Acadia Realty Trust (AKR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Acadia Realty Trust earnings conference call. My name is Chanel, and I will be your coordinator for today. All participants are in a listen-only mode. We will facilitate the question and answer portion 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 meaning of the Securities and Exchange Act of 1934. Actual results may differ materially from those indicated by such forward-looking statements. Due to the variety of risks and uncertainties, which are disclosed in the Company's most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call and the Company undertakes no duty to update them.

During 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 website for reconciliation of the GAAP measures with most directly comparable GAAP measures. Participating in today's call will be Kenneth Bernstein, President and Chief Financial (sic--see Press Release) Officer, Michael Nelson, Chief Financial Officer, and Jon Grisham, Chief Accounting Officer. Following Management's discussion, there will be an opportunity for all participants to ask questions. At this time, I would like to turn the call over to Mr. Bernstein. Please proceed.

Thank you. Good afternoon, thanks for joining us today. We will start with a discussion of market trends that we are seeing, and then also discuss our growth initiatives and then Jon will review our first quarter earnings, key operating metrics, and we'll conclude with a discussion of our recent investment activities.

As we think about the issues and opportunities that can drive our growth for 2011 and beyond, they are likely going to come from both our core portfolio and external growth initiatives. Relative to core performance, there is some macro trends that are at work and worth noting. First of all, we are seeing a slow but steady improvement in the shopping center fundamentals, and this is driven by the gradual strengthening in the economy.

Barring an unforeseen slowdown in the overall economy, we would expect these improvements to continue, but looking beyond the cyclical recovery, the shopping and center industry will continue to face legitimate secular pressures, as the continued growth of e-commerce and multi-channel retailing, along with the general implications of technology will potentially influence the location, size, and number of new stores that our retailers will commit to.

The challenge for our industry will be to gauge how significant will this impact be, which types of shopping centers and locations will be most impacted, and what will the time horizon be? And while technology will present challenges, more so for some retailers and property types than others, we are also encouraged by tenants' increased success in multi-channel retailing. With this trend, there seems to be even further emphasis by our tenants on the importance of dense, high traffic, high sale locations in supply constrained markets and increasing demand for quality urban and street retail locations. From Acadia's perspective, this is probably a net positive trend, given our existing portfolio quality, and our focus. But all of us in our industry are going to have to remain very thoughtful of these trends, and the risks and opportunities that are created by them.

Now as it relates to more micro or portfolio-specific issues, as we previously discussed, we are seeing two potential drivers for growth for Acadia with respect to its core portfolio. First is the stabilization of our existing portfolio, driven by the continued execution of our anchor recycling efforts. We are seeing continued opportunities to recapture and profitably release underutilized space within our existing centers. In the first quarter, we successfully completed the reanchoring of our New Loudon Shopping Center, and we launched the reanchoring of our Bloomfield Hilltown Square property, and looking forward, we are also pursuing opportunities to recapture and reanchor two of our A&P locations where we also anticipate net positive rent spreads, and Jon will discuss that in further detail.

The second opportunity with respect to our core portfolio is to further enhance its value through an asset recycling plus growth focus. Over the past several years, we aggressively pruned our core portfolio in favor of high barrier to entry locations and in doing so, we enhanced the portfolio's quality but we did this at the expense of size, and with increased operating volatility. So looking forward, as it relates to asset recycling and potential core growth, we believe that we can still, and should periodically and opportunistically dispose of certain assets, but we think that the portfolio would benefit in terms of both stability and diversification, and where pricing and strategy permit, from net additions to our core assets.

In fact, we are currently finalizing a couple of interesting opportunities, both in terms of potential dispositions and counter balancing replacements that should continue to improve our asset quality and our long-term performance. Now, we are not going to do this in a way that would be a material departure from our current business model, and we are not abandoning our discipline and our focus, but even $100 million of annual net additions to our core portfolio, on a leverage neutral basis, and without using our cash on hand would contribute approximately 3% to 4% of earnings, while still enabling us to move the needle through our value-added opportunistic investments.

Complimenting these internal growth opportunities, is our external growth platform. As a general overview, while the post financial crisis floodgate did not open, as some of us had hoped or anticipated, the resolution of the significant existing debt in the commercial real estate industry is beginning to work its way through the system. As a result, as borrowers and debt holders are beginning the clearing process, we are seeing a steady increase in interesting and actionable investment opportunities, consistent with our opportunistic and value-added focus. Consistent with the trend, since our last earnings call, Acadia, through Fund III, closed on three transactions with a collective gross asset value of approximately $93 million, and we will discuss these later in further detail.

But in short, with a healthy balance sheet, plenty of dry powder, and growth prospects both internally and externally, we feel we are well-positioned to continue to execute on these growth plans in 2011 and beyond. Jon will now review our first quarter performance and forecast for the balance of the year.

Good afternoon. I would like to touch on earnings first, and then review our progress in our portfolio. As we reported, first quarter FFO was $0.33, two items to take note of in the first quarter are one, we realized a $1.7 million gain, or $0.04, on the purchase of some of our mortgage debt. And then secondly, our transactional fee income was almost $2 million for the quarter, or $0.05 of FFO. This represents almost a third of our full-year 2011 transactional fee income, and this was driven primarily by leasing fees at several of our New York urban redevelopment projects.

Looking at the first quarter relative to full-year guidance, to get a rough baseline run rate for the next three quarters, one would make the following adjustments to the first quarter results. One, back out the gain on the purchase of our debt, which was $0.04. Adjust the transactional fee income down about $0.02, to be consistent with full-year 2011 expectations, and then thirdly, adjust interest income down by $2.2 million, or $0.05, for the expected payoff of our investment at 72nd Street. We were originally expecting this to be paid off at maturity, which was middle of July this year. It now looks like it's more likely that it will payoff even earlier than that, perhaps as early as May.

So taking these adjustments in to consideration, this results in a baseline of about $0.22, for the next three quarters, which when added to the first quarter results in about $1, which is the midline of our guidance. In addition to this, looking at our acquisition pipeline, we do expect incremental earnings from additional 2011 acquisitions, as well as promote income from Fund I in the second half of the year.

However, these will most likely be offset by some degree by anticipated recapture of the two A&P locations that Ken mentioned, which total approximately 100,000 square feet. As we discussed on our last earnings call, we have been in on going negotiations to recapture these two locations and during the first quarter we finalized these and are now awaiting approval. Our hope is to successfully recapture these leases shortly, and get to work on creating long-term value but like similar reanchoring activities, this will cause some short -term disruption, both in terms of earnings and reported portfolio metrics. It's difficult to predict the exact timing of this, but from an earnings perspective, these two locations generate about $400,000 per quarter or about $0.01, which as I mentioned, would offset potential accretion from external growth to some degree.

Although there have been a number of moving pieces from when we originally issued 2011 guidance, net-net, our current expectation is consistent with the guidance range that we set forth at the beginning of the year, which is $0.94 to $1.05. Along with the planned reanchoring of the two A&P locations, we have also made progress in our reanchoring activities in several locations in the portfolio. As Ken mentioned, at our New Loudon Center in Latham, New York, we have completed the replacement of a 65,000 square foot former Bon Ton store with expansion of the existing Price Chopper Supermarket and Hobby Lobby store at an average 50% increase in rents. Both of these tenants opened for business during the first quarter which was the primary driver for our occupancy up tick from 91.5% to almost 93%.

We also discussed last quarter the potential reanchoring of the Bloomfield Town Center in Bloomfield Hills, Michigan. During the first quarter, we made continued progress on this project, by completing the recapture of 70,000 square feet from several underperforming tenants and signing a replacement lease for a 50,000 square foot Dick's Sporting Goods. We anticipate executing the remaining replacement leases and vacating the current tenants during the second quarter. We expect replacement rents for the recaptured space will range from plus 40%, to almost double that of existing rents, and all of this space to come back on line mid-2012.

Although the temporary impact that these profitable reanchorings have on our reported portfolio metrics is a distraction, the accretion from these activities is significant, all other things being equal, the reanchoring at New Loudon and Bloomfield alone will add an incremental 2% same store NOI growth to the portfolio. Excluding the impact from these reanchoring activities, we continue to forecast same store NOI performance for 2011, of plus 1% to minus 1% for the balance of the portfolio, which is consistent with our first quarter results.

Lastly, turning to our balance sheet for a moment, as always, we continue to maintain a safe and secure foundation, underlying our internal, external growth activities. Historically and currently, we employ a low risk profile when it comes to leverage as evidenced by net debt to EBITDA for the quarter, under four times, and fixed charge coverage ratio over 3 times, and a low-risk profile vis-a-vis exposure to rising interest rates, given that we are essentially 100% fixed rate at the core. With that, I will return the call back to Ken.

Thanks, Jon. I will talk for a few minutes about our recent transactions. In general, we're seeing our transactions fall into two broad themes. One is the purchase of well-located properties that are anchored by distressed retailers, so far that's been primarily supermarkets, and then the other is a focus on street and urban retail opportunities where through lease-up or redevelopment, we will be able to create attractive stabilized deals on great properties.

In terms of distressed supermarket opportunities, as we have discussed in the past, when properties are saddled with troubled anchor tenants, the capital markets often have a hard time of differentiating between strong and weak locations. In situations where we are confident that we can successfully replace the troubled anchor, we are able to capitalize on these cap rate arbitrage opportunities and acquire well-located properties with current cash flow at attractive pricing. This was the case with our fourth-quarter acquisition of the White City Shopping Center, which was a 250,000 square foot Shaws-anchored center.

And then in the fourth quarter of this year, we executed on a second opportunity that is consistent with this theme, when we acquired a 65,000 square foot triple net leased A&P Super Fresh Supermarket, located in Silver Spring, Maryland, which is approximately 15 miles north of Washington DC, the Super Fresh is part of the larger 350,000 square foot Orchard Center that includes tenants such as Target, PetSmart, Kohls, and given this anchor line up and tenant interest for this Super Fresh box at this location, in the event that we are able to recapture the Super Fresh box, we believe that there is further upside, but if the lease is acquired directly by another strong tenant, our going-in yield of 8.5%, is quite attractive to us, and should lead to our achieving attractive return goals. We are working on other similar investments like this and we will keep you posted as they occur.

Secondly, is the street and urban retail focus. As I mentioned at the beginning of the call, we are seeing increased tenant demand for urban and street retail in high barrier to entry, high density locations. We are seeing this within our existing portfolio for instance, our redevelopment in Westport Connecticut, on Main Street in Westport, in recent months, we have seen increase in new tenant activity including Nike, Urban Outfitters, Theory all announcing that they are coming to the street, and as we announced previously, in the fourth quarter we executed a lease for our redevelopment with GAP, and then last month, we executed another lease with Brooks Brothers to expand their existing women's store, thus bringing that property to 85% pre-leased.

In general, we are seeing increased retailer demand for other high traffic street and urban locations, this is true not just in Westport, but also in Greenwich, Connecticut, it's true with Fulton Street in Brooklyn, in Lincoln Park, Chicago and it's certainly also true in Lincoln Road in South Beach, Miami where in the first quarter, in partnership with Terranova Corporation, we acquired a 61,000 square foot, three-property portfolio of high-end street retail on Lincoln Road in Miami Beach, Florida, the purchase price was $52 million, Fund III represented 95%, of the joint venture equity. Lincoln Road, for those of you not familiar with it, is a high barrier to entry, open air pedestrian shopping and dining district with recent tenants entering the Street ranging from J Crew to Apple, and Forever 21 and H&M both recently announced plans to open stores in 2012 there as well. Retailer sales often exceed $1000 a foot in the area, and for our specific properties, two of the three properties that we acquired are positioned on a Main and Main intersection of Lincoln Road and Meridian Avenue.

We are in the process of recapturing some of the space there, and over the next couple of years, we believe that there will be a compelling redevelopment opportunity, that portion of the portfolio that's fronting on Meridian and Lincoln Road all the way through to Lincoln Lane. We hope to take advantage of the fact that the retail boom on Lincoln Road has extended one block north to Lincoln Lane, where Crate and Barrel CB2 recently opened a newly built store, with its entrance solely on Lincoln Lane. Also, the newly-constructed Frank Erie Design New World Symphony Building, recently opened on Lincoln Lane as well. With the lease up and redevelopment of these properties, we should be able to bring the unleveraged yield to between 8% and 9% for those properties.

Also consistent with an urban and street retail focus in April, we acquired 105,000 square foot retail project located within the Chicago Loop's established retail corridor. The Heritage Shops at Millennium Park is the retail base of a successful 57-story residential tower , the property is located adjacent to Macy's historic 12-story Marshall Field flagship department store and benefits from a daytime population numbering 400,000, within a one mile radius and strong residential community as well that reinforces the live, work, play environment. The property was acquired for $31.6 million, at acquisition, the property is 75% occupied, with a going-in yield of about 8% and tenants include LA Fitness who has one of their high-end signature clubs there, Ann Taylor Loft, and the opportunity here includes both releasing some of the other existing tenancies as well as lease-up opportunity.

Finally it's also worth noting that along with these new investments, we continue to make important progress with our existing developments, which are heading towards stabilization and outlined on page 29 of our supplement. These projects, which upon the completion of our downtown Brooklyn project, will total in excess of 2 million square feet, also seem to be benefiting from the continually increased focus by many retailers on urban and street retail.

So to conclude, we are excited by the growth prospects in 2011 and beyond as it relates to our core portfolio, selective reanchorings, coupled with an asset recycling plus growth focus, have the potential to create long-term value and stability. Then combining this with our dry powder, and the reacceleration of new investment activity, positions us to continue to execute on our growth strategy going forward. I would like to thank our team for the hoard work in the first quarter, now we will open for

Thank you. (Operator Instructions). Your first question comes from the line of Christine McElroy, UBS.

Hi, good afternoon, guys. Ken, in light of your comments about the secular pressures and changing retail dynamics, what further pruning of the portfolio would you expect to do over the next few years. You spoke sort of generally about it but thinking about geographic profile and types of assets, what would you target for disposition and how much of your portfolio could you potentially see churning?

Thankfully, we have been pretty good opportunistic pruners over the past five and ten years. Not a significant amount, but what we like are those properties that fall in to the more dense locations, right now, half our portfolio or so, has a supermarket has an anchor in it. I can see that shifting downward a little bit, we like our street retail component, which now is 15 to 20%, I would see that increase. Then otherwise, the handful, it's really a small handful of assets, whether it be the one or two Mark Center Trust legacy assets we still have, or a couple of others that are in thinner demographics, over time, we will probably sell assets, the one or two that are left in the Midwest outside of Chicago, and the one or two that are in other weak locations.

Okay. And then I realize there tends to be a lot of noise in your same-store NOI growth because of one-off retenanting and repositioning, so it's difficult to see the big picture, but over time, as you have disposed of non-core assets and acquired more urban infill type stuff, looking at your core portfolio today, what kind of NOI growth do you think that core stabilized portfolio can generate annually over time?

If you take out the noise, we realize there is a lot of noise, that's part of the reason that we are going to try to provide a little more stability and growth with it. But if you take out the noise, and you take us to a stabilized mid-90s occupancy, we are right now -- at 93%, ex some of the moving pieces Jon talked about. Once you get to the 95%, we would expect about 2% growth. I will tell you that some street retail is achieving closer to 3%, market rate growth, and eventually then comes through contractually or on renewal. I would think 2% ought to be a more realistic number.

I'm on with Ross as well, I believe he has a question.

Hi, Ken, how are you?

Good, how are you doing?

Good, I got a sensitive question but wouldn't be doing my job if I didn't ask. Do you have comments on the indictments that have been handed down against Aaron Malinsky at PA Associates, and how this has any impact, if any on Acadia?

Yes. Ross, as we previously indicated, as soon as we learned about the alleged activities, per our documents, and as we stated, we immediately removed him from any operating involvement in our projects, and from a going-forward basis, we don't see any impact at the property level or otherwise, but we took immediate action which we felt was necessary, so now we think we are in good shape.

I'm assuming on current properties, where PA Associates is a partner, that you have gone back and redone audits to make sure that the flow of funds was appropriate?

You can rest assured that we have done a broad variety including audits of careful analysis of every different component. Including cash flows.

That's what I suspected. Thanks very much.

Sure.

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

Great, good afternoon. One of the last things that seemed to shift is the leasing spreads. What do you think is going to happen towards the remainder of the year, and what are kind of playing against that metric turning positive, while occupancy and some of the others have turned positive.

The leasing spreads, given the size of our portfolio, Craig, they tend to be pretty volatile. In general, we've seen over the last year or so that they seem to be moving in the right direction, but it's still a challenging leasing environment. Albeit that the directional movement is good. Current quarter, one of the positive drivers was the Dick's lease at Bloomfield Hills, but then we had other offsetting leases, mostly smaller leases that pulled that number back down some. So continues to be volatile, we think going forward that it improved steadily, and our expectation is by the end of the year, that they should turn positive.

Given the lack of supply coming on line, for the next couple of years, will that play in to leasing spreads, or maybe some of the leverage shifting towards landlords and away from tenants?

It's going to be an interesting back and forth between us landlords and the tenants. I think it's going to be very market-specific and product type-specific. We touched on earlier the multi-channel retailing trend that's impacting some of our retailers and shopping centers, and then on the supermarket side, there is other issues ranging from Wal-Marts and Costcos and Trader Joes, here is our sense, what our tenants are telling us is, for those markets that they very much want a presence in, whether it's the Lincoln Roads that we just acquired, or Westport, that there is a legitimate supply constraint, and we are starting to sense some real pricing power.

Elsewhere, in more generic retail, we are finally doing to confront whether or not the so-called statement that the United States is over retailed, whether that plays out against us as a host of our retailers have to rationalize both their store count and format size. So we are a little bit concerned for the kind of retailers, look if you think about Blockbuster, Best Buy, Borders Books, Barnes and Noble, so you don't have to go too far down the alphabet to hit a bunch of tenants that are at various stages of rethinking how their formats will exist, and whether they will exist at all, I think we may see some challenges in those type of formats. We just need to be thoughtful about how that plays out.

Bottom line for us is, it forces us to think more and more about the real supply constrained market irrespective of whether so-called new supply is built in to the market, because we think those will perform well, but the fact that there is no new development in some markets that are arguably over retailed today, I'm not sure that that's really going to create out performance.

Great, thank you.

Sure.

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

Hi, good afternoon. Ken, regarding the retenanting opportunities, the A&Ps and then also the White City and Silver Spring, Maryland deal, in the past, you have talked about the pool of replacement tenants, not being as deep as it has been in the past, but now it seems like you are ramping up on that side of things, so can you give us an update on your current thinking, and how you are getting comfortable with the risk to retenant or redevelop the centers?

Yes. I think there is a real difference from the past, when we were actively engaged in the purchase of Mervyn's or Albertsons and the bidding of Toys R Us and Lord and Taylor's, the list of tenants we would have as replacements was long enough that we would be willing to take a lot of risk and do portfolio-wide acquisitions, knowing that we had a long list of tenants. Unfortunately that list included Circuit City and Borders Books and a host of others that you would say, don't count on today, obviously.

What you are seeing us do now is really much more selective, much more about a needle in a haystack, where that specific store, when we speak to Whole Foods, when we speak to WalMart for a food operation, when we speak to other traditional supermarkets, they say yes. They say two things, one, if you can get us that location, we would be happy to sign a lease with you. But also beware, we are going to try to get it ourselves. We need to buy these at a price where, heads we win, tails we win.

White City, for instance, which is a larger shopping center, so that may be a better example, we looked at it, what if we lose the Shaws and do not immediately have a tenant, what would be the impact cotenancy and otherwise, for the balance of the center, and we got very comfortable that those risks were minimal. And then, what if we are not successful in the bidding war to get that lease back, and someone else gets it, are we comfortable with the returns, and in these instances you have heard us say we have been buying these as about 8.5% on leverage yield, we think the current cash, flow unlevered and levered, plus the chance to then enhance it, makes these work on a one-off basis. That is fundamentally different than us announcing we are acquiring a 50 shopping centers in wholesale basis with the confidence they will re-lease on a step basis. That may take a little while longer.

Okay. Then sticking with acquisitions, focusing on, I guess the on-balance sheet activity, sounded like you increased the net investment activity to about $100 million from $50 million, last quarter, or so. I was wondering if you could discuss the pipeline as it stands today and give us a sense of what we might expect in terms of timing.

Just to be clear, the $50 million, when we spoke about it at year-end, that was the total equity we anticipated deploying throughout the year. That was just the equity component, and that was a combination of on-balance and through the Fund, so don't confuse that number with gross acquisition targets for the quarter.

It's still a good question. What we are seeing are some select disposition opportunities, so far, we have matched those with acquisitions that were much more excited about what we are acquiring than we're disposing of. That's a net neutral from that perspective. Then we are circling around, and our goal would be to add about $100 million of net gross core acquisitions at some point during this year. I can't tell you when these close, to the extent there is existing debt involved, the approval process takes a while, and as we have proven time and again, we are more than willing to walk away from deals that don't meet our criteria, so to the extent that deals don't check out in due diligence, that happened to us in the Q4 of last year, for instance. We walk away and we'll hold too much cash for a period longer. But our hope would be at some point over the next couple of quarters, to achieve the goals I just outlined.

Okay. Then just lastly, Jon, this might be for you, just looking at the property lists in the supplement, looks like the anchor versus shop tenant mix changed at a bunch of centers and the occupancies sort of shifted between the two segments. I was wondering if you could talk about what is going on there, if you are categorizing the anchor space a little differently or if these properties are undergoing redevelopment.

Yes. And we did recategorize. This is in the context of increased focus throughout the sector, in terms of anchor versus non-anchor space, and the relative performance of the two, we went back through the portfolio and both from a quantitative and qualitative standpoint, went through and redetermined which tenants were anchors versus non-anchors. There was shifting between the two categories in our detail.

Cutting through the impact of that redesignation, the relative performance, if you look at year-end, versus first quarter, obviously overall occupancy was up by 130 basis points, because of New Loudon coming back on line, and the reality is that the shop space occupancy declined by about 18,000 square feet. Not a significant amount. Again, the variations between the way it was disclosed year-end versus first quarter, don't let the numbers muddy the waters too much. The reality is, is that occupancy is moving in the right direction, and again, this is just a result of going through and thoughtfully, making the determination of truly what is anchor versus non-anchor in the portfolio.

Okay. Thank you.

Great.

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

Good afternoon. Just going back to the same-store NOI growth profile and some of the noise you got coming through from the reanchoring, all things going well, you will get a positive impact over the next two or three years from some of the shop space. If we look at some of the reanchoring you are going to be doing, what do you sort of expect the impact to be sort of each year, is it this year it's a negative impact just from the reanchoring of 100, to 200 basis points, and then maybe negative 100 basis points next year and then you a big jump in 2013? Or do you start seeing positive impact in the reanchoring in 2012, if you do factor in A&P as well.

It will be depending on the timing of the recapture of some of the A&P space, will determine whether we see net-net a positive number, total number, 2012, versus 2013, obviously the quicker we get back the A&P space, the quicker we can retenant it, and that number will turn around. Bloomfield Hills will turn around as I mentioned mid-2012, the drag this year for Bloomfield Hills is about $500,000 or a little over 1% in terms of same-store NOI, and 2012, that number will probably break even, then beginning 2013 that turns positive as well. In total, probably we are looking at 2013, for the sum of that to turn positive.

Right. You sort of, I think you said it was positive 200 basis points on New Loudon and Bloomfield.

For those two together, yes.

On A&P, do you think the rents are at market levels or do you think there is upside to them.

We think there is upside as I stated before, we would expect positive lease spreads on both of those.

Okay. Then, just secondly, in terms of 72nd Street, can you give us an update on the timing of when you get your capital back?

We said more or less what we know, we believe there is a transaction that should close soon. It has not closed yet. We would know if it did. Jon said it could be early, as early as the month of May, and certainly we would expect it in June. That's why we added a little high-class caution in terms of earnings, because this is a very profitable investment we made, when it comes back, it has short-term negative implications, until we redeploy that capital.

Got it. Thank you.

Your next question comes from the line of Laura Clark, Green Street Advisors.

Hi. Can you discuss small shop leasing prospects in your portfolio, and if you are seeing any positive momentum on this front, or are market conditions still pretty tough for your typical small shop tenant?

Go ahead, Jon.

I would start out, in looking at our small shop space, the dropoff throughout this economic crisis, was not from my perspective nearly as significant as what we might have seen on an overall basis. If you look back, end of 2007 our small shop space was 84%-occupied. That was in the context of overall occupancy of almost 95% and our anchor space was virtually 99%, 100% occupied, so end of 2007, it was 84% occupied, end of last year, it was 83%-plus occupied. The dropoff again during that period was not that significant in terms of small shop space.

What we are seeing now, I think what happened for our shop retailers, they were able to hold on, primarily I think this is anecdotal and very market-specific. They were able to hold on. They were more frozen in terms of not expanding, not doing newer locations, et cetera, but not shrinking nearly as much as we had feared. Now what we are starting to see are local retailers, entrepreneurs and then national shop tenants, smaller tenants coming back to fill in, and we are starting to see an increased activity from the Panera Breads of the world, et cetera. So we would expect to see, in general an uptick in the performance, but I don't think it will be as meaningful because it wasn't as much of a downward pressure as some other parts of the country.

Okay. So if your portfolio, if the small shops were 84% leased in 2007, what do you look at as a stabilized number for your small shop occupancies?

It's probably going to be pretty close to that. The majority -- We have to be careful about how we characterize everything. Our occupancy at its peak was close to 96%. That was with approximately 85% shop occupancy, with some of the real estate that we had, probably not, I will call it functionally obsolete. There is some inherent either rollover, just due to timing or otherwise, and that would keep us in the 96% range on the upside. Where that would take us today is probably 200 basis points, 2% of shop lease upside, as the market continues to strengthen.

Secondly, you mentioned that you are seeing more opportunities that consistent with acquisition strategy. Can you talk about what you are seeing in regards to direction of cap rates today?

For core, there is really a separation, I think you are seeing it in the kind of opportunistic deals we are doing, where cap rates are in the 8 to 9 range for some of these opportunistic deals. As opposed to core, where high quality, core retail, certainly here on the east coast, is probably in the 6s, you could find a deal that is sub-six, and I wouldn't argue with you, and you could show me a 7.25, but I don't think there's a lot of those. As you move in to other markets, cap rates increase. And in general, I would say core is probably about a 6.5 to 7.5 range. What we are seeing with cap rates is they have remained low. We can all fret about where the 10 year Treasury is or is not, but as long as you have a sub 3.5% ten-year treasury and you are talking about 300 basis points of spread, there seems to be a fair amount of capital for core.

Until we see some meaningful change, and maybe Chairman Bernanke in a couple of hours will shed some light on it, but I doubt it. I would expect to see core cap rates remain about there with the following counter balances. On one hand, there is legitimate concern about base rates, especially on the long-term, but across the board. And the other hand, borrowing costs, the spreads have come in pretty significantly and that has counter balanced a lot of the movement. As long as the borrowing and buying community thinks it can borrow long-term at the 5% to 5.5% rate, which they can, our sense is that cap rates will hold where they are. If that changes either due to base rate change or spreads, that could shift.

On the opportunistic side, if you do not have an easily financeable asset because there is a lot of moving pieces, a lot of what I just talked about in terms of positive spread investing becomes relatively irrelevant. Whether it's new development, redevelopment or a lot of moving pieces with tenants because of distressed retailers, et cetera, the conversation is less about what could you finance today, and more about what can you finance, two, three years from now. As such, the type of capital that comes in, the type of expertise needed is keeping those returns, call it 200 basis points above stabilized returns. We like that arbitrage. We will play in both, we said, and we will add to our core portfolio, where we can find the right strategic assets but more so on the value add or opportunistic where there is a arbitrage.

Thanks so much.

Sure.

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

Yes, good morning. Ken, you have been working on the New York urban retail for several years now. As we went in to the economic crisis, we all assumed, with cap rates widening, that the value creation opportunity there was negatively impacted. Now with cap rate compression, and you have done a lot of leasing there, I was wondering if you could give us idea how these projects are stacking up versus your original expectations, and also if you think that market conditions are giving you better visibility on promote opportunity for Fund II.

Great questions and a lot of them. I will try to answer them and not run in to the next hour. In terms of the fundamentals, as a result of the financial crisis, et cetera, we probably lost 100 basis points of what we were hoping to develop to, on a unlevered yield basis, so we were shooting in the 9 to 10 range, it's more like an 8 plus now. During the financial crisis, we ran the fear of developing to an 8 plus, and selling at a 10, and that was pretty easy to calculate what our promote would not be.

Thankfully now what we are seeing is increased tenant interest that bodes well for those assets that we did not start the development on, Citypoint probably being the largest and most significant. Bodes well for the lease up of the balance of our assets whether it's Pelham Manor or Canarsie, where we will be beat pro forma for the final leases that we are doing. And our sense of the cap rate environment is the global capital markets are very focused on both coasts, very focused on difficult kind of real estate, so having a couple of million square feet of high quality urban retail and -- we think will achieve superior pricing when we are ready to two to the market.

I'm not right now, Sheila, prepared to talk about or give guidance as to the promotes, other than, I think in previous calls, we outlined that RCA, the other component of Fund II, is a 2X, already. So we feel good about that piece. Now it's the key is to stabilize this portfolio, get our downtown Brooklyn deal developed, which we are excited about and the level of tenant interest and new tenant interest over the past six months has been pretty compelling, and then we can sit there and evaluate our position, but right now it would feel like counting chickens before they hatched.

Okay, thanks.

Sure.

Your next question comes from the line of Rich Moore, RBC Capital Markets.

Hello, guys, good afternoon. The net gain that you had in the quarter, I think that was Chestnut Hill, is that right?

That's correct.

How exactly did that come about and what are you thinking you will do with that asset as you go forward, given that it seems to be somewhat lower-leased.

That was Rich, originally a -- multiple properties, but the main one was anchored by our Borders, and we lost the Borders and now we are finalizing a lease to replace it. Prior to the finalization of the lease, we had an opportunity to buy the debt, it was securitized debt, at a discount and we like to do those things. Nothing wrong with Chestnut Hill. Our patience we think, will be rewarded. It took through the financial crisis, a level of patience to now get this lease and our team is doing a good job. Those should get leased up in the next year. Then it's a nice stabilized asset.

Good, thank you, ken. What do you think happens with our guys' storage business going forward? What is the long-term plan, do you think with storage?

Keep in mind that everyone asset we buy for our funds, we buy it, hopefully fix it up, and then hopefully or always sell them and hopefully at a profit and more often than not we have done so. Storage would not be excluded from the thought.

The change that probably has evolved over the past year or two was, when we thought we would be aggressively building one or two new assets a quarter in the New York market, and where we could incorporate self storage on top of those that we would have a need for our own, and benefit from our own self-storage platform and that was the initial thought. Well we haven't been, and there hasn't been a need for as much new development and as much mixed-use new development.

So we have set storage up with its own platform, our expectation is and so far we are getting nice traction in terms of lease-up, et cetera, that that team will bring that to stabilization, and then our expectation is one way or other, we would monetize that asset. There is a lot of different alternatives in how we monetize. It is more likely than not, that the monetization will be consistent with how we monetized other Fund I, II, and eventually Fund III assets.

Okay. Good, thank you, Ken. The last thing, do you have any updates on your thoughts about a potential Fund IV?

Our Fund III ends in a year. Little over a year from now. We still have about $200 million of dry powder there of equity to put to work, which hopefully we will see the kind of opportunities that get us excited about that. We would probably start the dialogue, this summer, as to what and how and should we do a Fund IV, et cetera, thankfully the fund investment community is healthy and back on its feet, thankfully, we have been at that business now for plus or minus 20 years. We have a good long-standing relationship with a lot of these fund investors, it's a good business and we think that our shareholders would continue to benefit from it. All things equal, we would probably launch a Fund IV, right after Fund III, the world could change a lot in a year, so let's see how it plays out.

Okay. Great, thank you, guys.

Sure.

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

Hi. Two questions, first of all, John, with respect to the Bloomfield Hills reanchoring the $400,000 a quarter, I think it was about $0.01 a quarter, drag that you were talking about, is that starting the second quarter, so we should think of that as in place now? And then, thinking about marginal investment activity, is there something like a black and white type guideline in terms of what a typical balance sheet deal is going to look like over the next year or so, versus what a typical in the fund deal will look like?

Bloomfield, the $400,000 as related to A&P drag per quarter. Bloomfield is about $200,000 a quarter. That will start the second quarter, so it should be somewhere around the $0.5 million I mentioned in terms of the affect from Bloomfield.

Okay.

Let me take a stab on the other. The goal for the core acquisitions, is not to add more volatility to your lives, I think we have given you enough excitement. The goal is to acquire stabilized assets that we think over the next three, five, 10 years, are going to produce superior returns. We talk, three, five, 10 years, you guys three, five, 10 quarters is a lifetime, we are buying illiquid assets and we need to see that they perform consistent with where we see the industry going from a geographic product type, et cetera.

Cap rate-wise, if what we are looking for are assets that have 1% to 3% CAGR and that are substantially stabilized, our expectation is if we can acquire some great locations, great strategic acquisitions in the 6.5% to 7% range, that's probably realistic given where cap rates are right now. We think that again, these are at the uppermost end of our asset quality, and continue to allow us to shape our portfolio in the direction we want it to be long-term. That could be a nice incremental addition. As I said, this is not going to be a game changer, this is the fact that we pruned our portfolio pretty aggressively, the world keeps changing, we want to make sure that we are responsibly disposing of assets, I don't want to be accused to be one of those guys who said he knew he should have sold assets, but didn't because of its earnings dilution, but also, we want to make sure our portfolio is more stable, more robust.

I guess, the old saying you can't be too skinny or too rich, well if you think about it, we've certainly tested both theories in that we shrunk our portfolio. It's pretty darn skinny, and we got a lot of cash coming on board, so from a cash perspective, maybe we are too rich, our focus now would be to add some stability, a little less volatility, so that we can continue to recapture anchor leases when they make sense, but that it doesn't blow everyone's model up. That we have a base that provides a little more diversity on the core side, but the majority of the value-add growth et cetera is going to be done through the fund business, and the fund business is not about acquiring stabilized assets at 6.75% or 7% and hoping that they just appreciate more. I think there are two separate businesses that we will be able to handle in a distinguished way, and hopefully be a little less skinny and at least on a cash basis, a little better balanced 2012 2013.

If you are thinking about the media pipeline, are more of the opportunities following in to the core on-balance sheet bucket or the fund value-add bucket?

We spend the majority of our time on the value-add side. That's probably where we are seeing more. There is plenty of deals just starting to percolate out there now, because again, when we saw the amount of debt in the commercial real estate system, heading in to the crash and during the crash, our expectation and we were wrong, was that there would be forcing mechanisms, 2010, 2011, and/or flood gates opening as some people refer to it, and that didn't occur.

But also, remember that the deleveraging that occurred in the public markets hat not played out in the private side yet, so we are seeing owners on the private side selling core assets because they like the pricing and they can actually achieve equity return and redeploy that in to other needs they have, and we're seeing overlevered debt coming to the market in the form of occasionally REO, sometimes it's the borrowers having the chance to get discounted payoffs and we're playing in all of those pieces. I don't think it's going the translate into huge volume, but it is translating in to enough interesting stuff to keep us busy.

Okay. Got it, thank you.

There are no further questions, I would lake to turn the call over to your President and Chief Executive Officer, Mr. Kenneth Bernstein.

I lost the CFO title.

I apologize.

That's quite fine. I would like to thank everybody for taking the time and we look forward seeing you again soon.

Ladies and gentlemen, that concludes the presentation, thank you for your participation, you may now disconnect, have a great day.