Acadia Realty Trust (AKR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Acadia Realty Trust earnings conference call. My name is Alecia and I'll be your coordinator for today. At this time all participants are in listen-only mode. We'll facilitate the question-and-answer session towards 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 means of the Securities and Exchange Act of 1934. Actual results may differ materially from anticipated by 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 this website for the reconciliation of the non-GAAP financial measures with the most directly-comparable GAAP financial measures.

Participating in today's call be Mr. Kenneth Bernstein, President and Chief Executive Officer; Michael Nelsen, Chief Financial Officer; and Jon Grisham, Chief Accounting Officer. Following management discussions there will be opportunity for all participants to 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'll start with a brief overview of the progress we made in the third quarter and trends we're seeing, and then John will review our earnings, operating metrics and key drivers, and then Mike, John and I will take any questions. As an overview we're pleased with our third quarter results, which were consistent with our expectations and evidenced with respect to operating fundamentals a stabilizing and slowly improving leasing environment and with respect to the real estate capital market a significant strengthening, driven most significantly by the effects of low interest rates, declining borrowing costs and capital returning to the real estate markets, especially for high-quality assets. So today we'll discuss what we're seeing in the chief components of our business, most importantly our core portfolio, our external growth platform and our balance sheet metrics.

In terms of portfolio performance, in the third quarter our same-store performance for the quarter and year to date was consistent with our expectations and as we discussed on our last call. Although fundamentals continue to stabilize, significant cross currents remain in the economy. Even as the economy hopefully continues to strengthen, these cross currents are likely going to create challenges, volatility and opportunities in the shopping center sector, with certain regions, product types and retailers being disproportionately impacted, both positively and negatively. As we discussed on the last call our same-store NOI declined this quarter was concentrated in our two previously-discussed vacancies and our 180-basis point decline in occupancy was primarily driven by our recapture of the former Bon Ton lease, which we simultaneously released and will result in a blended positive rent spread of more than 50%. But as a result of the Bon Ton transaction there will be a short-term negative impact on both same-store NOI and occupancy until the two new tenants re-open in the mid 2011. Although we generally prefer NOI and occupancy improvements we welcome headline volatility when it's in connection with long-term value creation.

In terms of existing tenant performance and default, in general we continue to see improvements in the performance metrics of our existing tenants. One area that has received attention lately is the financial and operational strengths of certain supermarket operators and their impact on the shopping centers that they occupy. As a general overview, approximately half of the shopping centers in our core portfolio contains supermarket tenants. Within that pool of centers they fall in to two categories. First, those where the supermarket is the dominant anchor and the significant driver of traffic to the center, and then second is where the supermarket is just one of several anchor tenants. Our portfolio is about evenly split between these two categories, thus about 25% of our core portfolio has supermarkets as their primary anchor.

A&P Supermarket is one of the tenants being closely watched by the financial community, as they are a significant tenant of ours. We have four A&Ps in our core portfolio and one in our Cortlandt Manor acquisition. Of those five properties A&P is the dominant anchor in two of the five. In general all of these locations are solid performing stores for A&P and in our discussions with A&P in reviewing their sales performance it appears that these are not locations that they're likely to electively dispose of. That being said, the ultimate resolution of A&P remains to be determined and there is always a high level of uncertainty in fragile situations.

The reality is that tenant strength comes and goes more often than we'd like. We don't look forward to the financial deterioration of any of our retailers. And tenant bankruptcies, if they occur, at a minimum create short-term disruption. However, our acquisition and development focus has first and foremost centered on acquiring or redeveloping high-quality, high barrier-to-entry location properties, as opposed to following hot retailers. And as result, in many instances over our Company's histories we've faced anchor tenant bankruptcies and have been able to use these situations as opportunities to create significant value through the recapture and releasing of those spaces.

Whether it was the recapture of a bankrupt Caldor lease in Mazuma, Massachusetts, where we then subsequently retenanted it with Wal-Mart at more than three times the then days rent, or in Elmwood Park, New Jersey, where we recaptured a Grand Union Supermarket lease out of bankruptcy, replaced them with Walgreens at twice the rent. Whether it was in connection of the bankruptcy of Bradleys, or Aims, or Caldor, or K-Mart, Grand Union or Pathmark we've been through this drill before. Now we're not saying we'll always make money in the tenant bankruptcy process. [Tentraffic] and more recently Circuit City two less exciting examples. Nor are we always successful at recapturing valuable space from bankrupt retailers. In fact, this inability to recapture certain anchor leases, or even when we were successful, having to pay what we viewed as legal extortion to buy back these leases led us to create the retailer-controlled property, or RDP venture through which we subsequently completed the Mervyn's and Albertson's transactions, amongst others. So it's going to be interesting to see how these issues play out, both in terms of our existing tenants and existing properties, as well as future investment opportunities.

Turning now to external growth, first I'd like to talk about our existing fund investments where we continue to make steady progress in the third quarter. In terms of New York urban portfolio, the most significant efforts at our City Point, or downtown Brooklyn redevelopment. As you'll recall, at the end of our second quarter our fund two acquired all of our residential joint venture partners' in interests in the project, thus giving us full control of the entire 1.5 million square foot project at an attractive cost basis and it's allowed us to pursue a somewhat more simplified and more expedited course of development. We commenced construction on the first phase, which is 50,000 square feet of retail. Our goal remains to complete the construction of that phase in 2012 and during that time we also expect to finalize the design for, and release a significant portion of the phase two development, which will add about 500,000 square feet of retail to that project. And then finally, the third phase of that project will most likely be a stand-alone parcel containing a base of commercial or retail but more importantly, a residential tower of approximately 650,000 square feet. We'll keep you posted as to our progress on that project.

Turning quickly to self storage. As you can see on page 37 of our supplement, on a blended basis the portfolio gained 270-basis points in occupancy over the prior quarter and now 76.5% occupied. Recently we made important operational additions to the Storage Post management team by bringing in Bruce Rock and several of his key personnel to the operating platform. Bruce Rock was the founder of Safeguard Self Storage in 1989 and served as its CEO until its sale in 2009. During this time, he built one of the largest private self storage companies in the Eastern US. He and his teams experienced in operational expertise have already begun to make a significant impact on our portfolio and should further enhance the value creation options for this platform.

Elsewhere in the portfolio Westport, Connecticut, our Main Street redevelopment, at the end of the third quarter we executed an important lease with the Gap to consolidate three of its divisions in to our location. Gap will join Brooks Brothers to anchor the redevelopment. That redevelopment now is more than 75% preleased and construction is underway. Gap is anticipated to open during the second half of 2011,. And the remaining space is primarily the retail fronting on the Parker Harding (inaudible). Quick note on Cortlandt Manor where we, last week, accomplished a refinancing of that project. As you may recall, in 2009 we acquired the property for $78 million, and were at the time fortunate to secure $45 million-dollar of debt at 400-basis points over LIBOR. Subsequent to the acquisition we leased the vacant Linens 'n Things to Bed, Bath & Beyond and now where we stand the 2011 NOI will bring to us to about a 10% unlevered yield on costs before reserves with still the former 40,000 square foot Levitt space heft to lease.

This week we completed a refinancing of the project where the spread was reduced to 200-basis points over LIBOR. The initial funding was $50 million but more importantly, assuming that we lease up a small portion of the Levitt space that we're currently working on we'll have the ability to draw down another $25 million for a total of $75 million debt on that project. And even at the $50 million debt level, our current levered return, depending on what you want to assume for interest rates, is in the high teens to low 20s current yield. We can discuss the implications of this shift in the debt market certainly during the Q&A.

Terms of new investment opportunities. While the third quarter remained painfully quiet in terms of announced transactions, we're finally beginning to see high-quality attractive investment opportunities arising, primarily out of the inevitable deleveraging of the commercial real estate industry. And while these transactions are not all going to be as simple or straight forward as acquisitions like Cortlandt Manor we're finally seeing an increase in the volume of potentially attractive opportunities, driven by several factors, including the fact that not all financial institutions are continuing to simply kick the can down the road. The exact timing and size of these transactions remains unclear, but we remain confident in our ability to recycle our dry powder in highly accretive ways.

So to conclude, while we would have liked to have put more of our dry powder to work in the third quarter we are pleased with our performance and the continued improving climate that we saw in the third quarter. We remain well prepared for a bumpy road ahead before a full recovery, but we like the trend that we're seeing. Capital is returning, especially for high-quality, high-demand assets in major urban markets. This bodes well for the value of our existing real estate, both our core portfolio and our redevelopment pipeline. And while there is a full supply of capital, maybe an oversupply, for high-quality stabilized assets the more complicated or value-added transactions where restructuring, recapitalization, or property level stabilization is required, the imbalance is not nearly as severe and it seems that the opportunities are finally beginning to emerge. Given our strong capital position, both in terms of our current liquidity and our investment fund platform, we believe that we're well positioned to capitalize on these opportunities.

I'd like to thank the team for their hard work during the third quarter and now I'll turn the call over to Jon.

Good afternoon. As Ken mentioned, the core portfolio continues to improve. Year to date we've outperformed our original 2010 guidance and the portfolio continues to operate in line with our updated guidance from last quarter. Adjusted occupancy is 92.9%, when you're taking in to account the temporary vacancy as a result of the New Loudon reanchoring, which puts us at the high end of our 2010 expectation, And year-to-date same-store NOI performance negative 80-basis points, which, again, is consistent with our updated guidance range of 0% to -2%. And in general our tenants continue to hold up well within our portfolio. Both year-to-date bad debt expense and tenant defaults continue to run at about 50%, of last year's level.

Looking at leasing, as we mentioned in the release, current quarter results were largely driven by one lease at our one and only Ohio property in the quarter, and in evaluating our year-to-date result recall my discussion last quarter of the impact of Best Buy at Bloomfield Hills on reported leasing spreads. And excluding the impact of this one lease, on a year-to-date basis cash-basis leasing spends for the portfolio would have been down 4%, and on a GAAP basis actually slightly positive, up 1%. Interesting side note on this metric, we report leasing spreads on leases for which rent commenced during the quarter. An alternative is to calculate the spread on leases that were signed during the quarter, which is arguably a much better realtime indicator of leasing trends. So we'll evaluate which methodology is more useful to everyone and revise our disclosure accordingly. Maybe the right answer will do to disclose both, we'll see.

Turning to our mezzanine portfolio, as we reported we repaid all principle and accrued interest on one of our Georgetown loans, the large $40 million loan. This represents about a 15% annual return on this 2008 investment. This is obviously a great return for any era of investment, but even more amazing, given the fact that this one was made months before the collapse of Lehman in 2008. And for those of you who have established reserves for our mezzanine investment in calculating our NAV this monetization represents and accretive NAV event. For our remaining mezzanine portfolio it totals 84 million, of which the 72nd Street loan and the other smaller Georgetown loan, the $8 million loan, together comprise about $60 million. More importantly, from a balance sheet perspective this redemption adds to what was already a very strong financial position for us. Obviously, it increases our liquidity by $50 million, and looking at our net debt-to-EBITDA, for the core portfolio, it was just under five times. Now with this redemption it's four times. And our net debt yield for the quarter was 17%, now it's 19%.

Lastly, although our primary focus is NAV and the balance sheet, the repayment of mezzanine obviously impacts earnings until we redeploy the capital. As the Georgetown loan was paid off right at the end of the third quarter, third-quarter earnings did not reflect this event. In comparing projected fourth quarter to the third quarter we expect the reduction in interest income will be counter balanced by an increase in transactional fee income. In order to achieve the high end of our current guidance of $1.20 to $1.25 some income from our other income category will have to be realized, which could include promo income from funds income from our RCP investments or income from potential acquisitions. So to conclude, we continue to experience recovery in the core portfolio, as evidenced by our year-to-date results, although we remain concerned about the fragility of this economic recovery. As such, we remain focused on maintaining the strength of the portfolio and the strength of our balance sheet.

With that, at this time we'll be happy to take any questions.

(Operator Instructions). Your first question is from the line of Todd Thomas from KeyBanc Capital Markets, please proceed.

Hi, good afternoon. I'm on with Jordan Sadler, as well.

Hi, good afternoon.

Hi. Just looking ahead to 2011, you got repaid on the larger Georgetown loan, I was looking, should we assume that most or some of the remaining mezzanine investments get repaid in 2011? How are you starting to think about some of the remaining pieces of that portfolio as you put your budget together for next year?

A few big shifts are, I think you should assume that for high-quality assets, 72nd street and Georgetown, which are the two largest that we've been talking about, that borrowers are going to have a lot more choices. So if they want to they can go ahead and effectuate refinancings, either through sales of some portion of the assets, or all of the assets, et cetera ,and the sell market's open, as well. As it relates to the smaller part of Georgetown, they have exercised their option to extend and in my discussions with them they are not planning on a capital transaction for that portfolio next year, but that could change. On 72nd Street, thankfully, that project has been performing, I'd say beyond most of our expectation, and so, again, they'll have wide variety of choices. It's not clear to me what they'll do and I'm not going to -- as Jon was pointing out, these are high-return investments we made at a very tricky time, so I'm not going to apologize too much when we get money back plus a mid-teens plus return. And budgeting purposes, we recognize we're sitting on plenty of capital to deploy, so our guys are not worried about where the money's coming from. We have plenty of capital and we'll find good deals and put it to work.

Okay. Are there any prepayment penalties throughout the portfolio, or can they all be prepaid without any penalties?

With that -- with those transactions I was just talking about I don't believe that there's prepayment penalties as much as -- as you may recall, there were accruals in different pieces of these deals and at different calls people were focused on, geez, Ken, will you capture the accrued portion? We would absolutely capture the accrued portion, so on 72nd Street, for instance, there ' an accrual, or a kicker and we get the benefit of that on exit. Drilling down beyond that there may be prepayment penalties. Again, not -- it's not a significant moving piece one way or the other.

There may be on one of the two -- one or two of the smaller deals but in general, prepayment penalties are not an issue in the portfolio.

Okay, that's helpful. And then I was wondering, you mentioned about how you report your leasing spreads and I was just wondering if you could give us a sense of the leases that were signed during this quarter that will commence in future quarters what those leasing spreads look like?

We haven't had an opportunity at this point to go back and recalculate what it would look like. Anecdotally, obviously if you look at, for example, the reanchoring at New Loudon, those leases are at a 50% increase over the former Bon Ton store, so that would lead to -- and that's for 65,000 square feet, so that would lead to, I think, a very favorable result as it relates to leasing spreads for the quarter. Again, we're in the process of talking to everybody to see what makes sense and what's most useful for everybody, but certainly reporting on leases that commenced during the quarter is reporting on negotiations that happened two, three quarters ago, potentially, and is really not indicative of the current environment. So we will go through and look at it and determine what's the best presentation, but I think in general, it probably would look -- or present more favorably if we use more current leasing activity as opposed to deals that were negotiated sometime back.

Okay. And then lastly, there's been some recent reports -- I know you mentioned A&P, but some recent reports about Food Emporium being for sale and I was just wondering if you'd have an interest in that given exposure in New York City and burroughs and whether you expect something to happen prebankruptcy, or if there's anything interesting in that portfolio for Acadia?

Without commenting in any way about specific tenants, the visions, et cetera, certainly one of our businesses has been historically buying real estate from retailers and/or buying retailers where the real estate is a significant portion of the value. So we are always going to spend time looking at a wide variety of situations and whether it's through the existing Albertson's platform in some instances, or in other transactions, if we think we can make money owning real estate in high-quality retail locations, we jump on it.

Okay, thank you.

Sure.

Your next question comes from the line of Christy McElroy from UBS, please proceed.

Hey, good afternoon, guys. Jon, just following up on your comment regarding an increase if transactional fee income what's driving that increase and what are the different components that drive that line?

Yes, primarily it will be related to activity at our Canarsie project in Brooklyn. BJ's will take occupancy and start paying rent prior to year end, our expectation,and so there will be a corresponding leasing commission that we will recognize related to that. So that will more than counter balance the decline in interest income.

And that's just in Q4, or that's sort of going into next year?

That's just in Q4.

Okay. And then just following up on the leasing, given the impact that's some of these big box renewals and retenant things have had on your releasing spreads, are there any more that we should be aware of over the next year or so where you expect a big roll down? It seems like the in-place rents on next year's anchor expirations are a little bit higher than coverage.

No, there's nothing specific in terms of roll downs that we're expecting in the core portfolio.

And I apologize if you mentioned this, what would you cash and GAAP releasing spreads have been in Q3, excluding that one (inaudible) in at Mad River Station?

They would have been -- first of all it would have been only about 3,000 or 4000 square feet, excluding that one lease, so it truly is meaningless. I think it'd be minus a couple of percent or something, nothing significant, though.

Okay. And then just lastly, with regard to the new Gap lease in Westport you mentioned three divisions, will that include Banana, as well, or you're just consolidating the Gap, the Baby Gap and the Gap Body that are currently down the road?

Just consolidating the other three, it will not include Banana.

Okay, thank you.

Sure.

Your next question comes prom the line of Craig Schmidt from Banc of America-Merrill Lynch, please proceed.

Thank you. I was wondering if you guys are seeing or hearing from Wal-Mart in their efforts to gain entry in to urban markets with some smaller footprints.

Yes. Again, I'm not going to comment specifically on negotiation-specific sites, et cetera, but it is a fascinating trend and it's one of many trends that you're seeing the supermarket sector where Wal-Mart is now taking a new and different look at how they may penetrate high barrier-to-entry in urban markets where you may see them come in to certain markets. And as you've been reading, with 30,000 square feet, on the small end and maybe somewhat larger in other cases it greatly expands their ability to penetrate various markets that historically they couldn't be competitive in.

Okay. In the same vain, would you be inclined to put all these into your centers?

It really depends on the center. There are -- the reality is the supermarket business and the supermarket anchor shopping center business is going to continue to evolve over the next decade. And what we once thought of as these pristine, full-sized supermarkets and a simple strip along with it have been changing as supermarkets got larger and larger and now it's changing as shoppers have a host of different alternatives. So that in various different markets shoppers will do some of their shopping at a supermarket, some at higher end, whether you want to think of Whole Foods or more boutique, like a Trader Joes, they'll go to Wholesale clubs and don't discount, obviously, Wal-Mart, both full size and now maybe some of their other formats, or Target, et cetera. So this whole business is going to change and if you have the right property that needs a real deep discount thrift provider, whether it be a Dollar Store or an Aldy, you have to consider if that's best and highest use. I'd say in most instances our assets don't fall in to that category. In the very urban markets where the income level is that -- is Aldy level and there's such population that there's usually other best and highest use, but I have nothing against any good-to-great retailer who drives traffic and brings in the right kind of shopper.

Okay, thank you.

Sure.

Your next question come from the line of Mike Mueller from JPMorgan, please proceed.

Hi. Ken, wanted to follow up a little bit on your comments about seeing more activity and seeming a little more optimistic about being able to put capital to work. Going back to the mez piece and what's been repaid off, the run rate it looks to be about $0.15 a year dilution until the capital's redeployed, so off a small earnings base it's a notable number. Is your best guesstimate that this capital could be redeployed in the next couple of quarters, do you think? Do you think it'll start to see some traction by year end, or do you think we're into 2011?

Let me divide the question into a few different pieces, Mike, and the piece I'm going to provide you with the least help on is the exact month that we will redeploy capital. But first, why are we seeing decreased activity? Fortunately, a host of the financial institutions that we do business with, that we borrow from, et cetera, have gotten to a point -- and I think you're going to see this more and more -- where they have marked their debt positions down realistically. In fact, in some instances they're no longer looking at how they've marked it down, they're looking at where do they think the value is. We are seeing debt notes trade, we are seeing transactions where the debt is priced realistically and a borrower can then recapitalize, and we are seeing what has take an painfully long period of time from an acquisition perspective but is an essential part of working through the significant wall of debt that's in front of us, $1 trillion, plus we have seen that now to start to activate. And that's good for us, because we have not traditionally been able to create nearly as much value buying very simple, unencumbered assets at auction, meaning being the winning bidder.

Sure, when a Cortlandt comes along periodically and there's moments of distress in the capital markets we jump on that, but more often than not, it's associated with recapitalization, it's associated with redevelopment, it's associated with RCP, et cetera. So these are trickier deals. It is hard to predict exactly what month any of these close, but at least we're seeing them. You cannot open the Wall Street Journal on any given week and not see some story about debt trading at a material discount and debt trading. The other aspect to this is there's a lot of recourse debt out there, there are a lot of other interesting components to this that play into our core expertise. So my focus is not going to be so much about which month we plug an earnings hole. And, Mike, it wasn't that long ago that you and I were talking about, geez, what kind of reserve should we be thinking about, or should the Street be taking on these assets. As we get this money back making 15% plus my goal is to see that we put it back to work.

Now whether it goes back in similar style transactions, perhaps, or whether it's simply our co-investment piece into our fund two and fund three assets I'm fine because, as I just walked through on Cortlandt , we're clipping high teens now, 2011, on our Cortlandt co-investment. I realize that's a lengthy answer of saying I don't know which quarter it hits, Our goal is to invest this money profitably and to make sure we don't invest it imprudently. We are a business that is very focused and capable of putting this money to work and we'll do it, and when it happens I am sure we will hear a mixed bag of comments on the investment. I remember watching our stock price job when we announced the Cortlandt acquisition. So, good luck with the modeling, but we're going to focus on investing

Your next question comes from Andrew DiZio from Janney Montgomery, please proceed.

Thanks, good afternoon, guys. Can you talk a little bit more about the changes in the Storage Post's platform. Specifically we noticed that Storage Post is operating locations Acadia doesn't own, so can that management business consolidate more private self storage facilities under its umbrella and really how does Acadia participate and any management fees associated with that?

Right. The answer is we do participate it and the answer is it could. This was the focus. We had a very capable, what I'll refer to as merchant development at Storage Post, capable of finding and building some very good locations and that was the genesis of that business. When the recession hit and as the self-storage business evolved, it became clear that there was a level of operational expertise required in terms of revenue management, in terms of expense management, and my friend, Bruce Rock, who I've known for many years had sold his business, he and his team were available and we brought them in so that they could, first and foremost, drive profits at our properties. They will then have the opportunity to bring in additional assets, whether they're in the form of consolidating operations or acquisitions. Acadia participates, has the right to participate any way we want if we think that there is good to great uses of our capital and we've got plenty of capital.

I would continue to say that our focus within self storage has been and will continue to be really focused on where we can bring self storage as part of our urban, primarily New York City, redevelopment where we can put self storage on top of retail development and it gives us certain synergies and competitive edges. So as the redevelopment business kicks in I very much look forward to our ability in include Storage Post in that. If there's additional acquisition opportunities, Bruce has very good access to capital. We would participate in the general partner level but whether or not we would put significant additional capital we'd look at on a case-by-case basis.

Okay, that's helpful, and then just one other question. On the Kroger-Safeway portfolio, with there being such a search for yield out there is there a possibility to monetize that once the anchor master lease expiration is dealt with next year?

Yes, yes. I would say compared to a year ago, the opportunity to monetize just about anything looks so much better and in some cases it is going to be very compelling and we'll do it. The great news within our fund platform is we have the discretion to be patient when we want to be, if the market's not there, but certainly we are well incentified to monetize. So we will pick and choose our spots but if the market's willing to, the model we have set up is a capital recycling model. We like that model. It means that when we see opportunities we can acquire them, maximize the value, and then it also affords us the necessity to have the discipline to sell when there's a great opportunity. Sometimes that creates meaningful promote income and we try to separate that out so that you don't confuse it with standard cash flow. Sometimes it creates the dilution, or positive event dilution of having a made a lot of money and getting your capital back. So Kroger-Safeway falls into that category and other assets may, as well.

All right, great. Thanks, that's all for me.

Your next question comes from the line of Mike Mueller from JPMorgan, please proceed.

Just one follow up on A&P. When you're looking at the five locations and if you're just generalizing about the rents in place versus are they below market or at market, how would you cut that out?

It's a mixed bag, Mike, in terms of trying to figure out and identify which ones we think are significantly below market and which ones do we think are either closer to market, at market, et cetera. One of those leases was done in the past ten years, just about ten years ago, and the others are significantly older leases. So you could kind of look at the vintage and it's in our sup, and extrapolate from there. I'm hesitant to point to specific assets, partially because we're involved in a lot of different discussions associated with it.

Okay. Okay, that's fair, thanks.

Sure, thank you.

Your next question comes from the line of Quentin Velleley from Citigroup, please proceed.

(inaudible) future transactions might not be simple or straightforward so I'm just wondering whether you could elaborate on some of the potential structuring that might be involved in such transactions? And then secondly, given there's been such high competition for higher-quality assets, what kind of competitive advantage do you have in sourcing some of the non-simple and non-straightforward potential acquisitions?

Sure. So let's start with the simple and straightforward and those are going to be really tough. Simple and straightforward means a well-located property that is easily financeable, there's no debt issues, there's probably no anchor issues, and the queue up at this point now, for what we will call core, is pretty significant. I'd suspect when you start breaking through to some very, very low cap rates our competitive advantage to buying those simple and straightforward is simply that we don't do it. So now let's shift to where we think we'll be spending more of our time. If you have an over-levered asset, let's start with the debt, there's a few different pieces to that but the question is who holds the debt, is it a lender ready to sell the note, will they try to foreclose, is there mezzanine debt behind it, what is the borrower looking for, and then what's happened at the asset. As this financial crisis has worked its way through the system a few things that happened. For those assets that are over-levered more often than not they have not gotten the attention they deserve at asset level and over time retail assets require a fair amount of capital so they start deteriorating at the asset level, as well. So we look at the debt and we say is this a financial institution who just wants to sell a note. One of our competitive advantages is if they want to just sell a note we are happy to do that, we have the capital lined up, if there are no issues we are not, again, some core-only buyer.

What in the borrower looking for, do they want to stay involved in the property? We certainly have done transactions like that. Are they looking for tax protection? One of the advantages we have is we can afford to provide for developers who are facing recapture a wide variety of tax protection. And then ultimately, what is required at the asset? If the asset has tenants that are fragile -- and we just spent a good chunk of today talking about fragile tenants -- we'd be happy to acquire well-located properties at the right price where the tenant may not be currently financeable. Long term that has worked well for us and made a lot of money for our stakeholders. These are complicated deals, not withstanding the competitive advantages that I think we have, amongst which is that we've been doing this for 20 years. There's a lot of competition out there, so I don't expect us to get every deal, but given that we have what I like to think of as about $1 billion of buying power, for a relatively small company when we find the right deals we can drop everything we're doing, other than probably this call, and we can go after those deals. More often than not I'm pleased with the outcome.

Then just secondly you commented that the potential transaction volume had improved and you sort of had similar comments last quarter, so I know why you can't view what the volumes of transactions are likely to be. I'm just curious what you're seeing. Are you seeing $500 million of potential transactions today versus last quarter it was only $300 million and at the start of the year it was $200 million, is that the kind of growth that you're seeing coming through?

Yes, and if you dialed it back a quarter or two before it, it was feeling kind of like zero, because so many of the assets and transactions we would work on when it got to the -- closer to the execution the financial institution said we can't afford to take the realistic markdowns that we need to. Remember, debt cost was substantially higher, spreads can contracted a fair amount. So it wasn't just that lenders were being less realistic and kicking the can down the road it was also that transactions were more expensive to complete. Now I think you're seeing a nice overlay of realistic cost of debt, maybe -- actually I think debt's cheap right now. You're seeing better visibility in terms of the marketplace in general. That is all leading toward where I think you will see increased transaction activity. Hopefully a lot of it is ours, but I think in general you'll be reading about more and more assets trading associated with lenders being able to do the right thing.

Ken, Michael speaking. Is there -- outside of the debt acquisition do you have any entity-type deals where your currency in terms of your stock is going to be a use to buy?

Maybe, maybe. We're always having a series of those type of conversations, Michael, and yet if you think about it historically we've done just a handful of OP unit deals over the past ten years. I was actually more hopeful about entity level stock for stock deals when this was real cash illiquidity because you could turn to an institution and you'd say, look, Mike, my currency's precious but you don't have any other alternatives. Right now currency affords an opportunity if the pricing is very compelling and you're offering tax deferment benefits, et cetera. Depending on where tax rates go, depending on a whole bunch of different things, we 'l see how that plays out. But in my view of how we grow I think it's first and foremost putting the cash that we have, both on our balance sheet and at our fund level to work. If right entity level deals come great, but they need to be compelling and they need to justify using our currency that way.

How active our CP in terms of going back towards the retail landscape and you talked about some of the troubles. Retailers, is that an area of focus, or highest level of focus today?

Yes. It is increasing every month. There was a period of time -- because you need a right combination of events, including retailers being willing to transact, and it's evolving, both because I do think that there are some bankruptcies out there and then also you are just -- you're seeing ownership looking at a bunch of different alternatives, ownership at retailer level. So we think that there should be some interesting opportunities to acquire real estate from retailers in one form or another and we like that business.

Okay, thank you.

Sure.

Your next question comes from the line of Sheila McGrath from KBW, please proceed.

Good afternoon. Ken, I don't assume the supplement you did disclosed City Point at $200 million, I was just wondering if your could review if this is retail only how we should think about the timing and if you can reduce the cost basis in that lower by selling the residential portion?

Yes. Yes we can. The way we're account -- and it's still very rough numbers and until we lay out for you who the tenants are and exactly who we're doing turnkeys for versus doing just cold vanilla boxes or other wise, that number will fluctuate. That $200 million includes effectively our cost basis on the project in terms of land costs, with a relatively small amount of cost basis associated with the non-retail pieces. So if residential on phase three were sold for where we see the market today, that would provide a pretty significant cost basis reduction below the $200 million that we have right now. Don't want to count our chickens before they've hatched. It will be a little ironic but we're happy the take profits associated with the residential piece, ironic in that our main focus is making money on retail side and we think we will. But it is a pleasure to see that residential market coming back and FAR values, which a year or so ago were perhaps zero. You couldn't justify anything, even if you were given the land for free, coming back pretty meaningfully.

Furthermore, we have locked in here 421a tax abatement, ICP -- ICIP benefits that are also going to add significant potential value per square foot to whoever the future residential developers are. So hopefully you'll see the basis shift. More importantly and what I've outlined before if assume plus or minus we're going to spend $200 million on the retail component it'll be plus or minus 550,000 square feet over phase one and two and should have attractive yield supplemented by the potential sales for however we handle the residential piece.

And are you starting -- are you phasing that retail portion? It said in the supplement you started part of it, so are you going to do it as you lease, or what's the status?

In order to lock in the 421a and ICIP benefits on a phased basis and other pretty compelling benefits, we had agreed to start the phase one, which was 50,000 square feet. The balance -- so we're going to complete the 50,000 square feet, the entrance way, if you will, in the next 12 months or so, but certainly in 2012. During that time period it looks as though we will be able the put the other anchor pieces in the more-compelling part, the other 500,000 square feet. We'll put that together, and thus it'll effectively to the outside world look more like one continuous development of 550,000 square feet.

Okay, thank you. A quick question on the convert. That's putable in late 2011, how should we be thinking about that at this point?

Right now there's sufficient cash on the balance sheet. Worse case to just pay that off, obviously, but we'll gauge what the markets look like later on in 2011 and respond accordingly.

Okay, and last question. On the Westport lease, in order to consolidate the Gap leases did you v to pay them out -- pay them additional money to take out the existing leases?

No. No, the leases were maturing and this was a good opportunity for them. We're very happy with the deal. It was more or less right in line with what we had originally assumed. And the only last takeaway from it is we're simply moving tenants around. We did not own the other building so my point is it's not that -- it's not a great sign of here's Gap expanding on -- in Westport, it's a good sign that they're reaffirming and signing new long-term leases there. I think the next phase of what you're going to see in some of these hot street markets, whether it's Greenwich, et cetera, is new tenants coming in and that'll be a positive sign, as well.

Okay, thank you.

Sure.

Your next question come from the line of rich Moore from RBC Capital Markets, please proceed.

Hello, guys, good afternoon. Ken, a question for you on fund three, you have, I think, about 18 months left to deploy the remaining $350 million of commitments and I'm wondering, do you need to start thinking about maybe a fund four, or a back-up plan of some kind in case you don't get everything out there in the next six or eight months?

Yes, and I wouldn't call it a back-up plan, Rich. What we think about and we sit down annually at the board level and talk about strategically is do you want to a fund four. Whether we spend all $350 million or most of it, et cetera, each time it's time to think about a new fund it's certainly a consideration. I have a high level of confidence and a much higher level of confidence than, let's say, a year or two ago that if we want to do a fund four, absolutely fund four will be available. My best hunch, based on the returns that we provided for our fund investors, is that they would roll whatever dollars weren't used and/or recommit. And based on the dialogues that we have with investors what we hear is no one is probably doubling the size of their commitments, some are going to cut back, but there are other new investors who are coming and spending time with us. So whatever size fund we decide fund four should be, I'm comfortable we can get that done. And whether or not some of fund three capital is shifted in to fund four, look, it's long enough away, Rich, that we'll figure it out at that time. My focus is for us to profitably invest as much of the dollars as we have and not a penny more.

Okay. So when you think about fund four, Ken, would you need to start marketing that at some point, because like you say, it'd be open to a broader audience man just money left over from fund three? And as I recall, you market for quite a long period of time, actually, before you close, or at least on the other three funds, and so I'm guessing would you start some time next year, probably with the marketing of fund four, if you do that?

Probably. Look, we've been very fortunate that the discussions start about a year ahead of time and then we get a sense of how it plays out over the course of a few months in terms of are the existing investors really going to fill our needs and how much do we have to go out to new people? New people -- new investors have been in our offices and that process continues on informal basis. We don't generally hire an outside advisor, we don't generally go through a very rigorous marketing period and we've been at this now, as I said, for 15, 20 years, 15 plus in the fund business. So it's something we can do without it becoming this huge drain of resources.

Okay, I got you. Good, thank you. And then on Storage Post -- if I could go back to that for just a second -- you've made substantial changes and improvements, how should we look for improvement over the coming quarters in what we see that you present to us each quarter in Storage Post. Should we expect to see increases in the operating metrics, or should we expect to see some announcements that you've got some new projects underway or redevelopments underway, or some redevelopments underway, or an -- how should -- what should we see in the supplemental and the press releases?

First and foremost I want to see the occupancy get to stabilization, because until a property gets to stabilization, the ability to really drive those rents and cash flows is a little more difficult. So first and foremost let's continue to monitor the occupancies. I want to put those in every quarter and then I think you will see cash -- significant cash flow improvement and that always makes us happy and we'll certainly be giving more and more metrics on that. As it relates to new investments, let's see where that goes. The reasons to make these changes was to make sure that we were maximizing the value of this portfolio. I remain very interested and supportive to see what the team can pull off and I think some exciting things will happen, but first and foremost look at the existing operating metrics.

Okay, good, thank you. And then you kind of hinted a bit when you were talking about asset sales on the opportunistic side of things, but are you actively marketing, or thinking of marketing and of your stabilized, maybe non-core operating assets?

We're not actively marketing any, none are being held for sale. I think you would agree that there's few companies who sell as many assets as we do, so if the price is right and compelling, Rich, we're certainly open to it.

Okay, good. Thank you, guys.

Sure.

Ladies and gentlemen, there are no further questions at this time. This does conclude the question-and-answer portion of the call. I would now like to turn the call over to Mr. Bernstein for closing remarks. Please proceed, sir.

Great. Thank you all for taking the time, look forward to speaking to you again in the near future.

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