviewing our second quarter results in the context of the improvements in the economy and financial markets over the past year, but also in light of the more recent mixed macro economic data on housing, employment, consumer spending, and the resulting market volatility.

As we said in our last quarterly call, while we have been experiencing a strengthening or recovery in most aspects of the business, we also felt that it was prudent to be prepared for a bumpy road ahead before we entered into a full blown recovery. Now, half way through the year, we are seeing a continued year-over-year strengthening or stabilization of the key drivers of our business. In many instances in excess of the original forecasts, but our economy has certainly also experienced its fair share of recent turbulence. So today, we will discuss what we are seeing in key components of our business.

First our core portfolio, secondly our balance sheet, and third, finally our external growth platform. When we compare and contrast this performance with the headline data, what we are seeing so far is that the volatility associated with macro economic reports is not translating into new operational softening. Now, we recognize that most of our internal information is more often than not a lagging, not a leading indicator and it is heavily anecdotal. So some level of caution is appropriate. And probably most importantly, our view is however bumpy this recovery may remain to be, we believe we are well positioned both in terms of our existing portfolio, our balance sheet, and our external investment platform.

So, first, in terms of our portfolio performance in the second quarter, our same-store performance for the quarter and year-to-date were stronger than we had originally forecasted. This is primarily due to fact to our team was able to retain a higher percentage of tenant with lower default rates than was originally anticipated. As we previously discussed our same-store NOI decline was concentrated in the two previously discussed vacancies of Absecon, New Jersey and Chestnut Hill and excluding them the portfolio would have produced otherwise positive results more or less across the board. Further more in the second quarter, we also saw continued stability and consistency in the performance metrics of our existing tenants both in terms of defaults, evictions, bankruptcies and collections and our more anecdotal conversations in negotiations with our retailers seems to be consistent with a stabilizing economic outlook.

So, in short, as opposed to our original year-end more conservative expectations, we see the impact of the recession on occupancy declines having been shallower, and in shorter duration than we originally anticipated. Further more, we are beginning to once again see opportunities to harvest value within our portfolio by recapturing space from underperforming tenants and then releasing that space for positive spreads. In the second quarter, our leasing team successfully renegotiated the recapture of the coanchor in the New Louden shopping center. This was a 65,000 square foot BondTon department store box. It was terminated and taken back. And simultaneously, we entered into two leases. One to expand our existing and thriving Price Chopper Supermarket bringing that tenant to 88,000 square feet and the balance going to Hobby Lobby.

Now, due to Acadia's somewhat unique wall small numbers as Jon will discuss, is the, -- there will be a short-term negative impact on occupancy and NOI while this retenanting takes place. However upon the two tenants opening, which will be in the middle of next year, this transaction will be meaningfully accretive.

The second component, our balance sheet and liquidity. The improvements in the capital markets also benefited our already strong balance sheet. If you review the financial ratios and data set forth in our earnings release and on page 23 of our supplement, you will see that we are in a healthy capital position.

Third and finally, our external growth platform. First in terms of our existing investments where along with the positive momentum in general, in the second quarter, we made solid progress. Most significantly was our City Point development in downtown Brooklyn. Please note that a brief power point presentation on City Point has been added to the web site on the Investor Relations section of our home page. As you may recall, in 2007, Acadia, through our fund 2 originally acquired a 75% interest in the 0.5 million square foot retail component of a 1.5 million square foot mixed use development. Our original joint venture partner led by Mcfarland partners acquired the balance or the 25% of the retail component and 100% of the approximately 1 million square foot residential component. Thus Acadia's component represented just under 25% or $30 million of the total original purchase price which was $120 million.

At the end of the second quarter, Acadia purchased all of our joint venture partners interest in City Point for approximately $29 million. Now, while Jon will discuss the financial impact, this purchase gives us full control at an attractive cost basis of all 1.5 million square feet of the project. And it is allowing us to proceed on a simplified and expedited basis. For those of you looking at the power pont presentation, you will be reminded that our City Point development is just one component of the on going transformation of downtown Brooklyn.

Since 2008, over 3,000 residential units have been added to this market and it is expected that there will be 16,000 new residents in the downtown area by the end this year. Along with the future home of the New York Mets, downtown Brooklyn is also home to ten colleges and universities and rolling over 57,000 students. And even prior to these more recent changes, the Fulton Street retail corridor that City Point is a part of is already a strong draw to the downtown area with more than 100,000 shoppers a day and retail sales of over $1,000 a square foot. It's draw now includes a larger pool of national and international retailers including H&M and Arrow Postel, who both have announced that they plan to open stores on the Fulton Mall by the end of 2011.

With respect to the development of City Point, as we have discussed on prior calls we are now contemplating developing the project in three phases. Phase I which as of the past quarter, construction is now underway for a 50,000 square foot four-story retail building located on the Fulton Mall. Our goal is to complete construction of this phase within the next 18 months. During this time, we also expect to finalize the design for and the significant preleasing of Phase II, so that we may commence construction of Phase II prior to the completion of Phase I. Phase II is going to consist of approximately 450,000 square feet of retail as well as up to 200 units of affordable housing,, and contain at least one major anchor and several junior anchors. And it is likely that the major anchor will span the fourth and perhaps even the third level of both phases 1 and Phase II.

Finally Phase III will most likely be a stand alone residential parcel containing up to 650,000 square feet of residential units. Upon completion the redevelopment is going to contain 1.5 million square feet of retail, residential, commercial space including affordable and market rate housing. In short, we are very excited about the relaunching of this development. Our newly reinvigorated City Point has the opportunity to create a critical mass of new retail that can capitalize on the residential and commercial growth in the area.

Elsewhere in our existing investment pipeline, we are also making steady progress for instance in our Pelham Manor project which you will recall is one of the two projects in our New York development pipeline that is already construction completed, but that had significant lease up. In the second quarter, and more recently, our team has executed three leases that will bring that property's occupancy up to just above 90%.

Now, turning to new investment opportunities, we are seeing an increase in deal flow. While our patients is being tested and in general, we are continuing to see an imbalance where on a very limited volume there remain more buyers than sellers. We are starting to see enough indications that the kind of transactions that we have historically participated in are beginning to materialize. While the increased liquidity in the market may make it less likely that there will the wholesale 1990s RTC-like liquidation of high quality real estate of distressed prices, irrespective of precisely how this cycle plays out, we believe we are well positioned. The impact to Acadia of a continued recovery is likely to be positive in terms of our existing core portfolio and even more so, our redevelopment pipeline. And in terms of deploying our dry powder, given our size, competencies, and discretionary fund structure, we don't need the flood gates wide open to create value. So, in any event, even a moderate amount of opportunities enables us to significantly move the needle.

To conclude, we are pleased with our performance and the continued improving climate in the second quarter. While we remain well prepared for a bumpy road ahead before full recovery, we do feel strongly, that with we are well positioned both in terms of our existing inventory, as well as for new investment opportunities. I would like to thank the team for their hard work in the second quarter. And now I will turn the call over to Jon Grisham.

Good afternoon. Consistent with the positive trends experienced during the first quarter of this year, the second quarter saw continued strengthening within our core portfolio. We have already hit occupancy of 93% which is at the high end of our original expectations for year-end 2010. And same-store NOI is tracking markedly better then our original 2010 forecast which was -2% to -4%.

Looking closer at same-store NOI, year to date 2010 NOI is down roughly 1% against 2009. And this is primarily from the impact of the two anchor locations that is we discussed last quarter our Epseacon, New Jersey and Chestnut Hill, Philadelphia properties. But for these two locations, same-store NOI would have been positive 1.5%. Additionally a positive factor for 2010 was the relative improvement in tenant credit issues as measured by bad debt expense and even tenant defaults. Year-to-date, bad debt expense in the core of approximately $250,000 is tracking at about half of that from last year. There's also a significant decrease in the tenant default rate in the portfolio. Currently we have about 20 tenant that is are in default. In the core which is about half the number in default at this time last year. So, looking at our 2010 NOI forecast, we originally forecasted -2% to -4% same-store NOI. And recall that -2% plus a loan was attributable to Epseacon and Chestnut Hill. To date the positive performance of the balance of the portfolio has largely offset the effects of these two locations. And we are now forecasting that same-store NOI performance should range from flat to -2% or 200 basis points better than original..

We also noted on the first quarter conference call that occupancy was trending stronger than the original forecast. Following the opening of Best Buy at our Bloomfield Hills, Michigan property during the second quarter,, our occupancy now stands at 93% which already puts us at the higher end of the 2010 year-end target. As Ken mentioned, during the second quarter, we initiated the reanchorring of the new Loudon Shopping Center in Leyton, New York. And although it is clearly a long-term positive, it will negatively impact occupancy and NOI on a temporary basis.

We finalized and executed the agreement with BondTon whereby the lease is terminated and they pay us $225,000. This will generate incremental annual NOI of $140,000 which represents about a 30% incremental return on the net installation cost of about $0.5 million. This cost is inclusive of the associated down time through the middle of 2011 until rent commences on the replacement leases. Long-term, the $140,000 of additional annual rent represents about a 30 basis point increase in our overall portfolio NOI. However in short term, during the down time period, this deal will negatively impact NOI by $120,000 in the fourth quarter of this year which is minus 25 basis points of NOI. And do keep in mind that our updated NOI guidance already takes this into account. And then in the first half of 2011, this will create as much as $240,000 of NOI drag or minus 50 basis points of portfolio NOI.

As the leases for Price Chopper and Hobby Lobby for the entire 65,000 square feet have already been executed, there's no negative impact on the leased occupancy within our portfolio. However, as we report on physical occupancy, this will impact our reported occupancy during the period of down time by the 65,000 square feet or approximately 170 basis points starting late next quarter. So, you will see our current 93% physical occupancy come down to 91% plus next quarter, and this will continue to create a drag on occupancy until mid next year.

Looking at leasing spreads for the quarter, we reported average leasing spreads on a cash basis of minus 11.7%. I previously mentioned the opening of Best Buy and 30,000 square feet during the second quarter of Bloomfield Hills which as you recall replaced a former Circuit City. Excluding the impact of this one lease, cash basis leasing spreads for the portfolio would have been positive 4.5% for the quarter. This same lease was also the primary reason behind the 12% range between cash and gap leasing spreads.

Turning briefly to earnings, as Ken discussed Fund 2 bought out the third party joint venture interest in City Point during the quarter. And as we previously disclosed, we were required to report a noncash gain of approximately $34 million as a result of the transaction. This was based on recent third party valuation of $108 million, and in comparison to our cost basis of $74 million which was comprised of our original acquisition carry and predevelopment cost of $45 million plus the $29 million buy out that Ken mentioned. The REIT share of this gain, net of the noncontrolling interest share which is primarily our fund investors, amounted to $6.3 million or $0.15 per share included in second quarter FFO.

So lastly, related to 2010 guidance, we had already increased our guidance for City Point gain in an 8-K filing earlier this month. We are now increasing 2010 guidance by an additional $0.10 as a result of continuing out performance of our core portfolio and mezzanine investments versus forecast as well as our continuing efforts to tightly control G&A. Accordingly, we have now increased our original 2010 forecast range which was $0.95 to $1.00 by $0.25 such that our current guidance range is $1.20 to $1.25.

Do note that consistent with our previous guidance, these amounts are before any contribution from potential acquisitions or from our other income category which can include promoting income from our funds and income from our RCP investments. Again, not to suggest that we don't expect any activity in these areas in 2010. Rather, that any specific prediction is, is difficult and therefore we have not included it. So, to conclude, we do see continuing signs of recovery in our portfolio, which has translated into positive year to date results. We do recognize that our sector operating fundamentals are not necessarily realtime and we remain concerned about the fragility of the economic recovery. As such we remain focused on maintaining the strength of the portfolio and the balance sheet. With that, at this time, we will be happy to take any questions.

(Operator Instructions). Your first question comes from the line of Christy McElroy from UBS. Please proceed.

Hey, good afternoon guys. Since you continue to have some level of caution on the recovery, is it fair to say that there's still a little buffer in the event that you do see a softening in retail demand?

There is not much of a cushion at this point in time. What we are currently guiding to is our expectations as it relates to balance of the year. And to the extent there is a downturn in the economy, certainly it would impact our numbers.

Okay. And then, wondering if you can just give a little more color on the higher than expected interest income in your guidance? And where your cash is invested and if you have any marketable securities?

Yes. Recall that back when we were putting this forecast together, late 2009, Mike, it was a case where the Government actually --

They charged you to lend them money.

Right, to invest in short term treasuries. Obviously that situation is improved a little bit as well as in term of what we are currently investing.

What we are currently investing is high rated certificates of deposit, money market accounts, some short-term municipal funds that are AAA rated, and I think those are basically where they are. There are no quote marketable securities. We are not investing in common stock. We are not investing in individual bonds. What we have seen basically is over the six months interest, we have been able to put this added interest rates, significantly higher than we anticipated back in October or November when we were putting the original together, the original forecast together.

So as it relates to our $0.10 earnings increase, Christy, probably a couple of cents relates to this increased income primarily from the treasury function.

Okay. And then just lastly, I will ask the obligatory question on storage. The book value on the storage portfolio went from $174 million to $186 million. Did you add or open another storage facility?

We did not. In fact, the $180 is the correct amount. The amount last quarter, at the last quarter sup was not quite the correct amount.

Got you. Okay. And then, can you comment just on how you're stabilize storage (inaudible) performed this quarter and progress on lease up of the unstabilize stuff?

Sure. And we break out just in terms of occupancy growth that we saw over the past quarter, and we are seeing through year, gains in occupancy in most, well all of the components. So in overall basis just about 4.5% occupancy gain over the past quarter. The most significant is in the initial lease up component because that is the easiest to gain occupancy. But, we are seeing it even in the stabilize portion. The key now is to be able to not just drive occupancy but to start to drive rent, top line and bottom line again and control the expenses. That's really the team's focus at this point now going forward.

Okay. Thank you.

Sure.

Your next question comes from the line of Todd Thomas from Keybanc Capital Markets. Please proceed.

Hi. Good afternoon. I am on with Jordan Sadler as well. Jon, just following up regarding the increase in guidance, you just mentioned a couple of pennies, I guess, on higher yielding short term securities. But how much of the increase or maybe you can reconcile the $0.10 in general is related to better performance in the core wholly owned retail portfolio versus the mezz portfolio and then the funds as well?

Sure. So, in the core, we are looking at $0.03 to $0.35 in terms of the $0.10 coming from that and related to the improved performance in the core. Related to the interest income, $0.01 to $0.02. Some additional interest income for the mezz, maybe another $0.01. And then, G&A another $0.01. And then there's a combination of other items that make up the remaining $0.01 to $0.02.

Okay. That's helpful. Ken, at City Point regarding your partners motivation to sale its interest there, have you had discussions with other partners either in the endowment funds, pension funds or other investors also looking to shed assets or reduce exposure where there could be other opportunities for something like this to happen?

Sure, but let me make a very important distinction between an outside joint venture partner buy out which was the case in City Point as opposed to our fund investors who are loyal long term investors with us and our effective limited partner and they give us full discretion. I would view it as unlikely that you would see us enter into buy outs from those limited partners as opposed to our various different joint venture that we have, where a various different joint venture partner might say you know something, I either don't have the desire or the capital to continue through to completion of a project and that is certainly a possibility. Then even more significantly is there are a host of joint venture partners out there, not our current ones, but partners in undercapitalized projects that need recapitalization where because of our relationships, because of the kind of yields we do we can also participant in those type of transactions. So I do think that you will see a certain amount of we will call it joint venture partner fatigue and our ability to help recapitalize those partnerships. It's not that we are certainly focused on.

Okay. And then just lastly, it sounds like the corner, the property you have, the mezz investment with in New York here is doing pretty well. I was just wondering, what your thoughts are for that to potentially get refinanced by the end of year. You guys to get repaid?

It is certainly possible. There is what I view. And I am speaking from my own point of view not from the borrowers, attractive first mortgage financing in front of us. So, a total refinancing of the entire project is something I am sure that the borrowers would look at and take into account the costs associated with replicating that first, vis-a-vis the cost of paying back our mezzanine. Thankfully, the project is doing well considering it was only a few calls ago we were all sitting around or the outsiders saying, gee what kind of risk or impairment might your position have. Now we are all saying maybe you get repaid. Considering we made this investment in 2007-2008 when we were sitting on excess capital and weren't comfortable investing that into junior equity long term, the fact that we are parking this money at very high returns and now contemplating could it come back this year? Could it come back next year? High class contemplation. Certainly possible and I can't speak for the borrowers, but not as simple as it sounds.

Understood. Thank you.

Sure.

The next question comes from Quinton Velleli from Citi. Please proceed.

Following on 72nd Street, I am just curious if you do get your preferred investment back, if you get the cash back, how should we be thinking about the rate employment of that capital and what kind of returns you might be hoping to get as a replacement?

In general, and I think that is the right way to think about it. In general, we have been successful whether it is through the coinvestment into our fund, or if in other types of investments not unlike 72nd Street. We have been able to redeploy that capital in very high teens long-term returns. Plus if you look at what our last fund acquisition, Portland Manor, what the current yield to our 20% coinvestment, it is high teens right now. I am not saying we can replicate Portland's everyday of the week and I am not saying it gets there immediately on a given quarter, but from a value creation perspective, whether this gets redeployed into the $350 million our prorata share of the $350 million of dry powder that we have, keep in mind of that $350 million, Acadia is 20% or $70 million. So, whether it goes toward that redeployment, whether it goes to another 72nd Street-like transaction, I am relatively agnostic about it. I don't see us growing our mezzanine book. We felt at the time and where the risks and risk adjusted returns were 2007, 2008, that was the appropriate place to park some money. We think that there's another other potential opportunities that is are created by doing those kind of mezzanine deals. So we are glad we did them. The returns compared to almost any other 2007, 2008 transaction are going to look great. But whether some of it goes to mezzanine, some of it goes to redeployment of Fund 3, I don't know that I really care. What I care about is that we do we deploy capital aggressively and profitably.

Got you. Just the few questions on the guidance number, G&A came in $0.01 or so. Just wondering sort of where that came from and when we are model thing out should we think that will be a recurring in 2011 and beyond?

I mean barring any increases in management salaries, the $2.5 million is a good run rate number, going forward. So, I think that is again, a good benchmark to use in terms of 2011.

Where did come from?

Again keep many mind we are talking about $400,000 to $500,000, not millions of dollars, and it is fairly broad based. Some in the area of the compensation line item but then really across the board in terms of G&A?

Okay. And then lastly on guidance, I know you exclude any promote income. Can you just give us a feel for what the probability of achieving some promote income might be and what the amount might be?

We know that Fund 1 in total until the sub has probably somewhere in the range of $6.5 million to $7 million of embedded promote income in terms of timing. Again, the reason it is not in our forecast is I really can't speak specifically as to the timing. Could something happen late this year? Conceivably but it could as easily happen next year. So when that $7 million hits the bottom line, again it is difficult to predict with any specificity.

And Jon is not just being coy but he is being a little coy. In Fund 1 for example, you have assets ranging from redeveloped shopping center near Westchester that when we monetize, we will monetize at the right price and on our terms. To the Kroger Safeway portfolio, which there are a series of event that is play out the next several quarters thankfully. That deal has been hugely successful. That will determine how in the best way to monetize that investment. And then finally, half of our Mervyn's investment where the timing of that is far less in our control. The good news is for Fund 1 we are fully in our promote. So those dollars are just simply a function of when the dispositions occur. Some of the other promote or other income ranging from Albertsons to our New York urban pipeline, that will take some time. And we have to be very thoughtful about the best way to maximize the value. We are far less focused on its contribution to any quarters FFO than we have to the value creation.

Okay. Great. Thank you.

Sure.

The next question comes from Michael Mueller with JPMorgan. Please proceed.

Hi. A few things. First of all, Jon, can you run the numbers again on the Bonnton termination and the new leases? How much is dropping off in the third quarter and what's the number that is added back online again.

Yes. So let's just skip straight to when it all comes back online to start off with. And the incremental income or NOI from the re-anchoring is $140,000.

Okay.

Which represents based on our NOI base about 30 basis points of portfolio NOI accretion.

Is that $140,000 after you loss the income or $140,000 above what's in place now before you lose it?

That's net, right? So that's net of the income that it's replacing.

Okay. So that's $140,000 positive net.

Correct.

Okay. Got it.

But in terms of the dilute during the down time period for NOI, it is about $120,000 a quarter.

Okay.

Right. So, we expect Bonnton to leave end of the next quarter. So it is $120,000 for the fourth quarter of 2010 which is about minus 25 basis points.

Got it.

NOI, and then it is as much as the first six months of next year which is $240,000 of lost NOI temporarily.

Okay. Got it. Okay. And then, so it seems like it is $120,000 plus $140,000. So once you get to Q3 next year you would have call it a net $250,000 pick up or something.

That's correct.

Okay. Got it. And then I guess, Ken in your comments you were talking about you were seeing more activity in terms, I think the term you used was traditional Acadia transactions. Should we read into that, does that mean more buying something that is not really cash flowing as much up front and it's really a reposition opportunity as opposed to something that is more like cash flowing immediately? What did you mean by that exactly?

The short answer is yes. We were able to buy Cortland for $78 million during the dark days of the financial crisis and my hunch is that it would trade based on the increase in NOI that we have in place, in the $110 million to $120 million level. And that probably isn't historically where you have seen us participate in terms of that price level. So it is either going to be transactions where there is a need for recapitalization. The asset could be stabilize like Cortland but there has to be structural and capital restructuring necessary. Or as likely than not, it going to have a level of heavy lifting because there is still more capital changes highly stabilize existing cash flowing assets, than those that have hair on them that require redevelopments that require reanchorings et cetera. And it is just a function of where we see the market. Now, if we are going to take on more risks, as we traditionally have to do if we are going to do more heavy lifting, we have felt that our stake holders need to be well rewarded for all of that. And that is why you have seen us be patient to date, and be disciplined to date because the fact is that the markets have been surprisingly stagnated in terms of the type of opportunities out there. Thankfully, we are beginning to see enough lenders, enough partnerships, enough projects in need of recapitalization that we think we get to go back to work.

Okay. In terms of the heavy lifting, these types of projects with heavy lifting, is it along the lines of Cortland where the heavy lifting finding tenants and just kind of more of a quicker fix. Or something where if you go back to four years ago where it is multi-year process of heavy lifting?

Hard to tell. But not to make light of the great job that our leasing team did on Cortland taking the vacant linens and things box and putting in a bed bath. The heavy lifting in Cortland was having the discretionary capital and the guts to step up in really dark days and close the transaction. I don't think we will get the same reward because the risks aren't there. The risk of continued melt down of financial institutions. On one of the calls the concern on Cortland was coul you put any type of a first mortgage on real estate. Some of those risks are now fortunately greatly reduced. So, it is going to be re-anchoring, it might be redevelopment. It is not likely to be with new brand new greenfield development because we still believe overall, that in the retail sector, the best performance will come from high bear to entry assets, in supply constraints markets. And if it means that we acquire those assets and have to restructure balance sheets and do debt restructures, great. But also if it means we have to redevelop. As long as we're getting well paid for the risks we are taking, we have the capability to do that and we can do that as well.

Okay. Great. Thank you.

The next question comes from the line of Greg Schmidt from Bank of America/Merrill Lynch. Please proceed.

Thank you. Given the positive movement at City Point and the sort of modest stagnant acquisition environment, is it possible that you can have more investments in development and redevelopment than acquisitions in the next two years?

Craig it is hard to know. We don't sit there and precisely balance how many new developments there is. Although there is certainly a limit to the amount of any one type of food group that we want to spend all of our resources on. What I would say is we are seeing a combination right now. We are seeing lenders say to either to their borrower or to us, a year ago we were not sellers of our position of our debt at any price because of the financial implications. Now we have the ability to act what I view as rationally. And in the instances where there is borrower fatigue if you will. Where they're saying you know something, this borrower is not going get it done or this partnership needs recapitalization. We are seeing opportunities there. That wouldn't necessarily fall into the category of heavy lifting redevelopment. The flip side is we are hearing both from our national tenants and from various different owner of properties and projects. The interest in having a well capitalized team that can put both capital and complete a project that has the balance sheet and the experience to do it. And so we will periodically do that as well.

And then finally, remember that even though we are hopefully past the toughest of times vis-a-vis the retailing environment, there may also be retailers whose assets are worth more. Their real estate is worth more than the retailer themselves. That's a space we have played in the past and that's space we can play in the future.

Great. Just real quickly, do you know when Trader Joes at 72nd is actually opening?

I apologize, I don't. It shouldn't be that long off. I believe it is this year.

It should be I think it is before November but I don't know.

But in March you pretty much turned it over to them, so it is them that controls that; right.

Correct. and again we are the mezzanine there. And when I see we, the borrower.

Great. Thanks.

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

Yes, Ken I had a couple of questions on City Point. It seems you were able to reduce the land costs pretty substantially there from $120 million to $74 million from the venture. So I am just wondering what the dynamics were there? Were you the only person they can sale to? Were they in a hurry to sale? How did that all happen?

A combination of a bunch of events. Some of which are worth giving some color on and I will do now. And others that frankly are secondary to us getting the project moving forward. So probably not appropriate for the call.

But in general, as I outlined, they owned 25% of the retail. So you ought to assume that was a highly il-liquid, far less transferable piece. Then as we laid out, they owned 1 million square feet of residential on top of the commercial which also rendered that far less liquid.

So to say that we were absolutely the only opportunity for them, I think is an overstatement. We had been a very good and transparent partner through the process. There had been a change in terms of their management. The team that was handling that. We had outlined that in the past. And I think there was a desire for them to move past this. And there were certain time hurdles that incentivized them to do it.

So, there was a general understanding and agreement as to where we thought long-term valuation, where we thought land valuation would be. But we are committed to this project, so we weren't simply going to allow for the liquidation of it. And they couldn't force that unless thus they were somewhat constrained into that process. And we are now comfortable and satisfied that we are in a very good position to push this forward. So it works for us. I think that joint venture partners accomplish their goal. And so now we all get to go about our business happily.

And then on the residential component, is your plan to sale that or you are going to stay in on that?

So, what we have done and you can see we have laid it out into three phases. Which now that we control all of it, we can do that. We can minimize or reduce the footprint of the pure retail components of Phases I and II. And then that leaves a simple Phase III of a footprint for a pure residential component which our view of the world now having learned a lot from the past several years, is keeping it simpler, probably makes sense. We are not a residential developer. There are a host of good and great residential developers who I think best in highest use would be for them to be involved. The precise timing of when that would occur and the precise structure and for a whole host of reasons, I won't add to the speculation right now. But when you look at the 3,000 residential units that have recently come online. And the positive traction well in excess of, as most of their expectations as I speak to those developers, the opportunity at some point in the not distant future for someone to come in not at 2007 land prices but at rational 2011 prices or 2012, I think is going to be pretty exciting

Okay. And one last question on the promote. So in the supplement you give specific details on Fund I's promote. I was just wondering if you can giver us an idea of how you or frame work of how you think that people should view Fund II's promote at this point. And if you plan on kind of hammering out any additional detail in the supplement on that?

I think the way to think about it right now, Sheila, is if you look at Fund II, you have the RCP and urban redevelopment platform. Looking at the RCP investments, to date we have invested $50 million, and we have realized $50 million of profit. We've gotten a 2X. So, to the extent we can get our equity back from the urban redevelopments, then we are ahead of the game. And potentially to the extent we have covered the return, there's potentially promote there in Fund II. To the extent we make money on the urban redevelopment, even more promotes.

Don't sound so surprise, Jon.

A year ago, it wouldn't have been so easy to say.

Right. And obviously to the extent that we make more profit on the RCP investments, more promote as well. So, a little bit early to be throwing out numbers and ranges, but conceptually that's certainly the way we look at it and think about it right now.

Okay. Thank you.

Your next question comes from Andrew DiZio from Jamie Montgomery Scott.

Yes, good afternoon. Last week, A and D said publicly they were looking to raise capital through sale lease backs and we are hearing that other grocers are looking at similar transactions. It's a transaction type you have been involved in before obviously. Can you comment on whether you are looking at potential grocery deals?

I can't comment on any specific tenants. You can assume if there are interesting real estate plays embedded in retailers, that we certainly would be looking at that. And A and P as a company we know well. They're existing tenants. We have done a lot of different kind of businesses with them, and you may recall that the A of PA associates, Aaron Melinsky, was their Vice Chairman. So, we have watched most of these retailers first and foremost because they're tenants of ours. But also because as often as not, whether it is due to financial stress or opportunistically, these tenants can be a source of good to great investment opportunities.

Okay. That's fair. Thanks. Just one other question, can you talk at all about how the lease stuff is going on the office portion of Fordem Road?

It is taking time because we are dealing primarily with the agencies and various different city state tenants. And it is taking more time than I would like, but the good news it's heading in the direction that we proforma. It appears as though because if for no other reason, then the Fordem office building is the only new construction in that area of the Bronx that we will achieve our goals. But dealing with the bureaucracies especially at this time is something that takes a lot of patience from our tean. And they are doing a good job of pushing that along.

Okay. Thank you.

Sure.

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

Hello guys. On the operating expense front, is the lower operating expense in the quarter all due to lower bad debt expense?

The majority of it is, Rich. There was some reduction in Cam and also in real estate taxes. We've successfully appealed some assessments in the portfolio. But the bulk is indeed due to bad debt expense.

Okay. Because I have noticed that tenant reimbursement had dropped pretty substantially as well. I know you guys are good but I am sure you weren't getting your tenants to pay for your bad debt expenses. So as we look forward, do both of those line items pick up? Do you think we balance in Q3 in terms of operating expenses and commensurately in terms of tenant reimbursement as well?

I think that in terms of operating expenses, that will vary from quarter to quarter. My expectation is that bad debt expense will continue to trend favorably year-over-year. And I guess in terms of trying to get tenants to reimburse us for bad debt expense, Mike, we should think about that.

We can think about that, yes.

That's what to expect going forward.

I think you guys would be heros if you could figure out how to do that. Now on maturities of the, I think the lines of credit for the funds mature next quarter. Is that right?

Yes.

How? I guess, A, are you having discussions on those lines already? And really, more that I am interested in, how are the lenders perceiving lines of credits for those kinds of things as opposed to directly for the company itself?

Okay, yes, we are in fact having conversations. And what you will find is they're looking at those a little bit riskier than the real estate. So you will see with we are not going to be able to replace these lines of the favorable rates that we are at today. And clearly, in Fund III, that will never happen.

The good news. These, Rich, for Fund III for example, these are the acquisition lines and they get replaced with the equity as we call it down. So, these aren't long-term financings that would have any meaningful implications in terms of our total returns, whether they go from their very tight spreads that we were fortunate enough to have, great, but that doesn't drive the acquisition return and conversely if it widens to a couple hundred over, it wouldn't have a negative impact. And differentiated from corporate lines at the company level where there is a longer term carrying cost of that.

Okay. And then Ken, the capacity would probably be cut as well, I'm guessing, right?

Yes, but it is not relative, in other words, when we say we have $350 million plus or minus of buying power, the size of the line doesn't increase it. And the fact that the line were to go away doesn't decrease it. That's our buying power. The use of the line, historically and generally, is just to facilitate the acquisition, so we can on a very close short time period, close as we did in Cortland for instance. And then subsequently put more traditional debt financing in place. That's how we have historically use those lines. That's how they are supposed to be use. And thus whether you borrowing at 1% or 3% for 90 or 120 days is not a key driver. Some people use their lines differently, and then it can be and then it is worth thinking about but that's not historically been our mode of operation.

Okay. Good. I got you. And then on the spaces like Bonnton, was Bonnton expiring? And I guess basically you guys went to them and said let's go ahead and move this forward more quickly. Or are you guys actually finding tenants that have some duration left to the lease and talking to them and saying this a bad idea for both of us? Why don't you leave? What is exactly happening there?

It runs the gammet. Bonnton, my recollection had a significant amount of lease term. You can assume that our team has on their watch list good and bad throughout our portfolio. And as we do our monthly and quarterly reviews, we are analyzing where there's opportunity embedded and there's a host of those. We talked about some of them in the past. Our cross roads center feels like it has permanently embedded opportunities of below market anchors. And where there's exposure the other way. And then in our on going conversations with the tenant, we'll take their pulse or they may take our pulse as to the different opportunities. In the Bonnton case, I think there was a dialogue that predated the recession as to different potential opportunities. So when we know that, or when we are afforded an opportunity for the lease, we can move quickly and put in replacement tenants. In the case of the Bonnton deal, and only at Acadia would 165,000 square foot box have as much magnitude of moving the needle. But, we felt that we wanted to have it preleased before we take that lease back and we did that accordingly. In other case, you seen us take the box back, some time even pay for it to get it back, and take the lease up risk. We may do some of those as well. And what's nice is as the economy gets better, our retailers are coming to us and saying we recognize we can't simply wait for the next Circuit City to provide us with additional real estate if you could get us into this center or to this property, we're there for you. And our team is very good then about signing or presigning those up and then negotiating. So Richard it will run the gammet and as things get better, we hope to see more and more opportunities to harvest embedded growth that way.

Okay. You didn't have to pay Bonnton to get out; right?

No, as Jon pointed out, they made a small payment to us but it helped.

Okay.

Yes.

All right. Great. Thanks, guys.

Sure.

Your next question is a follow up question from Christy McElroy from UBS. Please proceed.

Hey guys, it is Ross here with Christy. A couple l of things, I want to confirm. At City Point, all of the costs to fund Phase I and II are going be done at a Fund 2; is that correct?

Correct. This case I missed both. There's Phase I, 2 and 3 capitalized by Fund 2.

I wanted to be clear because 3 is the one with more capacity but Fund 2 is taking care of City Point.

We tend not to mix.

Okay. Then with respect to Funds 3, you've put give or take a little under $100 million of equity to work. You've got $500 million to play with. So a $400 million differential. And you've got two year with the clock ticking. Do you believe you are going to put $400 million of equity to work which could be upwards of $800 million of total capital in two years? Or are you going to have to be asking for extensions on that investment period from your partners?

First let me clarify the numbers which even though you're correct. There's $400 million remaining and this goes to the lineover credit conversations. We view it really as only $350 million. In other words, $50 million are going into the existing investment. So we feel we spent $150 million of the $500 million and there's $350 million remaining. But that $350 million could be up to $1 billion of buying power, Ross. So then the question is, do you think you can do $1 billion of buying power of acquisitions in 23. Right. And if you extrapolate what we've done in Fund 3 over the past year, which is $0, you say, well, that doesn't look too likely. If you look at the historic run rate, both and take into account our performance, which has been quite strong relative to our fund peers et cetera, you can see both in terms of volume and returns, we ought to be. But to break it out, I think there are four possibilities. And you touched on a couple of them. One, is that we spend the money. Two, is that we don't and we go to the investors for an extension. Three, is that we don't and we simply create a Fund four. Fourth and unacceptable to me is we rush to put this money to work simply for the sake of putting it to work because we are in this business to create for our shareholders and stake holders profits that then result in meaningful promote value to our shareholders. So, a few unwise investments really is takes all of the fun out of this. I absolutely am concerned about how long it has taken for in general the investment environment to ripen and surprised. And frankly I have been wrong. I thought we'd see it by now. But our focus is going be to find great investments and whether it is strategy one two or three of how we deal with whether we spend it or not. I don't really care as long as we avoid number four.

So, do you think it is fair to say that your investment focus is on larger deals than you may have traditionally looked at in past in that doing a bunch of $10 million and $20 million interesting deals just frankly doesn't do anything for anybody in that fund?

Yes. We didn't do a lot of $10 millions in Fund 2 either. And Mervyns and Albertsons, I don't even know how many zeros above ten you have to add to it. I will go back to our focus is going to be to do profitable deals. At the $10 million level, it's not about gee, how do we get $350 million to work as much as it take as much time and effort to do a $10 million deal as a $50 million or $100 million. So if you look at Fordem, if you look at City Point, if you look at our participation in Mervyns etc, you get a decent sense of size. And, my hunch is, those are the size deals you will see in terms of equity deployment.

Do you have anything under letter of intent or contract at the moment that you didn't close on and announce at this call?

Is this just the two of us talking or, No, Ross you know we don't comment on that.

And lastly, I don't know if I missed this, but what is the targeted yield on City Point Phase I assuming some reasonable allocation of overall land or ground lease cost?

It is complicated to do it that way because as I mentioned in my prepared statement, it is likely that Phase I will have assuming we do, the same type of anchoring that we had originally had contracted for you. May recall we had a deal with Target that spanned Phases One, Two and Three. And our anticipation is that certainly phase one and two would have that. So, I am not sure we broke it out specifically, but our expectation would be if you try to do that I would be surprised if you didn't see a number in the eights.

Thank you.

Thanks, Ross.

There are no further questions at this time. This concludes the question-and-answer session portion of the call. I will now turn the call back to management for closing remarks.

Thank you everyone for taking your time in the summer. I look forward to seeing everybody soon. Thank you.

Ladies and gentlemen, this concludes the presentation. Thank you for your par participation in today's conference. You may now disconnect. Have a great day.