Acadia Realty Trust (AKR) 2012 Q4 法說會逐字稿

Welcome to the fourth quarter 2012 Acadia Realty Trust earnings conference call. My name is Trish and I will be your operator for today's call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Amy Racanello, Vice President of Capital Markets and Investments. You may begin.

Good afternoon, and thank you for joining us for the fourth quarter 2012 Acadia Realty Trust earnings conference call. Participating in today's call will be Kenneth Bernstein, President and Chief Executive Officer; and Jon Grisham, Chief Financial Officer.

Before we begin, 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, and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risks and uncertainties, including those disclosed in the Company's most recent form 10K, and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, February 6, 2013, 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 reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.

With that, I will now turn the call over to Ken Bernstein.

Thank you, Amy. Thanks for joining us.

Today I'll start with an overview of our accomplishments in 2012, as well as our business plan and goals for '13. Then Jon will review our fourth quarter and our year-end operating results as well as our guidance for 2013.

So when we look back at 2012, we are very pleased that we were able to achieve the vast majority of our goals. And we're able to do that despite several cross currents impacting our sector. First, in terms of our operating fundamentals, in 2012 we were still in the middle of a modest and uneven economic recovery and that was further exacerbated in the retail sector by the ongoing impact of e-commerce on certain of our bricks and mortar retailers.

But notwithstanding these issues, our portfolio performed at the upper end of our expectations. And that was due to several factors, including the fact that there is a lack of new supply of well-located retail product out there. And then, more importantly for us, certain retail markets, especially select high street and urban retail -- and that's where we spend a fair amount of our time -- these locations experienced strong sales growth. They experienced strong tenant demand and rental growth, and they seem to be enthusiastically embraced by both our shopper and our retailer as part of the future of omni-channel retailing.

Then in terms of the transactional markets, on one hand 2012 and certainly 2013 continue to be a competitive acquisition market that's driven by the fact that there's plenty of capital out there in search of attractive yield in a otherwise low-return environment. But counterbalancing that, at least from Acadia's perspective, is how we view our positioning. And that's our dual platforms -- our core portfolio platform, plus our Fund platform. Both are well capitalized for growth, so we have ready access to institutional capital, both public and private, both debt and equity, and at appropriate level and appropriate pricing.

Secondly is the fact that these dual platforms enhance our ability to be opportunistic. And by that, I mean we can be active acquirers, but we can also be opportunistic sellers. So as long as we stay focused on the various inefficiencies or trends in the market, we should be able to profitably execute at multiple stages in the investment cycle.

Third and finally, we are also now at a size that we're still small enough that we can stay patient. We can stay disciplined and stay focused on a select group of investments and still move the needle. But our platform is also now at a large enough size that our incremental investment activity is starting to see the benefits of economies of scale. These economies range from operating efficiencies to just a more meaningful presence in the key markets that we're focused on.

So in 2012, between our dual platforms, we successfully completed over $1 billion of transaction activity. This included $225 million of acquisitions for our core portfolio, close to $270 million of fund acquisitions, approximately $450 million of fund disposition activity. We also successfully completed the equity raise for our Fund IV, giving us about $1.5 billion of discretionary buying power to put to use over the next few years, and in the fourth quarter we already began to do that.

As we look forward to 2013, we see many of these cross-currents remaining in place. So we expect our focus, our goals, and the key drivers of our business to more likely than not remain similar to last year. So with that in mind, let's review our core portfolio and its key drivers, and then our Fund platform.

First, with respect to our existing core portfolio performance, our fourth quarter in year-over-year same-store results were solid. Last year a key driver of same-store growth was the contributions from several re-anchorings, but even after stripping out the re-anchored properties our same-store NOI growth for the year was just under 3%, which was at the higher end of our expectations. In terms of core acquisition activity, last year we added approximately $225 million of high-quality properties to our core portfolio, with over $100 million of these acquisitions closing in the fourth quarter. That too was at the high end of our 2012 goals.

And while $225 million of acquisition activity is perhaps a modest pace compared to our peers, given the relatively small size of our core portfolio, keep in mind it represented over 20% of our NOI. It will add approximately 6% to 7% earnings accretion on a leverage-neutral basis. And our focus is to add assets that are more consistent with the upper quartile of our portfolio, than our overall portfolio. Thus, this strategy enables us to move the needle both from an earnings perspective, and, probably more importantly, from a quality perspective.

Our acquisitions over the past year have been in the DC to Boston corridor, as well as in Chicago. They're all in key supply-constrained markets with strong tenant demand. And while there's a host of important metrics that we use in measuring the quality of real estate, one important one worth looking at is demographics. Our acquisition over the past year, from a population density perspective, has close to 400,000 people in a three-mile radius. That's well in excess of the sector average of just under 100,000 people.

And in fact, our acquisition activity over the past 24 months increases our core portfolio's three-mile population from 180,000 people in 2010, to close to 240,000 today. So, as we continue to add these assets to our core portfolio, more important than our increasing scale, more important than earnings growth or diversification, is to make sure that we are continuing to position our portfolio to be responsive to the changes in the shopping center business. And we believe these acquisitions are doing just that.

In terms of fourth quarter core acquisition activity, we closed five transactions for approximately $100 million. This included the final tranche of the previously announced street retail properties in Chicago that we had, had under contract for a good chunk of last year. It also included another Lincoln Park Chicago property that we acquired on the corner of Clark and Diversey. And while this was a relatively small $10 million acquisition, it is the fourth acquisition on this Clark and Diversey sub-market, where we now have over $50 million of properties on the street. This property is adjacent to our Trader Joe's and Urban Outfitters building, and it speaks, at least in a small way, to the scalability that we believe we'll continue to see in our platform.

We also added properties on Main Street in Westport, Connecticut; Connecticut Avenue in Washington DC. And then looking to 2013, we currently have approximately $85 million of properties under agreement in our pipeline. And our expectation is, that will maintain a similar core acquisition pace to last year and add to all components of our portfolio; but that street and urban retail acquisitions will continue to grow over time as a percentage of our portfolio.

Along with our core acquisitions in the fourth quarter, we also increased our first mortgage bridge loans and mezzanine investments. These really fall into two categories. First is the first mortgage bridge loans, which we made for an aggregate of $43 million, where in exchange for providing senior acquisition financing on properties in New York City and Chicago that we would be more than happy to have added to our core portfolio, we received an attractive yield of just under 10%, and then certain rights to purchase which may help our core deal flow in the future.

Then the other transaction was in connection with our Brandywine property in Wilmington, Delaware. As you may recall, Brandywine is a million-square-foot major retail complex in Wilmington, Delaware with dominant anchors ranging from Target to Lowe's; from Bed, Bath and Beyond to Trader Joe's. We currently own the 22% interest; and the 78% interest was purchased in 2006 from our Fund I by a private real estate company.

Then last November, we made a loan to our partner's entity in approximately in the amount of about $31 million. The current pay rate is equal to the current cash flow, which is about 6.5%, but there's also an accrual feature that should bring the yield to 15% per annum. Then from a basis perspective, after taking into account the underlying first mortgage, and then this loan, depending on reserves, it should bring the total loan basis to an implied cap rate of between 6.5% and a 7% cap on current NOI. So while there are a host of ways that this could play out in the future, if we were to own the additional 78% interest in the portfolio at our current basis, we would certainly be quite happy. If we simply make the 15% annual return, that works, too.

Shifting now to the Fund platform -- complementing our core growth initiatives is the second component of our business, which is the value creation that we generate from our Fund platform. In 2012, we completed the raising of our Fund IV. That was closed with $540 million of equity, and this gives us about $1.5 billion of discretionary buying power. During the fourth quarter, when we began to put those dollars to work, we closed on three acquisitions in Fund IV for approximately $150 million.

The most significant of those was our acquisition on Lincoln Road of a three-building portfolio for $140 million. We made this acquisition with our Miami-based partners, Terranova, with whom we already own three other buildings on Lincoln Road. So our current presence there certainly gave us insight into tenant demand and performance. And while there are several key drivers of growth in this recent acquisition, including some re-development opportunities, the most compelling from my point of view, is the fact that over 40% of the leases roll to market over the next 24 months. And the rents currently in place are at about half of market rent. And that the tenant demand today on Lincoln Road is as strong as in any market we are involved in.

With respect to our existing fund investments, in 2012 some of our redevelopment projects reached stabilization. And the demand for high-quality stabilized assets was very strong, remains very strong. So accordingly, in the fourth quarter, we completed the sale of over $380 million of the total $450 million of 2012 fund dispositions. This included the sale of our Canarsie Plaza property, as well as the Storage Post portfolio. In terms of Canarsie Plaza, we sold that property and recognized a 17% IRR and doubled our equity. Storage Post -- we also achieved a mid-teens return, and given that this was a 2008 top-of-the-market transaction, we consider that a very strong return.

As we previously announced, we sold the property to a private institutional buyer who is backing our existing Storage Post management team. Our Fund will retain a small profit participation in the properties as well as retaining a meaningful stake in the Storage Post operating company. As you may recall, we brought this operating team in a few years ago to stabilize this portfolio and they did a tremendous job. And while it was clearly the right decision for us to sell, and our team achieved great execution, we expect that the Storage Post team is going to continue to create compelling incremental value going forward.

Now, while the profitable sale of these assets creates what we call positive event dilution -- and Jon will discuss this a little more in detail later -- this dilution should be short-term in nature until we've redeployed the capital. And in any event, it's an important part of our capital recycling program.

So in conclusion, in 2012, we made steady progress with our business plan. Whether it was our core acquisitions or our re-anchorings, we continue to drive forward the quality of our portfolio. And whether it was new Fund acquisitions, stabilizing existing investments or profitably exiting more mature investments, our team continued to create value through this broad range of activities.

Now looking forward to 2013, we think we're well positioned. We are very well capitalized, both with respect to our balance sheet and our newly created Fund IV, so we can take advantage of a wide variety of opportunities as they arise over the next few years. And we are also of a size where we're beginning to see the benefits of scale, but we can still move the needle.

So with that, I'd like to thank the team for their hard work last year, and I'll turn the call over to Jon.

Good afternoon.

I'd like to recap 2012 results and then I'll go over 2013 -- our forecast for 2013. First, related to 2012 earnings, FFO for the fourth quarter of $0.29 and for the year of $1.04, with the higher-end of our original 2012 guidance, which was $1.00 to $1.05. Several items to note for the fourth quarter were, first, we incurred acquisition costs of $900,000, or $0.02, in connection with the $250 million of core and Fund acquisitions. Second, related to Fund II and III's sale of self-storage in Canarsie, we paid off the related debt on these assets and recorded debt extinguishment charges of about $600,000. And then, third, offsetting these first two items, we had an adjustment of our year-to-date tax provision, which was related to our evaluation and implementation of certain tax planning strategies.

Year to date FFO was $1.04, and excluding the debt extinguishment charges that I just mentioned, it would have been $1.06. Our core portfolio performance for the quarter and year to date exceeded our original 2012 forecast. Same store net operating income year to date was 3.7% versus our original 2012 forecast of 2% to 3%, which included the impact from our re-anchoring activities. Excluding the 80 basis point effect of these re-anchorings, NOI growth was 2.9% for the year. Occupancy at year end was 94.2%. And physical versus leased occupancy was essentially the same, only 20 basis points different, as the anchor at the Branch Shopping Center is now open.

We also made significant progress on our key re-anchorings during 2012. Recall we had three projects that we were working on, representing about $3.5 million dollars of additional net operating income. Bloomfield and Branch, which represent a little over two thirds of this, are now complete. And for the third, the re-anchoring of the Crossroads Shopping Center -- recall mid 2012, we discussed shifting from a more straightforward re-leasing opportunity to an expansion plan to add a somewhat more significant anchor to this center.

So the good news is that Storm Sandy didn't directly impact our portfolio, however it did impact this prospective anchor tenant, which experienced damage at some of their other locations, and as a result, curtailed their expansion plans, including plans at our center. Accordingly, we've shifted back to our original re-leasing plan, which we now expect to complete late 2013. And although this shift impacts the timing of the completion of the project by a quarter or two, economically the two alternative plans were only marginally different.

Shifting from 2012 to our 2013 forecast -- as we disclosed yesterday, we are forecasting an FFO range of $1.17 to $1.25 for 2013. Some highlights as it relates to this guidance -- one, this is before acquisition costs. Secondly, we are targeting core acquisitions of $150 million to $300 million and Fund acquisitions of $250 million to $500 million, assuming on average a mid-year closing. And for the most part, capitalization of these acquisitions will be on a leverage-neutral basis, although leverage on the Fund side may be a bit higher.

This guidance also includes the earnings dilution from the ongoing monetization of our Funds. As we continued to profitably sell Fund II and III assets and return capital with profit to our investors, we move closer to the threshold where we will earn a promoted economic share. But until we return all capital and preferred return for these funds and/or redeploy capital into new Fund IV investments, there will be some temporary earnings dilution.

The sale of Self Storage in Canarsie during the fourth quarter represents about $0.09 of earnings dilution. And of that, about $0.03 is related to asset and property management fees that go away as a result of the return of the capital. And our forecast also includes the potential additional dilution from other fund asset sales during 2013, including the potential sale of Fordham and Pelham, which are now stabilized, and together represent about $0.06 of FFO on an annual basis. So assuming a mid-year sale of these assets, that would represent $0.02 to $0.03 of earnings dilution.

And then lastly, fees are expected to be relatively consistent with 2012. Given that Fund IV was launched mid-2012, we will generate incremental asset management fees for 2013, but these will be counterbalanced by Fund asset sales and reduction in asset management fees that I just mentioned. Transactional fees should be comparable and will be primarily sourced from our City Point construction activities.

Our expectations for the core portfolio for 2013 includes same-store NOI growth between 2% and 3%. Initially during the year, we expect same-store net operating income to be a little higher and then moderate as the year progresses, as the year-over-year impact from our key re-anchorings becomes less significant. It's worth noting that included in this 2% to 3% range is the impact from re-tenanting activities at our center in Merrillville, Indiana. We have about 76,000 square feet that is expiring during 2013, for which we have a signed replacement lease for about two thirds of this space. The impact from the downtime related to this represents about 100 basis points in terms of portfolio NOI. So this downtime aside, 2013 NOI for our core portfolio should be up 3% to 4%.

It's also worth noting that full-year 2013 NOI on a same-store basis will not include the contribution of the $224 million of primarily street and urban assets added during 2012. Based on the contractual growth of these leases, these properties should out-perform much of the existing portfolio by as much as 100 basis points, but will not be included in the same-store metric until 2014. Looking at occupancy, although physical occupancy may dip 100 to 200 basis points during the year, primarily due to Merrillville, leased occupancy should remain relatively consistent between 93% and 94%, with our expectation of finishing the year around 94%.

So putting all these pieces together, we believe we now have a scalable model which should be able to achieve sustainable high single-digit, low double-digit growth in earnings year over year. Last year was 7%. For 2013 we expect to generate mid-teens growth.

In terms of the balance sheet, we continue to maintain a low-risk, low-cost capital structure. Looking at our debt, as I've mentioned before, our use of non-recourse secured financing has historically provided us with a very competitive cost of debt. This continues to be the case, as we have recently closed and continue to selectively finance properties, that spreads around 175 basis points over swaps for 7- to 10-year money at 60% to 70% loan-to-value. Although we been successful with our current capital structure in our use of non-recourse debt, we recognize and we've discussed before that, as we continue to grow, expanding our options will be beneficial. To that goal, last week we closed on a $150 million unsecured line of credit which replaced our $65 million secured facility. We also have the ability to accordion this facility up another $150 million as we grow the core portfolio.

So we'll continue to maintain our current overall low level of leverage, while still locking in attractive, long-term, non-recourse debt at 60%-plus leverage for select assets, while leaving other assets unencumbered, thus allowing us to grow the unencumbered pool. As relates to our equity, we've raised a total of $85 million under our current ATM, leaving about $40 million still available under what has proven to be an efficient low-cost vehicle for match funding our acquisition program. And in our Fund Platform we have about $1.5 billion of purchasing power in our recently formed Fund IV. And we've also put in place a $250 million acquisition line for the fund. And we started to put all this to work with $150 million of acquisitions during the fourth quarter.

So cash on hand, common equity, unsecured line, Fund IV capital and its acquisition line -- all of these position is very well in terms of liquidity and capital needs today and for the foreseeable future.

With that, we'll be happy to take any questions. Operator, please open up the lines for Q&A.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Todd Thomas, KeyBanc Capital Markets.

Hello, good afternoon, thanks. First question. On the mezzanine investments, I was wondering if your guidance forecasts that you hold the mortgage investments throughout the entire year in 2013? And then what is the expectation to grow this portfolio? Should we assume additional investments in 2013?

We do forecast that we hold these throughout the year. In terms of additional mezzanine investments, and/or first mortgage investments, our expectation is, is right now we're at about 5% to 6% of our total market cap in terms of the mezzanine book and first mortgage book. We think that we maintain it somewhere around that level and then we've talked about this target previously. So we don't currently forecast any significant additions to the book.

Okay. And then Ken, I was wondering if you could discuss the Supervalu transaction a bit? I know Acadia participated in the Albertson's deal earlier on, and I'm assuming you had some discussions with the investor group. And I was wondering if you talk about the Company's decision to not participate this go around, or what your involvement was throughout the process?

Sure. We're slightly curtailed in terms of the levels of detail, but you're right, yes, we are partners in the Albertson's transaction from our original investment. And so we were certainly offered, and then we opted not to make an additional investment into this now Supervalu transaction. But first, most importantly, as an existing partner, our interests are rolled into this transaction and we think not only with the original investment, where we more than tripled our equity, a very good investment. But the management team that, overseen by Cerberus, the guys at Albertson's, who are now going to run all of this, they did a tremendous job. And we have every reason to think and expect that, as it relates to our existing investment, they're going to continue to do a great job.

Our decision not to put more dollars in had absolutely nothing to do with our faith in that investment going forward. I think this is a very good sign for our industry because whether you're a landlord to Shaw's, which we are, I think that this team has a really good shot at turning around a bunch of these portfolio companies. So we are very bullish on their abilities. We are looking forward to -- we're very happy with the profit we made already. But we're looking forward to even more, and I'm not going to get into the specific details of why we decided that it wasn't the right fit for us, but it could be a very good investment, and we are rooting for them.

Okay. That's helpful. And then lastly, on the fund investments that you outlined for guidance at $250 million to $500 million for Fund IV, I was wondering if you could provide some thoughts on what those deals might look like, whether or not they'd be similar to what we've seen thus far, or if you think that they could take on a different type of real estate investment at this point?

One, our ability to see the future is very limited. But we really have four areas that we focus on that we think cover a broad range that's true to our core competencies. And those are the areas that I would really expect to see the vast, vast majority of these investments to go into. So one's opportunistic, and that's a very broad range, but when there are inefficiencies in the marketplace, if we go through some difficult financial times, often weakened by things inexpensively because we have fully discretionary capital that we can close immediately, irrespective of where the REIT market is, irrespective of where the debt markets are, et cetera. So that's a pretty broad range, but expect those to look like Cortlandt Manors or other types of very opportunistic deals that we've done over the past decade, plus.

The second area, then, is distressed retailers. What we've said in the past, and will continue to do, is we want to be more focused where there are distressed retailers, where we can buy the real estate underneath, where there is a cap rate arbitrage. So we bought several A&Ps, we purchased a Shaw's, we purchased Best Buys. All where we felt the risk-adjusted return was compelling because there was concern over the retailer, but the real estate was going to hold up. That's the second segment. And again, it depends on where we are in terms of our retailers and their level of distress, but we have found that in any three-year period, there is a fair amount of that.

The third area where we have been very active, is street retail. Of all the different segments of our business, the one that seems to have the most tenant demand and some of the most interesting opportunities, is the street retail component. So whether that's Lincoln Road in South Beach where we just made an acquisition or whether it's here in the five boroughs of New York, or other markets such as Chicago, that we are very active in, when we think that there will be those continued opportunities. And then finally, there is the heavy lifting associated with urban mixed-use and we'll selectively be involved in that as well. So expect it to be in any of those four and my strong guess is that will be the limit.

Okay, thank you.

Sure, why don't we go on to the next question.

Craig Schmidt, Bank of America

I guess following up. Have you had any conversations with the Consortium on Shaw's? Not so much as your investment, but what they plan to do with the Shaw's supermarkets in the Northeast?

Craig, we speak to all of our tenants as much as we can, but I'm going to let them, when they are ready, speak as to their own plans, because I think they could do a heck of a lot better job explaining it than I could, other than we think that this is a very good, important step for them.

Okay. And then second, could you tell us a little bit about the Alamo Draft House that's coming to City Point?

Sure. They are a Texas-based high-end movie theater chain that attracts a clientele much hipper and younger than I am. But we think it's going to be a real nice complement to what's going on in downtown Brooklyn. They've targeted a few key markets that they're going to expand into. Brooklyn was high on their list and we were thrilled to have them come join this project, which is going to have that right blend. Remember, downtown Brooklyn has really become a 24-7 live, work, play area, and so it's going to be important through our food marketplace that we address some of the interesting food needs in that area. There's going to be residential, a lot of very exciting soft goods retailers and then Alamo will be there as well.

As an aside Craig this is a full-service theater with food, and I'm told that they have 20-plus different types of beer on tap. I plan on being one of the first customers there when they open up.

Sounds fun. Outside of Century 21 and Armani X and now Alamo, have you announced any other tenants coming in to City Point?

No, not yet. So stay tuned.

Okay. Thanks a lot.

Sure.

Paul Adornato, BMO capital

Hi, good afternoon. I was wondering if you could talk a little bit about your future plans with respect to Self Storage, since you're keeping an interest in the management company. Do think that you'll do what you have done, that is, storage related to retail or would you consider potential stand-alone storage?

It would be highly unlikely that we, through our fund, or Acadia Realty Trust, so highly unlikely, period, that we're going to do stand-alone storage. So the first thing we're going to do, is thank our lucky stars that we made a top-of-the-market transaction that was arguably outside of our core competencies. There were a lot of good rationales, and you touched on some of them, Paul. First we're going to be very thankful that we were able to go through that learning experience profitably. And I credit the quality of the real estate locations that were developed, as well as the tremendous job that the Storage Post team did. We always liked self storage, still like the business. Especially in these urban markets, and we are continually intrigued by putting Self Storage on top of urban mixed-use developments. So we have enough of an interest here that, as you see us do urban mixed-use where Self Storage would go on top, is the most logical solution to that is to see Storage Post there. And sure, we would have an economic interest in that. But what became abundantly clear over the past several years is, it's a separate business. It's a B to C business that's fundamentally different than what we do. And while, again, I'm very pleased with our returns, I think that the business is great. We think we best serve our stakeholders staying focused on those four groups that I talked about.

Okay. Could you tell us if the public storage operators have a look at the portfolio and if it went to the highest bidder? The best outcome for AKR shareholders?

Sure. All we have is our interest fully aligned with our stakeholders. There's no other business out there and it was absolutely in our best interest to get the best execution. We absolutely went out to other private and public buyers. Sometimes we do a broad marketing using a third-party firm, other times we do it more quietly where there is a more select group. But we had made it abundantly clear to a wide group of people that we were sellers. We signed confidentialities and we got very good execution, and on top of that, Paul, we still also have a retained interest. I have absolutely no doubt that this was best execution for our shareholders, best execution for our fund investors, and then we'll see if there's any gravy on top of it.

Okay, thank you very much.

Sure.

Quentin Velleley, Citi.

Hi, good afternoon. In terms of the funds, could you talk a little bit about, I'll call it the embedded promote income? It seems with Storage Post in Canarsie, that your unlevered IRR is a 500 to 700 basis points above what your return, or your preferred return on equity requirement is. So I guess, or I calculate, that the embedded promotes from those sales would be significant. So can you talk a little bit about that? And then also, what you're thinking on Fordham and Pelham, which you're getting closer to selling, as well.

Sure. So I don't forget, let me start with Fordham and Pelham, the easy answers and Jon will chime in, because I'm sure I'm going to get a bunch of this oversimplified. Fordham is 100% leased. You should expect to see us go to the market on that, and it'll be very interesting to see how it prices, but my expectations would be that will be a 2013 transaction. I think, Jon, you forecasted mid-year.

That's right.

And Pelham's not that far behind. I don't think it's appropriate right now for us to give pricing guidance on it, but these are great assets and we would expect to see good execution. From a fund basis, you can't, unfortunately, do asset by asset and calculate the promote, although we all want to do that. But remember they are pooled. For Fund I, and the case will be Fund II and Fund III, et cetera. First you have to return all the capital plus the preferred return.

That's right.

So we've always been fairly to very hesitant to count our chickens before they are hatched. But, yes, we have sold a bunch of, and you were referring to both Fund II and Fund III, assets, last year we sold a bunch of Fund III assets, as they reached stabilization, and the returns were in that spread to our preferred hurdle. So if we can keep that up, it still could be a couple years out there, then I think the math will get easier and easier to help you do that calculation. But we're just superstitious enough and cautious enough to not want to forecast that amount at this juncture.

If you look at, for example, Fund III to date, as a result of these sales, of the $475 million of capital in the fund, about $160 million has been returned at this point. That's based on sales of some assets that I'll call pre-Lehman genre assets. So if we can continue to make profits on some of the post-Lehman acquisitions, which arguably have more inherent profit embedded in them, I think our track looks pretty good here. But as Ken said, until we cross that threshold of returning all capital and all accumulated preferred return, we don't start to recognize the promote. And interestingly, it creates some timing difference in terms of, I speak about earnings dilution from the sale of those assets, and we are going to have, hopefully, promote income down the road once we cross that threshold. But the timing between those two is obviously separated. So it would be nice to be able to accrue it. Unfortunately, that's not our practice and I think it's the right practice. So there's always going to be that differential in terms of the two events.

Okay. From our perspective we should really start thinking about putting something in from an NIV perspective, but from your perspective it's to early to try and give that kind of guidance to us.

Yes, I mean we provide pretty good disclosure, Quentin, so that you guys can do your estimates and I think you're absolutely on the right track. From our point of view, it's really more about NAV and value creation, than it is about how all this layers in, in terms of earnings. We are pretty excited about a bunch of the successes that we've had over the past 12 and 24 months, both in terms of stabilizing assets as well as exiting others, so it makes us feel a lot better about that.

Okay. And lastly, the first mortgages, the $43 million on the New York City and Chicago assets, given that yield is so high, I assume that the value of the underlying assets isn't far off that first mortgage amount. Is that a fair assumption?

Well, there was a fair amount of equity. I don't remember off the top of my head, that went in junior to these. At year end there was a bunch of transactions out there. We tried to get our hands on as many as we possibly could. Some were tax planning-related or otherwise. And where people needed to close quickly on assets, well, fine, you go fix it up and there may, in some cases they needed to complete a lease or something, we'd be happy to own it at that point. So we made the bridge loan. It's an attractive yield. We probably get paid back in the next 12 to 24 months. And then let's hope I get to talk about it as rolling into our core portfolio. But there was equity defined as real people putting real money in junior to us.

Also keep in mind that the 10%, or it's a little bit under 10%, isn't all an effective interest rate. That includes various fees, and if you look at the actual interest rate on the loan themselves, it's closer to 8%.

Right. That high yield basically reflects the need to close quickly on these deals.

Yes, that's true.

Thanks, guys.

Rich Moore, RBC Capital Markets.

Hi, good morning guys, or good afternoon. The first thing on the RCP income, that's running negative. How should we think about that? Does that continue that way or what exactly is happening there?

What that reflects is, in the current year there was a settlement related to the Mervin's investment and we picked up our share of that settlement. It wasn't a huge number, but that resulted in the negative number that you're looking at. I think on a go forward basis, you won't see any more negative as it relates to that situation. And that I would expect our Albertson's investment still has inherent value in it and would hope to see some positive results from that.

Okay, good. Got you, thanks. John, also on the provision for income tax, I think you might have touched on this a bit at the beginning, but I wasn't quite sure I understood it. In the fee income, the provision for income taxes is very positive for the quarter. Not quite sure what to do that, either.

Looking at it on a full year basis and on a 2013 basis, because of restructuring and certain tax planning, including, for example, as we grow the core portfolio, obviously our 5%, what I'll call bad income bucket, grows or expands as well, so we are able to take advantage of that. Items like that have enabled us to reduce the tax bill here, so that I think on a full-year basis for 2013, you're looking at an all-in tax bill of somewhere between $0.5 million and $1 million. So that's the way you should be thinking about it in terms of 2013.

And, Rich, when I touched on scalability, as our core portfolio grows, these are some of the operating efficiencies that start to inure to all of our benefit.

Okay, yes, good. Thanks, Ken. I got you guys. The last thing I had, I was curious about this gain on involuntary conversion of an asset. I had a picture of the fiscal cliff settlement occurring and the Feds coming to take away your guys' assets, and just want to make sure I understood what's going on.

So this actually wasn't a bad involuntary event from our perspective. This related to our center in, near Wilkes-Barre, Pennsylvania. It was a Kmart-anchored shopping center that incurred some flood damage back in September 2011. We received insurance proceeds as it related to that, and they were in excess of our basis, which creates a gain, if you will, in terms of those proceeds. So cash in our pocket and monetizing part of that investment at an attractive cap rate is, in our minds, a positive event.

Okay, good. Thank you, guys. I appreciate it.

Sure.

Jason White, Green Street Advisors.

Hi, guys. A question on the two smaller Fund IV acquisitions. When you look at those two smaller deals, what's the strategy there? And what's the upside potential? And how do you move the needle with those smaller deals?

Yes, for a company of our size, we still need to be a little careful about doing deals that are too small. But thematically, and I was just touching on them before, where we can buy properties that we think that there's an underlying opportunity but the retailer is distressed, we will do those. And we will try to do them programmatically enough. So we acquired, outside of Baltimore a 50-plus thousand square-foot box that is leased to Best Buy. There's about four years left and we bought that on an unlevered cap rate of high teens. So our equity will come back just through lease term, provided Best Buy stays through lease term. If they don't, and we're rooting for them, but if they don't, we're comfortable that we can re-tenant and successfully do so, and make a very nice entrepreneurial return.

If that turns out to be the only of those kind of deals that we do in the distressed retailer category, Jason, you're absolutely right, it's a fair amount of listing for just one transaction. What we have found over the years though, is we can do these more programmatically. You have to start somewhere, so let's see how that plays out over the next couple years. We've certainly been successful doing this with a bunch of A&Ps, made a very high return converting and A&P into a ShopRite, and then selling it relatively quickly thereafter, with Shaw's. So we think will be a host of these kind of opportunities, and it's worth being in it and in that business so that you're seeing that deal flow. The other deal, and I promised my acquisition team I would talk very little about it, but it's a street retail acquisition, relatively small, on one of the streets in New York City, that I would term an emerging market.

So there's some areas, Lincoln Road in South Beach, or Broadway in SoHo, that's not a secret and if you can get your hands on the right asset, great, but everyone's focused on it. It's also clear that there are other markets that our retailers are going to trend towards, and you look at where the hotels are coming, you look at where the housing, the apartments, the conversions, some of the restaurants are going, and it's pretty clear that a host of our retailers are going to show up on some of these corridors. Williamsburg, Brooklyn for instance, and for those of us based in New York, we could probably pick five or 10 of them. Again, you have to start somewhere, so we made a small acquisition on one of those streets. My hope is, and our team is working hard to make sure we do many more of them, to the extent that in any of these emerging markets we just do one small deal. You're probably right, it's a little small. The profit may not be worth the brain damage, but our experience has been, we can add to them and we can add to them fairly readily. We've certainly been doing that in Chicago, for instance, in Lincoln Park, one building at a time, but they start adding up over time.

Okay, thanks, that's helpful. And then, last question, it looks like your cash leasing spreads were pretty flat in '12. Were you expecting rents to start trending in your favor? Is that a small sample size issue? What are you looking forward to in '13?

In '13 we expect a better result. Not that '12 was that bad or anything. It is an issue of small numbers, unfortunately. We are quickly growing out of that, but we still have to talk about it. I'll give you an example, we had one lease during the fourth quarter, a new lease for 3,600 square feet, where the rent was actually down 20%. It was a situation unique to that space and to that particular situation. But that actually pulled down the leasing spreads for new leases for the fourth quarter by 150 basis points. So we still get a little bit of distortion, but hopefully we quickly grow out of that so we don't have to talk about small things like this.

One bad pizzeria lease and it screws up all our numbers.

All right, thanks guys.

Sure.

We have no further questions in queue at this time.

Great. Well, I'd like to thank everyone for their time. We look forward to speaking to everyone again soon.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.