Acadia Realty Trust Inc. Q4 2008 Earnings Call Transcript

| About: Acadia Realty (AKR)

Acadia Realty Trust Inc. (NYSE:AKR)

Q4 2008 Earnings Call

February 12, 2009; 12:00 pm ET


Kenneth Bernstein - President & Chief Executive Officer

Michael Nelsen - Chief Financial Officer

Jon Grisham- Chief Accounting Officer


Michael Mueller - J.P. Morgan

Michael Bilerman - Citi

Rich Moore - RBC Capital Markets

Alan Seymour - Columbia Management

Alex Barron - Agency Trading Group


Good day ladies and gentlemen and welcome to the fourth quarter 2008 Acadia Realty Trust earnings conference call. My name is Shane and I’ll be your operator for today. At this time all participants in a listen-only mode. We’ll facilitate the question-and-answer session towards the end of the conference.

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 risk 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 reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.

Participating in today’s call will be Kenneth Bernstein, President and Chief Executive Officer; Michael Nelsen, Chief Financial Officer; and Jon Grisham, Chief Accounting Officer. Following management’s discussions, there will be an opportunity for all participants to ask questions.

At this time I would now like to turn the call over to Mr. Bernstein. Please proceed.

Ken Bernstein

Thank you. Good afternoon. Thanks for joining us. As we review our results and discuss how we positioned ourselves going forward, we need to do so in the context of the continued turmoil in both the credit markets and in the overall economy. We are all confronting serious issues affecting our economy and our industry, ranging from deflation to de-leveraging and from a frozen credit market to a frozen consumer.

While this turmoil is beginning to create opportunities, any management team that is not adequately sobered by these issues is lacking both sense and prudence. So, today along with reviewing our earnings, we’ll review the key components of our business; first, our core portfolio and operating fundamentals; second, our balance sheet, liquidity and maturity schedules; and third, our external growth platform.

In terms of our operating fundamentals, our fourth quarter core performance continued to be solid. We are acutely aware of the softness in the economy and while we have yet to incur a material drop in occupancy or revenues, we’re very focused on the potential short-term impact to our industry, from this softness and seeing it eventually creep into our portfolio.

Keep in mind that our core portfolio consists of primarily higher barrier to entry assets in supply constrained markets, 84% of our portfolio is anchored by either necessity based grocery and drugstore tenants or value oriented discounters. While we think that in the long run higher quality assets and higher barrier to entry markets will outperform their counterparts, we don’t think any portfolio is immune to the current softening.

As such, we’re taking a very cautious view of short term core portfolio performance and as Jon will later discuss, we’re holding a fairly wide range of potential same store NOI reserves. It’s not that we know with any unique clarity how 2009 will play out, but rather because of this uncertainty and steady stream of negative data, we think it makes most sense to be prepared.

Second, we’ll review our balance sheet. Our balance sheet remains in a solid position. As Mike will walk through, as of the fourth quarter we had about $117 million in cash and line availability. No material on-balance sheet debt maturities until December of 2011. We also have limited debt exposure at our fund level, both in terms of maturities and loan to values and finally if need be, we continue to have enough capital to internally fund our existing needs for the next several years.

The third component; our external growth platform which is primarily driven by our investment funds. The structure of our discretionary investment fund provides us with access to capital enabling us to take advantage of opportunities as they emerge, without having to be overly dependent on the public markets of equity. Our current fund, Fund III, is alive and well. Even after our recent acquisition this year, it still has approximately $350 million of its original $500 million of equity commitments available for future acquisitions.

The investment management business has come under intense scrutiny. Some of it’s justified, but keep in mind, not all funds are created equal. There’s a huge distinction between those funds that are discretionary, not subject to near term redemptions, have solid long-term investors and access to attractively priced subscription lines, as compared to those funds that are not discretionary, and have been effectively frozen out from making future investments in this market.

Just because we have dry powder doesn’t mean that it’s the right time to use it. We believe that we’re still early into the process of price correction and that our stakeholders need to be very well rewarded for us moving early off the sidelines.

In the case of our recent acquisition, we felt adequately protected on the down side and well incentiveized on the up side to move, but until there is better clarity in the markets, our investment focus will continue to emphasize discipline and patience.

So today, we will review our external growth initiatives, both the status of our existing fund investments, which include the progress that we’re making on our New York City portfolio as it moves steadily towards stabilization; the status of our existing mezzanine and preferred equity investments, as well as new investment activities and opportunities including our recent acquisition of Cortland Towne Center.

In short we fully recognize the challenges of the capital markets and a weakening economy. While we feel our portfolio, our balance sheet and our investment platform are all well positioned to absorb the impact of the challenges ahead; we will continue to be vigilant and focused as we work through what we believe to be one of the most challenging periods in a very long time for our economy and for our industry.

Now, I’d like to turn the call over to Jon who will discuss our fourth quarter and year end earnings. Jon.

Jon Grisham

Good afternoon. To briefly review our earnings, to start with, FFO for the fourth quarter was $0.12 and for the year $1.16. In evaluating these results, it’s important to keep in mind that our reported FFO per share was diluted by about $0.045 for the year as a result of the issuance of 1.3 million shares in connection with our special dividend. So adjusting for this, FFO would have been $1.20 to $1.21, which is in the upper half of our revised guidance of $1.17 to $1.22.

As we already announced during the fourth quarter, our 2008 guidance was revised as a result of the $4.4 million impairment charge for the Tollway Investment. In addition, there were two other significant offsetting items during the fourth quarter. These were one, the purchase of $8 million of face value of our convertible bonds which resulted into $2 million or $0.06 per share gain and then offsetting this gain for the most part, we provided additional reserves totaling about $1.6 million or $0.05 on accumulated straight line rent balances.

Importantly, this reserve is not associated with any specific tenant write-off, but given the state of the current retailer environment, we believe it is prudent and appropriate to increase these reserves on a $13 million balance on our straight line rent receivables.

Turning now to 2009 guidance; it’s obviously a challenge to project earnings given this current economic environment and accordingly our 2009 earnings guidance provides for a wide range of forecasted earnings. As I’ve done previously, I’ll discuss the forecasts and the framework of the five major areas of income of our business model. As a quick reminder, they are (1) core portfolio income, (2) our pro rata share of JV fund income, assets based fee income which includes asset and property management fees, transactional fee income which includes our construction, leasing fee income, etc and then lastly, our promote RCP and other income.

We’ve detailed the numbers in the press release. A couple of key factors I would like to focus on during the call today. Number one, our core portfolio income and pro-rata share JV income or core portfolio income. Given the retail environment we provided for additional reserves against NOI in 2009, which results in forecasted negative same store NOI ranging from minus 2% to minus 5%.

We recognize this degree of NOI contraction is perhaps a departure from what many of our peers maybe forecasting and we’ve always tended to be a bit more conservative as it relates to our forecasting, but especially in light of the current market conditions, we think that this conservative bias is warranted.

Currently, we’re at the lower end of that reserve range in terms of the forecast in our model and it strikes us as unrealistic to think that there's no more bad news in 2009. So, again, we think that this level of reserve is appropriate. The other factor that's impacting our NOI model is the law of small numbers. Given the size of our portfolio, it does have an impact given certain events. Importantly, keep in mind that our NOI base of about $50 million for every 1% NOI movement that only equals about $500,000 or a penny and a half of FFO.

Looking at our share of JV income, in total we expect this to be down about half a million to $1 million dollars and this is primarily as a result of the continued monetization of our Fund I. We anticipate this will be partially offset by additional income from Fund II development assets coming online, primarily Pelham and Fordham and Fund III acquisitions during the year. We anticipate that the Fund III acquisitions would generate $1.5 million to $2 million of our pro-rata share of earnings and as a result of our recently announced acquisition of Cortlandt we’ve already achieved the low end of this guidance.

The decline in Fund I income is primarily the result of the sale of the Haygood Shopping Center, which occurred in 2008 and the recent sale of six of our Kroger-Safeway locations, which just occurred in February of this year. Offsetting our core and JV income declines will be additional interest income, principally from our mid 2008 mezzanine investments at Georgetown and 72nd Street, New York City.

Asset based fees are estimated at about $11 million for 2009, which is comparable to 2008. Transactional fee income is anticipated to range from $9 million to $10 million, compared to 2008 of about $8 million. This forecasted activity is based primarily on anticipated fees at developments that are currently under construction or near completion, primarily Fordham and Pelham.

Lastly, turning to promote RCP and other income; first, looking back at 2008, we had a total of about $9.5 million for the year, which included promote and RCP income of $3.5 million, lease termination of $4 million, and $2 million gain on the purchase of our converts, which I just mentioned. For 2009, we anticipate these sources will provide in total approximately $5.5 million to $6.5 million and as we're sitting here today, we're confident of attaining at least the low end of that guidance range.

To summarize, we're currently forecasting 2009 FFO to range from $1.05 to $1.19 of share, which is also after giving effect to the non-cash interest expense related to the new accounting on our convertible debt. As I mentioned, we recognize that the guidance range is wide and we will continue to keep you updated as to our progress during the year and its effect on that guidance.

Now I'll turn the call over to Mike.

Michael Nelsen

Good afternoon. As a result of the continued economic turmoil, it’s clear that balance sheet strength and liquidity are of paramount importance. Debt exposure has become a more critical component of all company’s financial conditions. In analyzing debt it’s important to focus on more than just leverage levels or cost of debt. While our fixed charge coverage of 2.9 times for the year and blended cost of debt at the core portfolio of 5% on its face puts us in good stead. It is clear that not all debt is created equal.

Specifically, one must also consider levels of recourse, financial covenants, scheduled maturities and the effect of JV debt. Acadia’s debt is detailed in our year end reporting supplement on pages 29 to 31. Keeping this in mind, our only recourse debt is our convertible notes and there are no financial covenants related thereto.

Now, looking at maturities; at the core level, including extension options, no debt matures before December of 2011. Although we fully expect to be able to exercise these options, without extension options, $48.9 million of that debt matures in December of 2010 and contains two one 0year extension options.

The conditions for those extensions include maintaining a debt service coverage ratio of 1.3 times, where we’re currently at 1.9 times and a 65% loan-to-value, where we’re currently at 45%. $15.5million matures in December of 2011 with similar conditions that we currently exceed to exercise a one year option. As a result, we don’t believe we have any exposure to maturities in the quarter prior to December of ‘11.

As it relates to our opportunity funds, Fund One had total debt of only $20 million at year end. $5million of this was Kroger-Safeway debt, which has already self-amortized in February of 2009 and the remaining $15 million matures in 2010. Fund II had a total debt of $264 million at year end of which $184 million, after giving effect to our partner’s share of debt at City Point matures through 2011 including extension options.

Fund II has $108 million of available unfunded investor commitments available to deal with this $184 million of maturities. Accordingly, we don’t believe that we have any issues with maturing debt that can’t be readily dealt with. For Fund III, the total debt maturing through 2011 including extension options aggregates $102 million. Investors unfunded capital commitments, exceed $400 million at year end. Again, the fund should have no issues in regards to this debt.

Turning to our liquidity levels at December 31, excluding our funds, we had cash of $87 million and availability on our lines of $42 million. It’s important to point out, the difference between the terms of out lines of credit and other company’s unsecured lines. Our lines are non-recourse, revolving term notes with fixed maturities secured by first mortgages.

Additionally, as Jon discussed, we purchased $8 million of our convertible bonds during the fourth quarter. Although a use of current liquidity, this reduces our 2011 maturity requirement. While the reported earnings effect is front-loaded, we prefer to look at this as an investment, which generates a 15% annual return for three years.

To the extent that this opportunity continues, we will consider additional purchases of our bonds, based on future levels of liquidity. All things being considered, we think the de-leveraging of our balance sheet at these levels of returns is a good use of the excess liquidity.

In summary, while we hope that the current market and economic turmoil doesn’t continue for an extended period of time; should it, we believe our balance sheet, both in terms of liquidity and debt maturities, puts us in a favorable position to be able to continue to execute our business plan.

I’ll now turn the call back to Ken.

Kenneth Bernstein

Thanks Mike. I’d like to first discuss our core portfolio performance. In the fourth quarter, both our same store NOI and occupancy held up nicely, as the strength and hopefully resilience of our portfolio is the result of a deliberate asset recycling program whereby over the past several years we’ve sold off the bottom 50% of our portfolio. We then either, redeployed our capital into higher quality assets, held the cash or returned it to you in the form of special dividends.

This be, 7% of our portfolio is supermarket and drugstore anchor, 27% is value and discounter anchor and 16% is urban and street retail. While the strength of our portfolio will not exempt us from the weakening economy or troubled retailers, it should help ensure that these vacancies, if and when they occur are more successfully addressed.

In terms of our tenant exposure to-date, we’ve avoided most of the significant bankruptcies. We have recently been impacted by the bankruptcy of Circuit City at two of our core portfolio locations and the 2009 FFO impact as Jon discussed is just over $1 million or $0.03 a share.

While to-date the actual vacancies, terminations and defaults are also not yet significant, as Jon discussed, in relation to our guidance, we think it’s prudent and appropriate to take a cautious view as to the potential fall off for 2009. It is certainly possible that the quickly decelerating economy finds a bottom in the near future and begins to climb back. We truly hope that’s the case, but hopes not a strategy with which we’re going to run this company.

Turning now to external growth, the key driver of our external growth is our discretionary investment funds business. Our existing fund investments break out into two broad categories. First, is opportunistic investing which includes purchase of distressed assets, distressed debt and our RCP investments and the second is our value added investments which include developments, especially our New York Urban/Infill assets.

We’re generally agnostic when it comes to choosing between value added versus opportunistic investments and we look at both of them in terms of which provide the best risk adjusted returns at that time. However, the time when we’re able to buy high quality existing cash flow at a discount to replacement cost, such as we did with Cortlandt Towne Center, it requires potential redevelopment yields to be significantly higher to compensate for the additional brain damage and risk associated with ground-up construction projects.

In terms of our existing fund assets, first Fund I, it’s already returned a 33 IR to the investors, approximately a 2X equity multiple with more profits hopefully to follow as we dispose if the balance of the Fund I assets, which include our Kroger Safeway portfolio, half of our Mervyn’s investment and a few other redevelopments. Kroger Safeway is continually being profitably liquidated, with six properties recently sold back to Kroger this month.

In terms of Fund II, this fund was characterized by both opportunistic investments as was the case with our retailer controlled property or RCP venture, as well as value added projects such as our Urban/Infill portfolio. Our RCP venture for Fund II includes Mervyn’s as well as Albertson’s.

With respect to Mervyn’s, we previously walked through the success and the status. To-date we’ve already received approximately two times our original equity investments. Albertson’s to-date has returned in excess three times our equity investment of $20 million. In the fourth quarter we received a $2.2 million distribution to our fund from Albertson’s bringing the total distribution to-date to approximately $64 million on that $20 million investment.

In terms of the value added component, with our New York urban development pipeline, we’re making steady progress towards stabilization and not withstanding a steady stream of negative news. On the retail and development front we’re pleased to see strong national tenants ranging from Trader Joe’s, to BJ’s, to Marshall’s still committing to new space and signing new leases in the New York City market.

As we break out in detail on pages 47 and 48 of our supplement, the construction on five of the nine Fund II developments are now substantially completed. One project is under construction and it will be completed this summer and then the three remaining are in design phase. As Mike discussed, we have limited debt issues at the fund level including the development projects, but those properties that have been completed, the retail is 84% leased, the office is 71% leased and the significant remaining moving pieces are limited to two of the projects as follows.

At Fordham Road in the Bronx, the retail component is complete its 98% leased. Construction of the office component is now complete and to date it’s approximately 1/3 leased. Thus, the moving piece here is the continued lease-up for the remainder of the office space. We are receiving interest in working with primarily governmental agencies and we’ll keep you posted as that lease-up occurs.

The second project, Pelham Manor, construction on our anchor, BJ’s Wholesale Club which you may recall replaced Home Depot is well underway and we anticipate that they’ll open in May of this year. The moving piece here is the lease-up of the balance of the center which is currently 74% leased and should lease up over the next year as the anchors open for business.

Additionally, as I mentioned before, the adjacent property is being redeveloped and it’s going to be anchored with a new Fairway Foods market, adding another highly complementary anchor tenant to this market. The balance of the projects in Fund II consists of three projects in the design phase where we continue to focus on pre-leasing, cost control and design and return optimization.

There as follows: Carnarise, Brooklyn, as we previously mentioned Home Depot paid us $24.5 million to buy out of their obligation to anchor this center and that reduced our land basis to approximately $1.5 million. We’re close to finalizing a replacement anchor with a tenant that will represent approximately 80% of the retail GLA of that project. We will then be in a position to commence construction and that project is debt-free. Second project, Sherman Avenue in northern Manhattan, we’re in the final stages of negotiations with three commercial tenants which would substantially pre-lease the commercial portions.

Additionally we’re in negotiations with a third-party developer and a university for the sale of the residential air rights for student housing, which if that occurred would supplement our returns but it’s not a precondition to our proceeding. We hope to commence construction on this project in the second half of 2009, but we’ll only do it once we coordinate these pieces so as to keep our risks to a minimum.

Third and finally, in terms of our City Point redevelopment in Downtown Brooklyn, while it continues to be a high demand location for retail tenants including our anchor tenant, which is Target. We will continue to proceed with caution and make sure that we do not commence the project until the appropriate pieces or in place and we’ll keep you posted as to that as well.

Turning now to Fund III. This fund was launched in 2007 with just over $500 million in equity commitments. We remain substantially on the sidelines for 2008 and to date had only by year end utilized 20% of the fund. Even after including our recent acquisition of Cortlandt it brings our allocation of Fund III equity to under 30% or approximately $150 million and while this is about half the pace that we would normally deploy over this period, given the continued strain on the economy, we felt that we’re still in the early phases for opportunistic investments.

Furthermore, with Fund III equity available until 2012, we have plenty of time to put that money to good use and we’re in no rush. As opportunities arise, we can quickly move on them. But we can also afford to remain patient and disciplined as well. Additional had a time when the capital markets are severely constrained and debt financing continues to be limited and rather costly, we’re fortunate to have the liquidity of a discretionary fund that also has an attractive available subscription line.

The line allows us to quickly move on opportunities without having to rely on the conventional acquisition debt markets and affords us a very low upfront borrowing cost of 55 basis points over commercial paper which today brings our line cost to under 2.5%. I want to briefly review our Fund III investments.

First, Sheepshead Bay in Brooklyn; it’s still in the design stage but strong tenant interest remains due in part to a strategic location within a dense, well-established residential community and its proximity to the Sheepshead Bay subway station and the Bell Parkway.

Second, 125 main street in Westport, Connecticut, is also progressing through the design phase and we’re working with several tenants as we determine how to best reconfigure this existing structure. While the slowdown in retailing is going to clearly impact the timing of this redevelopment, the unique main street location remains in strong demand from national retailers who are looking for exposure to that market.

Third, our storage portfolio of 11 properties continues to operate, consistent with our expectations, while storage should not directly correlate with retail performance and the Northeast seems to be holding up rather well to date, we don’t believe that self storage is going to be immune to a struggling economy and we expect that the lease-up of the REIT positioned portion of the portfolio is going to take time. We acquired the portfolio a year ago at 70% occupancy. It’s currently in the mid-70s occupancy level and we expect it to lease-up and stabilize over the next several years.

Finally, in the third quarter of last year we closed on a small high yielding first mortgage on a well-located retail development parcel in Farmingdale, Long Island and while the investment may convert at our option into full ownership, for now it’s simply a high yielding 14% first mortgage with two year maturity at a very attractive basis. Like to touch on Cortlandt Towne Center briefly, at the end of January, we closed on the acquisition of a 640,000 square foot property in Westchester, New York.

This property is predominant retail shopping center in that market with high barriers to entry for regional and national tenants. It’s anchored by quality national tenants such as Wal-Mart, A&P, Marshall’s, Best Buy, all of these tenants have strong historic sales performance at the center and the cost of the acquisition of $78 million or $120 per square foot translates into a significant discount to replacement cost.

The property which was initially developed in the early 1970s and was then expanded 10 years ago has historically remained well over 90% occupied and with a stabilized NOI above $9 million. The recently vacated spaces, previously a Linens-N Things and Levitz, brought the occupancy to below 85% and the NOI to about $7 million and it will provide us with the opportunity for upside as we re-tenant these spaces. We already have strong interest for a significant portion.

Our goal would be to simply get back to the historic NOI of $9 million over the next five years and that should provide us with an attractive unleveraged and leveraged deal. I’d like to turn now to the mezzanine and preferred equity investments that we’ve made. We have periodically made on balance sheet mezzanine loans, preferred equity investments and on page 27 of our supplement we included a general breakout of these investments which total $122 million as of year-end.

In general, these investments have either been a means of investing our excess capital at safer risk levels than investing in the junior equity in an overheated market or occasionally planting seeds for future growth. While in hindsight, from a safety perspective, nothing would have fared better than stuffing our cash in a mattress, in general, well executed mezzanine investments should perform better than the junior equity counterparts of the same vintage.

What we’ve seen, though, is that in many cases, the safety margin has compressed significantly as assets values dropped. Further more in some cases the underlying first mortgage maturities created additional exposure and we witnessed these firsthand. In the fourth quarter we wrote-off a $4.4 million investment in Tollway and concurrent with realizing this loss, we also carefully reviewed our other mezzanine investments to make sure that they are still on sound footing.

As outlined in our supplement, the two most significant of these investments are the Georgetown DC retail portfolio and then second is the development at 72nd street and Broadway in Manhattan and those together comprised $88 million of the $122 million total. Of the remaining $34 million, half of it is in the form of first mortgage loans and then the other $17 million are mezzanine loans. Based on our frequent review of the underlying collateral, we're comfortable that no additional reserves are currently required.

The underlying maturities of these investments should all be able to be readily addressed at that time borrower level or if need be at our level. All of the investments, even in light of today's revaluations remain on solid footing and while loan to own sounds too cavalier right now. We continue to be more than willing to own these assets at our basis.

In terms of the Georgetown investment, we made a $48 million senior preferred equity investment in a portfolio of 23 properties, located primarily in Georgetown, DC. This is a solid portfolio, in extremely high barrier to entry location with high quality national tenants. Our original underwriting a year ago put us at the 65% to 85% loan to value portion, which even when revalued today should put us in an acceptable collateral position and the vast majority of the senior debt does not mature until 2016.

The second mezzanine investment we made last year was a $34 million mezzanine investment collateralized by a mixed use retail and residential development at 72nd street and Broadway in the Upper West Side. To-date the construction is well underway, 11 of the 19 levels are built so far and completion is slated for June of 2010.

With respect to the retail component, the developer recently signed leases with trader Joe's and Banc of America for the retail components of the property of rents that are consistent with our underwriting and while our initial underwriting earlier this year brought our LTV to approximately 70%, upon stabilization, even with the shifts in market value and the shifts in residential rental rates, we believe we are more than adequately protected. The underlying mortgage there matures in July of 2011, with an additional one year extension option.

Now, in terms of Tollway, different from our other mezzanine investment, Tollway was not a flight to safety investment. While we certainly thought the investment was sound at the time, our primarily goal in 2005 for that investment was to make a small preferred equity investment in exchange for the future rights to acquire the balance of the portfolio of redeveloped retail complexes at rest stops along the Chicago toll roads.

While their exclusive locations should have created positive barriers to entry from a leasing perspective that the developer was unable to execute on its strategy sufficiently and we elected not to acquire the balance of the interests and then due to the difficulties in stabilizing and then refinancing the project, the owner went into maturity default under the first mortgage loan and we have so far opted not to cure or extent in.

While they’re remains a possibility that we may stay in a restructure transaction we believed it prudent to write-off the entire $4.4 million investment. We do not take any losses widely and have learned from this mistake. Furthermore, given the shifts in the market, other than in connection with our fund platform, it's hard to imagine using our current on balance sheet cash positions for anything other than maintaining our liquidity.

In contrast to Tollway, while there is no such thing as a risk free investment, our preferred equity in mezzanine investment in Georgetown and 72nd street are both high quality properties in irreplaceable locations. We would welcome owning both of them as they are clearly inline with our long-term investment strategy.

As it relates to future investments, while we've remained relatively constrained for most of 2008, we expect that there will be opportunities in the upcoming year. These may include relatively stable properties such as Cortlandt, but there will also be a wide variety of distressed opportunities and given our opportunistic acquisition capability, as well as our value added redevelopment skills, we think we will be well-positioned to capitalize on a host of these opportunities.

So today, to conclude, we have yet to see a glimpse of the recovery from one of the most difficult economic periods of our generation. While we will never lose sight of the continued turmoil and our potential exposure, we will not hesitate to act when the right opportunities present themselves and while no single company or institution is protected from this considerable downturn, we do feel strongly that we’re well positioned to respond to the difficulties and more so capitalize on them.

We will continue to focus on maintaining a stable core portfolio. We will make sure that our balance sheet remains solid with sufficient liquidity as we await a thawing of the debt markets. Third and finally, we will continue to position our acquisition platform to take advantage of any unique opportunities as they arise.

I’d like to thank our team for their hard work during a very challenging year and at this point, I’ll be happy to open the call for questions.

Question-and-Answer Session


Your first question comes from Michael Mueller - J.P. Morgan.

Michael Mueller - J.P. Morgan

Jon, with respect to the fee income components, Asset Management fees, transactional fees, you laid it out for ‘09. With respect to the transactional stuff particularly, can you talk about what sort of initial trends you’re thinking about as you move into 2010, because a lot of this is obviously a function of what is in process on development?

Jon Grisham

Yes, I mean first looking back at 2009 and back to 2008, 2008 was mostly construction fees, related to the Urban platform and less about leasing commissions. 2009 as that construction progresses and finalizes, it’s more about the leasing commissions as opposed to the construction fees. Depending on these remaining properties that are currently in design phase and the timing of the starts on those, we’ll determine obviously what happens in 2010 and even in the latter portions of 2009.

I’d anticipate that as those start and hopefully some of those start in the latter portion of this year or early 2010, you would see again a swing back towards construction fees. So that’s the general trend if you will. In terms of dollar amounts, it’s pretty early obviously to try to predict any type of dollar amount as it relates to 2010.

Then the other component, though is obviously this assumes that there is no additions to the pipeline in terms of new redevelopments and that’s the current assumption at this point as it relates to any projecting that I’ve done, obviously to the extent that anything is added to the pipeline, that also increases construction fees and also in the case of Fund III will generate development fees as well.

So that’s if you will kind of the overlay of it all.

Michael Mueller - J.P. Morgan

Okay and any thoughts of carrying that conversation forward to the promote RCP line. As we think about 2010, do you see a pipeline that you feel good about in terms of harvesting and replacing that income?

Jon Grisham

In terms of what’s left as it relates to the promote income, the big pieces are obviously as we continue to monetize the Fund I and as I mentioned we sold six assets this year in February, that’s going to create some promote income. There is still a remaining 18 properties in Kroger-Safeway, which we would expect to be monetized over the next two, even maybe three years.

Then there’s also the remaining assets still in the Albertson’s investment and some in the Mervyn’s investment as well. Those will contribute to potential promote income down the road as well. A little bit early to start talking about any type of promote income as it relates to Fund II, obviously.

Ken Bernstein

Just to add to that, one of the nice shifts in terms of where the market is, is we’re now able again and it’s been probably three, four years. We’re able to buy existing assets with existing cash flow, where the upfront accretion is pretty darn meaningful. The beauty of the redevelopments were that we’re able to build to higher and acceptable yields in a tough environment and have transactional fee income that Jon was just talking about in place upfront, but given our choices if you can get upfront accretion from acquisitions of existing cash flow Mike, we’re more than happy to have that.

Michael Mueller - J.P. Morgan

Yes, that was actually the next question, because it seems like the investment buckets, the way I think them are something like a Cortlandt transaction where it’s more along the lines of buying and releasing as opposed to where you’re buying a project, scrapping and redeveloping and then third bucket would be the mez investment. So, here if we’re thinking about capital allocation at AKR’s level for the next year, putting aside carrying through on redevelopments, do you think the bulk of it is going to be in Cortlandt type transactions as opposed to mez or the typical urban refill stuff that we’ve seen in the past years?

Ken Bernstein

Yes, with the following caveats. It feels right now like stabilized retail is an oxymoron and so you need to be prepared to re-anchor, redevelop, reposition even stabilized assets and while I don’t anticipate us taking on new ground-up projects when we can buy at a discount to replacement cost. I do expect our skill set and our capital to be invited into a host of opportunities that need to be fixed, where they will be more accretive going in, more or likely they’re not, like Cortlandt and Mike, you remember our Wilmington, Delaware transaction which was very similar economics to a going in on Cortlandt and we’ll always gravitate towards simple and straight-forward if we think our stakeholders are going to be well rewarded for that.

Michael Mueller - J.P. Morgan

Okay and last question. With the development pipeline obviously this does take some time, but it looks like some projects given the environment are taking longer than you would have liked. Are there any implications at the fund level with the investors if Carnarise takes much, much longer and if City Point takes much, much longer and this was drawn out by a few more years than you expected?

Ken Bernstein

If you added many, many years, Mike and we dealt through the documents at some point, but that’s not the issue and yes, they’re taking longer because we’re being cautious. I believe that the New York Urban portfolio will be well validated relative to having at the same time purchased equivalent assets stabilized, where the majority of the equity would have been wiped out, whereas in this case I really don’t believe that will be the case.

You need to be careful that you don’t pre-build. We’ve seen some other parties do that and build too much on spec and that’s where you get into trouble. So we’re far better off taking our time, recognizing that there is a carry cost to it, but then matching up the right debt, the right tenants, for the right returns and then I think we’ll be fine.


Your next question comes from Michael Bilerman - Citi.

Quinton Falelli - Citi

Hi I am Quinton here with Michael and Lenny, just the first question, in terms of your same-store NOI forecast, the next year down 2% to 5%, you mentioned the reserves. I’m wondering exactly what they are and how much of the drive in same-store NOI is driven by reserves?

Jon Grisham

The vast majority of that same store prediction is baked into reserve. The decline from the Circuit City bankruptcy of about $1 million was offset by some other leasing that did occur during the fourth quarter of that offset that NOI to a large agree. So the minus 2 to minus 5 really is a $1 million to about $2.5 million of reserve that has not yet been used but we think is prudent to build in there.

Michael Bilerman - Citi

Okay. So, the underlying portfolio you think is actually holding up reasonably well?

Ken Bernstein

Yes, so far, so good, but it is a tough environment out there, obviously and we’re seeing an interesting trend. It will be important to watch how this plays out it’s relates to tenant’s ability or lack thereof to avail themselves of bankruptcy. But what you are seeing are tenants working hard to restructure their portfolio before they go into bankruptcy. You saw that with Circuit City.

Because of the change in the bankruptcy laws, they are only allowed to stay in bankruptcy, in chapter 11 for a much shorter time. Much harder to get dip financing and much easier to end up in a chapter 7 and then what we’re seeing in the chapter 7 is the liquidations tend to be more broad based, even high quality leases are being terminated because the retailers are waiting and figuring they are better off negotiating their own leases themselves than picking them up.

So, what that’s causing us to do is take a look and say if tenants file, there may not be that same distinction between high quality locations and low quality in the short run. In the long run, I have no doubt that the distinction, 2010 and beyond, will be validated. But we’re saying wow, let’s see what happens, there are a lot of retailers who have clearly stated that they’re having a hard time. We think we have a good portfolio. We know that they’re the right locations. We have a nice tenant mix and I discussed it but in the event that bankruptcies occur I think we may be surprised at how democratic if you will, the upfront losses will be.

Michael Bilerman - Citi

Just in terms of your interest expense, with the floating rate, I’m wondering what you’re assuming in guidance for next year?

Ken Bernstein

I’m sorry, could you repeat that? I’m not sure I caught it.

Michael Bilerman - Citi

I’m just wondering you think clarify what your floating rate debt assumption guidance is?

Ken Bernstein

We don’t have very much floating rate exposure. If you look at our portfolio, including our pro rata share of the funds, it’s about 10% so it’s not a big number in either way, up or down in terms of rates. But we’ve built in a 1% to a 1.5% LIBOR at the end of 2009.

Michael Bilerman - Citi

Okay and just briefly, I know you mentioned City Point, but it looks like the costs in the area are down. Can you just explain what’s driven that?

Jon Grisham

Construction costs?

Michael Bilerman - Citi

Construction costs.

Jon Grisham

Yes. We have seen a steady decline over the past three months, really over the past six months, in construction costs. The benefit of retail but probably as importantly, because remember, this is going to be the portion we don’t own, but that’s being developed by our partners, is going to be affordable rental housing and not only is there bond financing to make the financing piece of that attractive, but the costs there have dropped. We think anywhere from 15% to 20% and it’s still working its way through that process.


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

Rich Moore - RBC Capital Markets

Jon, I’m thinking about the or Ken, I’m thinking about the timing of new investments over the next year, because it seems to me as I sit here in Cleveland, Ohio, obviously the center of U.S. real estate, I mean, there aren’t any buyers and there ought to be a lot of distressed or sellers looking to sell and just can’t find a buyer. I mean it seems like these things should be all over the place, opportunities like Cortlandt. I mean what do you think in terms of when you might find new opportunities this year on the center front, on the operating center front?

Jon Grisham

We were a little surprised that things didn’t hit in the fourth quarter of last year and now they're starting to emerge, Rich, but it's pretty clear that sellers need to be forced to the table to acknowledge the pretty significant change in pricing and sellers who were in denial and capable of staying in denial will probably continue to do it because it's two bad conversations. Its cap rates are up and your NOI is down and so in the case of Cortlandt, again, you had to say I know you had $9 million of NOI, but you don't today and in Cortlandt would have traded at $9 million of NOI a couple years ago, Rich, for $150 million, plus.

So that's a pretty startling change in pricing for anyone who is not being forced to the table. What we are seeing now is lenders are beginning to force the owners to the table and that's probably how it will play out. It will probably be a lender-driven forced transaction and given our size, it doesn't have to be billions. In fact, I hope it isn't.

I hope this is more orderly than not because if it's a blood bath, it's not great for our industry and/or for our existing inventory, but I do expect and we are seeing sellers saying okay, I got to do something now and you're seeing the kind of pricing in the 7% to 9% going in yield range, where vacancy is being given away for very little cost and so you can get the kind of yields that we used to have to do ground-up redevelopments for buying going in and I think that will start to kick in and it is as we speak.

Rich Moore - RBC Capital Markets

So Ken, do you think I mean, are we seeing like two or three of those now and we'll see a couple dozen over the next quarter or so or is it just going to kind of trickle in over the next six months kind of thing?

Ken Bernstein

Do you mean in terms of what we choose to take down.

Rich Moore - RBC Capital Markets

I'm thinking more in terms of just what you might be looking at. You guys are going to be selective, but I'm wondering are you seeing the volume increase in terms of what's out there to look at as possibilities?

Ken Bernstein

Yes, we are, but I don't want to give anyone the indication that we're going to be jumping left and right. We are still early as I said before in terms of how the retail environment settles out and we will continue to step in cautiously as it relates to our assumptions on the fundamentals. So, don't expect a Cortlandt per month. If there's a Cortlandt per quarter, great and that would be more than we would need to meet well beyond the high-end of what Jon outlined as his expectations.

Jon Grisham

Cortlandt gets us two thirds of the way there in terms of our current guidance. So, we don't have to do much more to hit that.

Rich Moore - RBC Capital Markets

It seemed to me and maybe I'm mistaken, but it seemed to me that operating expenses jumped more this quarter over the third quarter than just the straight-line reserve that you guys put in there. Am I wrong on that or is there something else?

Ken Bernstein

Couple items there, Rich. Number one, when I talk about the net impact to earnings of the straight-line rent reserve and I say $1.6 million that includes straight-line rent reserve that was established at the funds as well and that line item that you're looking at for operating expenses is gross at the fund level. It doesn't net out the minority interest share. So, the actual number at the gross amount, if you will, is about close to 2.1/4, $2.5 million for that's one component. The other component is snow removal costs, about $1 million and then there is a couple other smaller items, but that's what makes up the bulk of the variance.

Rich Moore - RBC Capital Markets

What's going on I guess with G&A and with interest expense, both of those were down pretty sharply as well, anything special in there?

Ken Bernstein

Other than the fact that I'm severely under paid.

Rich Moore - RBC Capital Markets

I knew that, right.

Ken Bernstein

We reduced bonuses this year and that decision was made in the fourth quarter. So that impacted G&A by almost $1.5 million and that reduction of bonuses was made really company-wide. So that is the bulk of the $1.7 million decrease.

Rich Moore - RBC Capital Markets

Then Ken, on the dividend, is there any thought in your mind on doing something different with it, its just the big topic I think in everybody’s mind as far as dividends go. I mean is there anything, you’re thinking in terms of size of the dividend or components, how you paid that out?

Ken Bernstein

We have historically set our dividend policy once a year which we did last quarter and it gets reviewed quarterly by the Board and I guess in unusual circumstances we could make a change, but that was pretty straightforward in terms of what we did was we kept the dividend the same amount per share. We increased the share count through our special dividend and as of now that’s where we stand. In terms of all the chatter in the marketplace, I’ll let you guys duke that up.

Rich Moore - RBC Capital Markets

Then when you do the special dividend just like a procedural sort of question, do the unit holders get new units? Is that how that works or do they get all cash for their dividend?

Jon Grisham

The unit holders got all cash for their dividend; their dividend equivalent of the $0.55.

Rich Moore - RBC Capital Markets

So they don’t get additional units like the shareholders get additional shares?

Jon Grisham


Rich Moore - RBC Capital Markets

Then the last thing I had was well I guess a couple more quickies. There’s no more bond gains in guidance is that right?

Jon Grisham

In 2009 guidance?

Rich Moore - RBC Capital Markets


Jon Grisham

There will be some bond gains.

Rich Moore - RBC Capital Markets

Did you say how much that was, Jon?

Jon Grisham

I don’t have an exact amount for you right now, but in the RCP promote and other income bucket, which I spoke, about which I said ranged from 5.5 to 6.5 that will include some bond gains.

Rich Moore - RBC Capital Markets

Then the last thing, the time limit on the deployment of Fund II capital, is there any limits on that?

Jon Grisham

Fund II or Fund III?

Rich Moore - RBC Capital Markets

Well, I was thinking II could you talked about III, Ken and I’m wondering if you are waiting out some of these maturing loans, do you have a timeframe that you might not be able to go beyond.

Ken Bernstein

No, as it relates to Fund II, we’ve already identified all of the sources uses for that and we’ll call down that money and there is no time limit and as you can imagine, if we didn’t need the money upfront, our investors would be more than happy for us not to call it, but we always have the right to call it and then for Fund III which is the fund that is for new investments as I said, we have until 2012 to identify those investments.


Your next question comes from Alan Seymour - Columbia Management.

Alan Seymour - Columbia Management

Most of my questions have been asked and answered, but I’d be curious as to your insights on my understanding is it, I think some of the fund guys who you’ve been involved with have looked at you as an alternative investment management and whether or not as a result of the problems in the marketplace, they’ve come to you and talked about maybe either reducing their commitment or trying to get out of the commitment.

Ken Bernstein

Fortunately not, it’s an important topic that everyone in the investment community is looking at and first of all, it’s because we were lucky. I don’t think anyone when they were dealing with the various different Ivy League institutions went and did reverse due diligence on who had which commitments, but we’re just very fortunate that the institutions that are our investors happen to be well-capitalized in a good position.

Additionally, we’ve been in this fund business for longer than we’ve been public. So, we’re going well over a decade with Yale University and have a long relationship with them. That doesn’t guarantee that investors don’t get into trouble, but this is not a new short-term relationship that we have with these fund investors that they would act unduly capricious on.


Your next question comes from Alex Barron - Agency Trading Group.

Alex Barron - Agency Trading Group

I guess you mentioned the decline in NOI you guys are expecting for this year. What is the corresponding occupancy range that you guys are modeling in that?

Michael Nelsen

Yes, it will be anywhere within that forecast, 100 to 300 basis points, 1% to 3%, 3% at the high end.

Alex Barron - Agency Trading Group

Okay and just to verify, the way you guys define occupancy is based on physical or on leased?

Jon Grisham

Based on physical.


I would now like to turn the call over to Mr. Ken Bernstein for closing remarks.

Ken Bernstein

I’d like to thank everyone for joining us and we look forward to speaking to you again in the near future.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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