Acadia Realty Trust (AKR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen; and welcome to the second quarter 2011 Acadia Realty Trust earnings conference call. My name is Shaquanna, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session for this -- at the end of this conference.

(Operator Instructions).

Please be aware, the statements made during the call are not historical, and may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1939. 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 at 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 these non-GAAP financial measures with the most directly comparable GAAP financial measure.

Participating in today's call will be Kenneth Bernstein, President and Chief Executive 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 pose 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 I will begin by reviewing our progress on our key initiatives, and then Jon will discuss our second quarter earnings and operating metrics. One way we think about the key drivers of growth and value creation for Acadia is to break them into 2 broad themes. First, through our core portfolio, where we have the ability to drive growth both by pursuing accretive re-anchorings, and lease-up projects at our existing shopping centers. And then also by acquiring high-quality stabilized assets as part of our asset recycling plus growth initiatives. And then the second segment is through our fund investment platform, where we have the ability to drive growth both by continuing to develop, lease-up, stabilize, and then monetize our existing investments. And then, by executing on new, value-added, and opportunistic transactions.

So with this framework in mind, today I will first discuss our activities with respect to our core portfolio, and then I will briefly update you on our fund activity. In terms of our core anchor recycling initiative, our goal is to recapture and profitably re-tenant underutilized anchor space. This year we completed the re-anchoring of our New Louden shopping center, and initiated a second project at Bloomfield Town Square. And in both cases, we will achieve positive lease spreads on the new leases of between 40% and 50% on those executed leases. Additionally, during the second quarter, we successfully recaptured two of our A&P supermarket leases. And we are pleased with the tenant interest that we are receiving, and anticipate releasing those spaces at blended rent spreads similar to those of New Loudon and Bloomfield.

Now while all of these transactions, even those that are fully pre-leased, will have short-term negative impact on occupancy and same-store NOI, and as Jon will discuss, these transactions are certainly the key drivers of our negative variance for the second quarter of this year, the long-term accretion resulting from these re-tenanting activities will be a compelling source of incremental growth. The other component of our core portfolio growth will come from our asset recycling plus growth initiatives. As we have stated on previous calls, we will continue to periodically dispose of those assets that are inconsistent with our long-term growth strategy, but we anticipate that we will acquire more assets than we'll prune. Our goal is to add at least $100 million of high quality assets annually to our core portfolio. And for a Company of our size, this can contribute meaningfully -- approximately 3% to 4% to our earnings annually -- and increase our portfolio's stability and its diversification.

But more importantly, our focus is to use these additions to continue to elevate our portfolio's quality and optimize its product mix; so that we can ensure that our properties remain relevant to our tenants and their shoppers, not only today, but even more so 3 years, 5 years, 10 years from now. Because, even after the cyclical challenges of this last recession are resolved, retailers will still have to respond to the secular changes that are taking hold. Given the growing importance of technology and e-commerce, many of our retailers are appropriately focused on multi-channel retailing, and how they can best utilize e-commerce initiatives to drive sales at their stores. While for those of us in the real estate business, the good news is that retailer's physical stores will continue to play a significant role in their strategy. However, in light of this anticipated sales growth from alternative channels, our retailers are becoming even more selective as to the location, more selective as to the size and format of their next-generation stores. And we're finding them even more focused on dense high traffic retail corridors, where retailers can utilize smaller and more productive formats closer to their shopping population.

Our sense is that the bifurcation between the haves and the have-nots, both in terms of retailers -- and more importantly, in terms of real estate locations -- is going to continue to widen. And while it will be a mistake to over-react to these changes, it would be an even more costly mistake to ignore these shifts altogether. So our asset recycling plus growth initiative is not about growth for growth's sake; but rather, it is about continuing to build a best-in-class real estate portfolio that will position us to capitalize on these changes over time. So to that end, during the second quarter we sold our last remaining enclosed mall, in Ledgewood, New Jersey, for approximately $37 million. And then subsequently closed on or entered into agreements to acquire approximately $137 million of urban and street retail properties, through a series of separate transactions.

These properties that we'll acquire at a blended cap rate of approximately 6.75%, are located in 3 strategic metropolitan markets. First, Chicago -- more specifically in Lincoln Park, Lakeview, and the Gold Coast -- where we will add 20 properties totaling approximately $109 million. And that is inclusive of our previously announced Trader Joe's anchored asset. Secondly, in Georgetown, Washington DC, where we are going to transition our existing mezzanine loan to now include a 50% equity interest in 6 properties there. And then finally, in New York City, with the acquisition of one property in Soho, and another in the Bronx. To help illustrate these acquisitions, we have posted a presentation on our website under Investor Relations Presentations. All of the properties being acquired are located in dense, high-barrier-to-entry, high traffic retail corridors; where retailers' proven sales performance has translated into high tenant demand. We believe these street retail and urban properties are well-situated to benefit from the continued evolution of multi-channeled retailing.

First, with respect to Chicago, Chicago is the third largest city in the United States. It is just one notch ahead of Brooklyn. The properties that we are acquiring are concentrated on the key retail corridors of Clark and Diversey, and Armitage/Halsted, and Lincoln Park. And on the Rush Street corridor, including Walton Street in the Gold Coast; and tenants range from Trader Joe's and Urban Outfitters to Intermix, BCBG, and Ann Taylor Loft. While Chicago is clearly part of the midwest, these live-work-play neighborhoods are in many ways more like dynamic gateway coastal markets. These are high density markets that have experienced strong population growth over the past ten years. The population is young, the population is affluent. It is highly educated, and the job market and the housing markets are on solid footing.

Along with our West Diversey acquisition that closed during the second quarter, the balance of those acquisitions will be acquired for approximately $81 million. And will be subject to existing debt of approximately $28 million; and approximately $15 million of the purchase price will be in the form of OP units to the seller. Inclusive of our existing Clark and Diversey property, and our recent Heritage Shops investment that we made through Fund III, we will now have approximately $150 million of street retail properties in Chicago. And this gives us a nice platform for future investments in this vibrant street retail market.

Our Chicago acquisitions are nicely complemented by our planned acquisition in Georgetown, DC, where we recently entered into an agreement to acquire a 50% equity interest in a 6-property, $26.5 million portfolio. 5 of the 6 properties currently serve as the collateral for our $8 million mezzanine loan to the current owner, East Bank Properties; and East Bank will retain the remaining 50% interest, and be our partners in these properties. The portfolio is located primarily on M Street, which is Georgetown's dominant retail corridor, and tenants at these properties include Coach, Juicy Couture and Lacoste.

The sale of Ledgewood, and the purchase of the street retail assets are one step in the right direction of maintaining a well-balanced and forward-looking portfolio. Inclusive of these, and our two New York acquisitions -- if you now look at the makeup of our combined portfolio, including our pro rata per share of our Opportunity Fund investments, urban and/or street retail estate will increase by approximately 10%, and will now represent more than 40% of our overall portfolio. This is up from approximately one-third of our portfolio at the first quarter. And then, the balance of our portfolio is nearly evenly split, between supermarket-anchored properties, and then value or discount-anchored centers.

I would like to now briefly turn to the second key segment of our business, which is our Fund Investment platform. Although our recently announced transactions have been primarily core acquisitions, value-add and opportunistic investing through our Fund platform remain an important component of our business. Over the past year, Acadia, through our Fund III, has closed on 4 transactions, with a collective gross asset value of approximately $150 million. And while our Fund investment mandates and activity has been very broad over the years, most recently our investments has fallen into two themes. First is our urban and street retail development opportunities. And then the other has been, recently, the acquisition of well-located real estate anchored by distressed supermarkets.

With respect to urban and street retail, as we discussed on our last call, during the second quarter, through Fund III, we have acquired Heritage Shops at Millennium Park in Chicago. We acquired that project at about an 8% yield going in, and there are some moving pieces, but we intend to stabilize that at a yield north of that. And with respect to our existing urban and street retail investments; notwithstanding a tepid and perhaps an uneven economic recovery, we continue to see strong tenant interest for our urban and our street retail projects, both in New York City, and in the other key markets that we participate in. This is ranging from City Point in Brooklyn, and Fordham Road in the Bronx in New York; to Westport, Connecticut, and then Lincoln Road in Miami. You will find on pages 28 and 29 of our supplement, a summary of our urban development status.

And finally, as a quick update, with respect to our distressed supermarket investments -- in May, the lease on our recently acquired Fund III A&P Superfresh property in Silver Spring, Maryland was acquired at bankruptcy auction by a ShopRite affiliate; bringing a solid balance sheet, and a strong operator to that property. And we believe that this change clearly enhances the value of the property, which we had acquired earlier this year at a cap rate of approximately 8.5%. So in conclusion, we are very pleased with the progress that we made during the second quarter on our key growth initiatives. Within our core portfolio, our re-anchoring projects, and more significantly, the new additions to our core portfolio, should create long-term value. And combining this portfolio with our opportunistic and value-add investment platform, positions us to take advantage of a wide array of opportunities as they arrive. I would like to thank our team for their hard work.

And now, I will turn the call over to Jon.

Good afternoon.

I would like to first touch on earnings and guidance, and then review our activities in our portfolio. As we reported, second quarter FFO was $0.17. 4 items to note in connection with these earnings are -- 1, they included $2.6 million, or $0.06 non-cash impairment charge for our Fund I's Granville Center. As you may recall, Granville was part of a 3-property portfolio that Fund I purchased back in 2002. We sold the other 2 properties, Sheffield Crossing and Amherst Marketplace, during 2007, for effectively the entire purchase price for all 3 properties. And presuming we dispose of the Granville Centre at its now-reduced basis, Fund I will still have realized an overall net profit on the 3-property portfolio.

However, we all realize that FFO is not a perfect earnings metric, as it excluded the gains from the first 2 sales in 2007, but includes the current impairment charge on Granville. That all being said, none of this changes the fact that, to date, Fund I has realized a 32% IRR based on distributions; and the ultimate sale of Granville for any amount, as well as the sale of the other remaining Fund I assets, only increases this return to Fund I, and generates additional [promote] income to Acadia..

The second item to note -- at the end of May we received $55 million, representing the full repayment of our loan and exit fee on a property located on 72nd Street and Broadway in New York City. We made a $23 million profit on a $33 million investment over the course of 3 years, for a 20% IRR. From an earnings perspective, this investment generated about $2 million, or $0.05 a quarter of interest income. So, for the second quarter, interest income decreased $0.02 over previous quarters; and starting in the third quarter, interest income will decrease by the full $0.05.

The third item -- as Ken mentioned, we commenced anchor recycling activities at three locations. 2 of these were former A&P supermarkets, and the third, at our Bloomfield Town Square. I will discuss these in more detail in a minute; but from an earnings perspective, the combined temporary downtime from these 3 locations represents about $650,000, or almost $0.02 per quarter until the new anchors open. The last earnings item is the sale of the Ledgewood Mall, which is also short-term in nature. Although we have closed on the majority of the replacement properties, the timing between the sale of Ledgewood and the purchase has created an earnings drag of about $0.01 during the quarter.

Turning to earnings guidance for the year -- as we stated in our release, we are currently expecting full-year 2011 results to come in at the bottom half of our original 2011 guidance range, which is in large part due to the $0.06 non-cash impairment. So now back to the core portfolio and anchor recycling activities.

As I mentioned, we recaptured 2 A&P locations, totaling about 100,000 square feet, at the Crossroads Shopping Center here in White Plains, and at the Branch Plaza on Long Island; and are actively engaged in re-anchoring discussions with potential tenants. Initial indications are that the A&P rents were as much as 40% below market, and our current expectation is that replacement tenants will be in and paying rent during the second half of next year. We also completed the recapture of 70,000 square feet from several underperforming tenants at the Bloomfield Town Square in Bloomfield Hills, Michigan. Recall last quarter that we had pre-leased 50,000 square feet to Dick's Sporting Goods, and we are currently finalizing the leases for the balance of the space. Replacement rents will increase approximately 40% to 50% over the previous rents when this space starts to come back online mid-next year.

As I already mentioned, short-term, these re-anchorings will represent a drag on earnings; but long-term they will generate up to 3% incremental earnings growth, and from 2% to 2.5% portfolio NOI growth, before any contribution from the remainder of the portfolio. These re-anchor recyclings also create temporary noise in our portfolio metrics. In terms of occupancy, they account for about 3.8% of the occupancy decline from first quarter. So, adjusting for these, the occupancy would have been 93.1%; which is a 30 basis point increase over last quarter. And similarly, the re-anchorings accounted for an NOI drag of about 2.3%, year-to-date. So adjusting for this, NOI was minus 85 basis points, which is in our original guidance range; albeit at the low end of that range, which was plus 1% to minus 1%.

Last, but not least, turning to our balance sheet. At June 30, our financial position remained solid, with liquidity of $128 million of cash in the core, and additional line availability of $63 million. Taking into consideration the current acquisitions, both closed and currently under contract, we are addressing our historic high class dilemma, of what is arguably too much liquidity. And assuming we close on these transactions, our balance sheet will remain solid. Our debt to EBITDA in the core will remain between 4 and 5 times; and our debt to total market cap will remain around 35%.

These are levels we think are appropriate, and feel comfortable operating in. In terms of managing our cost of debt, we continued locking in long-term rates in the core. During the quarter, we completed 2 interest rate swaps totaling $23 million, at an all-in rate of 4.8%, and weighted average maturity of almost 9 years.

So, in summary, notwithstanding some of the short-term noise from our anchor and property recycling activities, given our current acquisitions, we are positioning Acadia for long-term growth, while sticking to our fundamental strategy of keeping the balance sheet strong.

With that, we'll now be happy to answer any questions.

Operator, can you prompt for questions, please?

(Operator Instructions). And your first question comes from the line of Quentin Velleley, representing Citi. Please proceed.

Good afternoon. Just in terms of the Chicago acquisition, the yield seems quite attractive particularly relative to some of the other transactions and quality assets that we have seen for over the last three to six months. I am just curious to sort of why that differential exists. Maybe you could talk about why you think the yield to high here, is it because I don't know whether the market rents are in line with the in-place rents, maybe there is an opportunity because it is midwest city versus coastal markets?

I think there is a few things at play. And your last point is worthwhile, at least for the short-term -- the markets are still very coastal focused. And we notice there is a big difference between cap rate yields for high-quality assets that our tenants very much want to be located in, there was a pretty big difference between what they were looking for in New York City or DC, as opposed to what we were able to achieve here. We expect that gap to narrow. We expect Chicago to be viewed, especially these key markets a similar to the other key coastal retail markets. But we were pleased with the yields, we were able to acquire.

In terms of rent to market, rent to sales, stability, tenet performance, all of those things checked out very nicely. So, we expect this portfolio to have superior growth over the next five years, as we look at the specific tenant performance in many of these locations, as well as what we expect in terms of market rent. Everything looks strong. And that includes the existing tenants that we are about to acquire -- on the Rush Street corridor. Or then in Lincoln Park, where this is a brand-new Trader Joe's. So we don't have sales performance, but it just recently opened, extremely strong, great location. So we're pleased with that. And while that arbitrage might end at some point in the near future, we're glad that we were able to pick up these $100 million plus of assets, at this kind of pricing.

And sort of how -- slightly how old are some of the other assets surrounding what you have purchased there? I am just curious whether you think there is additional opportunity to sort of consolidate ownership, around these acquisitions?

The ownership is fairly fragmented, including in some cases one off, And that can be a deterrent to many buyers, because you are talking about single assets that are in the $2 million to $10 million range, depending on its location. But now we have that platform in place, we would like to consolidate more of the real high-quality real estate, because what our retailers are telling us, and the trends we're seeing is that is the kind of real estate, that our real estate -- that our retailers are really looking to enter into. The other thing I would point out, as a differentiating component is, when sellers are looking for OP units, it does give us the opportunity as sellers are interested in contributing assets into the portfolio that is of high quality, a portfolio that has a strong balance sheet. And probably most importantly a portfolio, where their contribution can meaningfully move the needle. We find ourselves very well-positioned from that perspective.

[Manny Kotin] is here. I think he had a question.

Hi, Kenny, can you just kind of go over how you put this portfolio together? It looks like at least pieces of it were on the market for some time, and widely marketed. So if you could kind of remind us where you came up with this mix of properties?

Right, well, first of all, we have a great acquisition team. But so do many other companies, so -- the team deserves a lot of credit for bird-dogging this for an extensive period of time. To some degree, when we stepped up and acquired the Heritage property, and made it clear that we were very interested in being active in downtown Chicago, and were able to move very quickly and deliberately, that has helped. A portion of the portfolio that you are referring to -- a small portion, but the portion was put on the market in the dark days of 2009, and like a lot of assets that went to market in 2009, it didn't trade. And sure, we wish we could have owned this portfolio at 2009, Cortlandt Manor pricing. We didn't. No one else did, not a lot traded, other than the Cortlandt Manor's of the world. And so we had to get over that, and look more at today's pricing.

Our team did a very good job of an expanding -- the owner of that portfolio expanding the number of assets that he was willing to contribute, and that led to the transaction that we acquired today. Simultaneously with that, and this owner also happened to be a partner in the Trader Joe's Urban Outfitters Diversey asset that we acquired. And so it helped, that we were able to step up and quickly, preemptively close on that deal. And so, these pieces are nicely coming together.

And then, how do you look at -- so if you look at the Heritage property, which was done within the Fund, and then this group of properties, also in Chicago, that were done on your balance sheet, how do you distinguish what goes into the Fund, and what you guys wholly-own?

Right. And it is important to make these distinctions. When we're growing our core portfolio, we are going to be buying high quality assets, that are substantially stable, with strong growth, that can add to the stability and the diversification of our portfolio, but think stabilized. So a brand-new Trader Joe's, a brand-new Urban Outfitters, or these other high-quality street retail assets, they are going to have nice growth in front of them, but it is fairly stable. Now, the good news is, as Jon went through, we are able to acquire assets with our blended cost of debt -- in the proximity, put it altogether, about 5%. So, if you are acquiring at 100 to 200 basis point spread, that provides a nice leveraged return, and we think will help our portfolio long-term. But, it is a stabilized return. And don't confuse that with the opportunistic or value-add plays that we then do in our Fund business.

And what is compelling about the Fund business is we put up 20% of the equity, for 40% of the profit. But we expect volatility, we expect NOI sometimes to -- in the case of redevelopment's go away. In other cases, NOI is just not relevant, as it was the case in Mervyn's or Albertsons, just highly profitable transactions. So, higher risk, higher return, more volatility in the Funds. And then, for the focus of increasing the size, but more importantly increasing the quality of our portfolio, adding stable assets to the core makes sense.

Thanks.

And your next question comes from the line of Sri Nagarajan representing FBR. Please proceed.

Yes. Thanks, and good afternoon. Just to follow-up on the previous question. Just to -- Ken, if you can just tease out the Chicago Loop Fund-owned acquisition that you made, in terms of the value-add that you see out there, the opportunities you see there, versus the other assets under contract for the Chicago sub-market.

Yes, so the yield on the fund transaction going in was a very attractive 8%. But, we at -- we expect a fair amount of tenant rollover.

Okay.

We are pleased with -- I am even pleasantly surprised by the amount of tenant interest in some of that rollover. But I think the last thing we wanted to in our core portfolio is add more of those kind of but-for conversations. So, expect the yield to drop before it goes back up, but we are pretty confident that we can handle that rollover. And then, there is, at what is called the Pedway, and I don't want to drill into too much granularity here, but there is a whole level that we think eventually, over the next couple of years will also provide lease-up opportunities. But it is just more volatility to get to a stabilized return.

Got it. Just to shift focus onto the Bronx, on the Walgreens opportunity. Could you show us some color on -- or shed some color on that particular acquisition that you guys did?

Great location, infill, urban -- I guess, that will be less exciting in every way, meaning we expect Walgreens to be there operating profitably for a very, very long time.

Got you.

And then beyond that, there maybe some more opportunities way down the road. It is just a good add-on. As we were getting rid of our one enclosed mall in Ledgewood, New Jersey, we had 1031 needs. And that was not the main driver of it, but getting rid of Ledgewood which was an enclosed mall that over the long run maybe we could have redeveloped. But, it was clear to us the market was willing to pay us more, than where we were valuing the redevelopment. Then, translating that through into a Trader Joe's on Diversey, a Walgreens' in the Bronx, we liked that trade.

Okay. Fair enough. One quick question, obviously, we've heard on the office side, on people making mezzanine investments, that they are still able to get about 7% to 8% yield. It suggests on the Georgetown transaction, that obviously you guys have renegotiated to an 8% yield. I mean what kind of interest are you seeing, or opportunities are you seeing rather in the mezzanine investments? Would you participate in deals that are in -- let's call it urban street locations that are in the 6.5% to 7% range, or would it take little bit more there?

It would take more than that, in one of two ways. If it is real estate that we would long-term want to own, we are probably going to be pushing harder than we did in the past to have conversion rights. Because, absolutely, no regrets about our 72nd Street investment, a 20 'IRR and Jon, I think you said, 20?

$23 million -- (Multiple speakers).

-- profit considering that was a deal that we did top of market. No regrets about it, other than I wish I had even fought harder for more conversion or absolute conversion rights, as opposed to just the right to be a winning bidder. So, no, I am not a 6% to 7% yield player. I don't think our cost of capital affords that. But irrespective of yield, I really would -- if we grow our mezzanine book -- and what we said is we want -- we really only want to keep it in the 5% to 10% range, so that we don't have the high level of volatility that we went through with 72nd Street. But as we grow it, we really want to make sure we have the ability to convert this towards long-term, permanent ownership, as opposed to just short-term yields.

Thanks. That is helpful.

Sure.

And your next question comes from the line of Craig Schmidt representing Bank of America Merrill Lynch. Please proceed.

Thank you. I'm wondering -- in the urban street area, I mean you have been pretty active, but are you planning at looking at additional markets than the ones you have invested in? And would any of those be west of the Mississippi?

The west of the Mississippi conversation is clearly one of those quarterly conversations we have. It is always possible, Craig, although street and pedestrian, and west of the Mississippi often don't mix. But there are some great markets West of the Mississippi, if it makes sense, fine. What I would rather point to, is when you think about now the footprint we have settled into, downtown Chicago, a bunch of the key markets, Westport, Connecticut, Greenwich, Connecticut, Lincoln Road, down in South Beach. There is a lot to do in those markets, and plenty for us to talk about. And then, if you add a few east of the Mississippi markets like Boston, where there is a fair amount of activity going on, there is plenty to do here. I wouldn't reject the West Coast, it was compelling for our stakeholders. But for a Company of our size, we certainly don't need to do that, in order for us to be able to meaningfully move the needle, and really create a best-in-class real estate portfolio.

And, just in terms of putting together acquisitions in these street urban markets, is there anything that you would cite, that is notably different than buying say, suburban shopping centers?

Well, again -- if you are talking of assembling building by building, these are smaller transactions. And you just need to be cognizant of them, so that you don't run into some of the pitfalls that occur in buying $2 million to $10 million deals. I think the bigger issue, is understanding how our retailers and their needs are going to evolve over the years, as a result of multi-channel retailing. And listening very closely to our retailers, when they tell us that they are shifting their formats, they are shifting their size, they are going to focus on being closer to the shopping population. And making sure we own that kind of real estate, so that it is, owning these buildings, and redeveloping them. And we have been through that in the Bronx, we've been through -- are going through it in Brooklyn. They have a high level of sophistication, both on the leasing and the development side. There is a high level of brain damage. We think it is worth it, other people will tell you, no, I would rather just own a perfect suburban shopping center. And we are happening on those too. It may be more difficult. We think it's going to be important, maybe essential, as we think about these evolutions.

Thank you.

Sure

And your next question comes from the line of Cedric Lachance representing Green Street Advisors. Please proceed.

Thank you. Going to the A&P space that was taken back, when do you expect the releasing costs are going to be there, in terms of the TIs that will have to be provided, in terms of prospective lease and improvement to the structures at the two locations? And how do you think it will impact the net effect of rent for these properties?

Depending on -- and we are in negotiations right now, that run the gamut from low-cost as-is, probably with less spread, but still an attractive spread, to rebuilding some of this space, which would then be in the $50 -- (Multiple speakers).

$75 --

-- $50 to $75 a foot. In both cases, you are talking about older buildings. And depending on what we do with it, those will be the kind of numbers that we would have to put into it. But until we have these deals, finally done, it would be premature to give you an exact number. And irrespective of these costs, based on the returns we see, it is going to be attractive.

Okay, do you also foresee more, I guess deeper redevelopment potential that those properties, when you have a different anchor?

Yes, the property that we have here in Westchester, for instance -- I think we'll go through multiple series of re-anchoring's. For those of you who are probably not familiar with it, we had an old, below market rent A&P. And we paid some money, and bought that lease back, and now we are in the process of repositioning that. But, there is also an old below market K-mart, that we have tried multiple times, and so far have not been successful in recapturing. And there are some other below market leases. It's one of those properties, that we just have to be ready to step up each time we can acquire these leases, and then put the capital into redevelop it, because you've got great populations surrounding a shopping center that is tired, at this point, and really needs to be rejuvenated.

And then, in regards to the DC conversion from mezz to equity position, what are the economics that determine the 50% equity position, were you not able to capture the entire interest in those properties? And what is the structure effectively going forward, now that you have the 50% equity, is there any chance you can capture and even greater equity stake in those properties?

Yes. So, they were interested in selling a 50% -- at what we both agreed to, was a fair conversion price. That -- and without breaking out individual assets, etc., we said, overall the portfolios that we are now acquiring blended to a 6.75. DC was lower than that, and there is some movement over the next year or two until we'll get to the full stabilization. But assume that it's yields that we are all very comfortable with. They were interested in selling 50%, and only 50%. We lost out, the last go-around a year ago, on another one of these mezz conversions, I was not going to get greedy and demand 100%. It was a fair price, and we were happy to do that. And then the only other concession as we listed is, we are keeping our mezzanine now, for probably about another year, while the refinancing of that portfolio occurs. And we lower that rate to 8%. So, the long-term purchase price value -- it was a fair price at a cap rate that we both agreed to, and there was no unique pricing associated to that, other than we agreed to do a 50-50. And the concession we made was keeping money out of 8%, rather than 9.75%.

Okay, thank you.

Sure.

And your next question comes from the line of Todd Thomas representing KeyBanc Capital Markets. Please proceed.

Hi, good afternoon. I'm on with Jordan Sadler, as well. Sticking with acquisitions, the assets that you have closed or have under contract in the core, they get you to the $100 million full-year forecast of net investments for the core. So first, does that mean we should expect no additional acquisitions in the balance of the year? And then since you have talked about wanting to grow the size of the portfolio by about $100 million per year, do you think there is room to exceed those expectations? And if so, I am kind of curious what you think Acadia could do over the next two to three years?

First of all, to the extent the acquisition team is listening, good job, guys. I am glad you achieved our goals mid year, but by no means, does that mean you take the next six months off. Look, a $100 million is a decent target. And if for no other reason, it helps show that every $100 million should add 3 % to 4%, for those of you focused on earnings. And that means something. But we have also set we could double or triple the size of our core portfolio, before we have to start rethinking our business model, in terms of fund, etc. And, we are very interested in acquiring assets that make sense, from a positive yield spread. So, while we can borrow at, let's say, 5%, and buy at, let's say, 6.5% to 7%, we should do that and not stop, simply because we achieved some stated goal. To the extent that spreads narrow considerably, and we saw that in 2007, when we became net sellers, we should stop immediately, irrespective of our goals.

And then, putting aside, whether the window of opportunity is open or not, I want to make sure we are adding assets that as we think about what a best-in-class portfolio will look like, three, five, ten years from now, are additive to that process. So, whether or not we meet our goals in any quarter or in a year, in terms of growth, we have got to improve, what I believe is a moving target, in terms of asset quality and tenant (inaudible).

Okay. And then given that, can you provide a little bit of color around the pipeline, for additional investments in the core and in the fund today? And maybe even thinking geographically, along the East Coast, are there other markets here that you have not entered yet in a meaningful way, where we could see some investments, perhaps Boston, perhaps Philadelphia?

Yes, yes, those are markets we have been active in, over the years. So, most of the high density, urban assets that I think is where you will see most of our core activity. We may or may not be in that market right now, but we are certainly focused on those. And two you just touched on for instance, we would be happy to own more, if they meet the criteria that I just outlined. But, let's not lose sight of our Fund business. We have plenty of dry powder, we are seeing interesting up eternities there, more on a turnaround basis, more on the opportunistic side. But, what we are seeing in our pipeline right now, is the next phase -- of the fact, that while the flood-gates it did not open, there are a host of sellers or lenders who are now looking for recapitalization or monetization. And, so we are starting to see some interesting transaction opportunities, no where near the amount that had the flood-gates open. But, I think you will see within those areas that we are interested, continued opportunities. So we pointed out one A&P that we acquired earlier this year that has already been -- the lease was purchased and we were outbid at bankruptcy court, but purchased by a ShopRite affiliate. We like those kind of trades, and we can make a lot of money doing those as well.

All right, and then just lastly -- switching gears, just looking at Storage Post, looked like activity in the Storage -- the self-storage portfolio was very strong in the quarter. So I was wondering if you can give us an update on Bruce, and his involvement since he came onboard about four quarters ago? And then, can you talk about the strategy with regards to holding those assets in Fund III, they are adding to your storage exposure, or even monetizing them? I'm not sure if it is a bit early for that, but I am thinking particularly, about the seven or eight stabilized assets.

Yes, yes. First of all -- Bruce, Jack and their team have done a tremendous job of really picking off a lot of low-hanging fruit. And they feel that, the first step is getting the occupancy up. But, then it is starting to move the margins, and we are pleased with the progress they are making. So that is a move in the right direction. You are right, yes. It is still early within the life of Fund III, and within the trajectory of these assets to be talking about monetizing, than short-term. But, all of our fund assets get monetized, and Storage Post will be no exception to that.

In terms of us putting more capital into this, I am really going to be looking to Bruce and his team, to see how they want to grow that platform, and how Acadia -- where our funds might be able to help them. But, our conclusion is and was, that we really should let Storage Post and their team grow that platform. If we can help them with capital, fine. We are probably not going to be the primary or even a major source of that growth capital, as the great news is, they are very talented team, proven track record, and I think they can create a lot of growth. And, since we are owners in that platform, that inures to the benefit of our stakeholders. So it is still in our interest to see them grow, even if we are not the main source of capital. And, I don't think we will be the main source of capital, but it is an exciting business and we are especially -- it intersects nicely with our urban focus, it lends well for us.

Okay, great. Thank you.

Sure.

And your next question comes from the line of Rich Moore representing RBC Capital Markets. Please proceed.

Hello, guys, good afternoon. You, Ken don't have a lot of OP units outstanding, so I am curious -- are you more interested in doing OP unit deals, and perhaps just as importantly, are the sellers, now you think looking for OP units more, as a part of the capital structure?

It is hard to tell, Rich. And in general, we periodically have these conversations, and they tend not to follow as closely (inaudible) to where tax rates may be going, etc. And so, at any given year, we are in a few of these conversations. We generally like how we seem to stack up, when we talk to sellers and they say here are the two, or three or four different alternatives that we have, as opposed to the 20, or 30, if it is just cash. It is hard to predict. It is something we are always willing to do, but only if the deal works. In this case, the deal worked, so we did it.

Okay, so not necessarily a bunch of people looking for OP units?

No, but a Company of our size, $100 million deal here and there, adds up to bunches of growth, so.

Sure, I got you. Then, on the fund side of things, is there any -- or I guess, what is your thought process at this point about a new fund? And what is investor's appetite for a fourth fund?

Yes, the good news is that, all in all, investors are back. They are more discerning than they were in past -- in terms of which managers they go with. And the good news is we have to live or over the course of ten, 15 plus years, to our fund investors, so there seems to be strong support. Our fund expires, next May. We hopefully will deploy the capital we have on hand, but either way, depending on exactly what is going on in the world -- if there is no major changes, I would expect to see a Fund IV, on or before that. If we deploy the capital faster, then you will probably see Fund IV sooner than that. But if not you will see it by that time period probably. In terms of size and specifics, my hunches it looks more like Fund III, than not.

Okay, very good. Thank you. And then, on the interest expense line, it seemed that -- it was definitely higher this quarter, and we could not quite ascertain exactly why it went higher. Do you have any thoughts on exactly what happened with interest expense this quarter?

Yes, what I think it is, Rich is, if you look at our supplement. We think the disclosure is good, but we are always looking to make it better. So, we actually took the amortization of loan costs, that was formerly in the depreciation and amortization line item, and we broke it out separately as a line item, right underneath interest expense. But I presume that you now are adding those two numbers, in your interest expense number, whereas formerly you may not have been doing that, because our disclosure was different. That probably accounts for, I'm guessing, about half of the difference. And the remainder of the difference probably is due to the reduction of capitalized interest on our Canarsie project,, as we've placed the entire thing in service at this point. That probably accounts for the [majority].

Okay. Very good. Got you, guys. Thank you very much.

Thanks.

(Operator Instructions).Your next question comes from the line of Ross Nussbaum representing UBS. Please proceed.

Hi, it is Christy here with Ross. Just as you look at sort of redevelopment opportunities within your portfolio, how much capital do you expect to invest annually?

In terms of our core, it is so dependent on when we can get anchor leases back. And I think short of these two A&P's, we potentially could get back some that I outlined before when I talked about our Crossroads asset, but I am not sure it would be a prudent idea to actually reserve, or expect that on an annual basis. It is probably not that significant. Jon?

Certainly, relative to the capital that we're earmarking for the fund investments and for core investments, it is not a significant component of the capital needs.

Okay, and then, what would you say are likely replacements for the A&P space?

Stay tuned, read local papers if you want to, but there are a few different tenants that are vying for it. And -- I am glad it is in Westchester, and that there is strong demand.

Would it be grocers, or would it -- could there be potentially be another type of tenant in their?

Again, the local shopping community is sensitive about these things, but given that this is a multi-acre property, multiple uses are certainly viable.

All right. Thanks, guys.

And your next question on line is from Michael Mueller representing JPMorgan. Please proceed.

Yes, hi. And Ken, I think you touched on this a little bit before, but you have been active in terms of balance sheet acquisitions at this point. But if we look out over the next couple of quarters, should we expect to see the pace of what hits being still more skewed toward on balance sheet deals, or do you think we are going to see a little bit more happen in the funds?

I -- my hunch is, I think that you're going to see fund activity kick back in, whether also, you see additional core acquisitions -- I'm not going to predict that at this point. But, there is some decent real interesting stuff we are seeing on the fund side, nothing that we are prepared to discuss on this call. But deals that I would really like to see the team get their hands around and get closed.

Okay. Great, that is it. Thank you.

Sure.

At this time, there are no further audio questions. I would now like to turn the call back over to Mr. Kenneth Bernstein for closing remarks.

Thank you all for joining us, I hope you enjoy the remainder of your summer, and we look forward to seeing you again soon.

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