Acadia Realty Trust's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.24.13 | About: Acadia Realty (AKR)

Acadia Realty Trust (NYSE:AKR)

Q1 2013 Earnings Conference Call

April 24, 2013 10:00 ET

Executives

Amy Rancanello - Vice President, Capital Markets and Investments

Kenneth Bernstein - President and Chief Executive Officer

Jon Grisham - Chief Financial Officer

Analysts

Todd Thomas - KeyBanc Capital Markets

Craig Schmidt - Bank of America

Christy McElroy - UBS

Ross Nussbaum - UBS

Josh Patinkin - BMO Capital Markets

Michael Mueller - JPMorgan

Operator

Welcome to the First Quarter 2013 Acadia Realty Trust Earnings Conference Call. As a reminder, this conference is being recorded. At this time, all audience lines have been placed on mute. We will conduct a question-and-answer session following the formal presentation. (Operator Instructions).

I will now turn the call over to Amy Rancanello, Vice President of Capital Markets and Investments. Please proceed.

Amy Rancanello - Vice President, Capital Markets and Investments

Good afternoon and thank you for joining us for the first quarter of 2013 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 maybe 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 risk and uncertainties including those 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 April 24, 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.

Kenneth Bernstein - President and Chief Executive Officer

Thank you, Amy. Good morning. Thanks for joining us. Today I’ll start with a brief overview of some of the trends and key drivers that we’re seeing in our business, then Jon will review our operating metrics, our earnings as well as our forecast.

In terms of the market in general, in the first quarter we saw a continuation of many of the trends that we’ve seen over the last year, in terms of the capital markets, cap rates and bond spreads continue to tighten. In the public markets, the majority of this activity appear to be in pursuit of the higher yielding investment opportunities whereas in the private market it appears as though we saw greater cap rate compression for the higher quality core assets especially those in the gateway markets.

And while it maybe worse, noting these divergent trends from Acadia’s perspective, since we participate in a fairly broad range of investment themes through our dual platforms. We can remain fairly agnostic or opportunistic as to where and how we choose to allocate our resources. But irrespective of the enthusiasm perhaps, exuberance that we’re seeing in the capital markets what we can’t do is confused this momentum with the realties of our industries operating fundamentals, because in the long run its our tenants performance, its our tenant demand that really drives our business. And just because cap rates are declining doesn’t mean that rental demand is increasing.

What we’re seeing is that, well the overall market is nicely improving, it’s primarily in our most dense suburban locations or even more so or a high-street and urban locations where there seems to be sufficient tenant sales growth and leasing demand to really drive the prospects for healthy long-term growth.

So with that in mind, let’s look at each of our dual platforms first our core portfolio, our first quarter same-store results look solid, they were at the higher end of our expectations and even after stripping out the contributions from several of our previously discussed re-anchorings our same-store NOI growth for the quarter was still a very solid 5.6%.

Its probably worth noting that inclusive of our most recent core acquisitions, street and urban retail now represents over a third of our core NOI that’s nearly double, where it was a few years ago and keep in mind that given the significant amount of acquisitions that closed over the last year or so. Over half of our street-retail portfolio is still not in our currently reported 2013 same-store NOI. So it’s our expectation there over any extended period of time and on a stabilized basis street-retail should provide us about a 100 basis points higher contractual NOI growth that are more traditional suburban assets that we are optimistic that over the next several years our same-store NOI growth should be stronger with the addition of these high-street assets then if we had simply stuck with our strong but suburban portfolio.

In terms of core acquisition activity in the first quarter we made an important $86 million addition to our Chicago Street Retail Portfolio with the acquisition of 664 North Michigan Avenue. Complementing our already exciting retail properties on Chicago’s Gold Coast and at Lincoln Park is this property is at the base of the New Ritz Carlton residential condos it’s in the heart of the eight blocks that make up Chicago’s Magnificent Mile

Our property is leased to tenants including Tommy Bahama and Ann Taylor Loft with neighboring tenants ranging from Apple and Niketown to Burberry and Cartier. North Michigan Avenue with approximately 40,000 pedestrians daily is one of the most heavily traffic retail shopping districts in the country. And we were fortunate that this acquisition was priced about a year ago since the seller had to complete various conditions associated with the new residential condos above us and that’s the leasing with the key tenants was also priced over a year ago. So the improvements in both the leasing market and the transaction market over the past year certainly new to our favor.

In terms of core acquisition volume overall last year, we added about $225 million of high quality properties to our core portfolio is these acquisitions have been focused in key supply constrained markets with strong tenant demand ranging from Washington, D.C. up to Boston as well as in Chicago as we said in our last call our expectation is that we’ll maintain a similar acquisition space to last year. So, as we continue to add assets like North Michigan Avenue to our core portfolio. More important that scale, more important than our earnings growth the diversification is to make sure that we are continuing to position our portfolio for continued long-term growth as well as to face the ongoing changes in the retailing landscape. In terms of our Fund Platform complementing our core growth initiatives is the second major component of our business which is the value creation generated from our Fund Platform.

As we previously discussed we are currently investing on behalf of our Fund IV which has $540 million of equity and gives us about $1.5 billion of discretionary volume power. In the first quarter while we didn’t announce any new investments we are seeing enough interesting opportunities to keep us positive and keep in mind we get well rewarded to be opportunistic and disciplined and we get appropriately penalized when we are not. And while adding new investments is clearly an important and necessary goal for this platform equally important is maximizing the value of our existing investments and the opportunities embedded into this pipeline and from that perspective we also think we are very well positioned.

Last year, we sold just under $500 million of Fund Properties that included Canarsie Plaza as well as our Storage Post Portfolio and then with respect to our remaining fund assets they break out into roughly four equal components as follows. So, current portfolio is above $1 billion on a cost basis. We have approximately 25% of that portfolio which is now stabilized urban redevelopment primarily in our Fund II as we previously discussed we’ll continue to monetize those assets.

Then another 25% of our projects in several of our Funds that are and what we call Lease Up Mode. And by that we mean the current occupancy blends into the low 80s this includes our two portfolios on Lincoln Road in Miami as well as our Lincoln Park Sector Re-anchoring opportunity at Chicago and several New York area lease-up projects.

And in this quarter the NOI is projected to more than double over the next few years. The third quartile are our current high-yielding projects where are going on unlevered yield has been strong and what we’re currently equipping a high-teens levered yield on properties ranging from Cortlandt Town Center to Heritage Shops in Chicago, and in the final quadrant the balance are redevelopments. City Point is certainly the highest profile but collectively we have over a million square feet of – redevelopment opportunities. Primarily in the New York Area, but also in the DC as well as Miami and while our exposure to new development are appropriately mitigated has demand in these key markets grow we feel we’re well positioned to benefit from this as well. So, whether it’s capturing the benefits of comprising cap rates by selling our stabilized assets or in joining strong kind of demand and the corresponding NOI growth from our leased-up projects, whether it’s benefiting from the attractive current levered yields of our high – higher-yielding properties or prudently executing on our development pipeline. We like how we are positioned with respect to these fund assets and the opportunities that we see going forward with them.

So in conclusion, in the first quarter we continued to make steady progress with both our core portfolio on our fund platform whether it was through re-anchoring, leasing or core acquisitions we continued to try forward the quality and performance of our core portfolio and then with respect to our fund platform we like our position there as well. Looking forward, both platforms are well capitalized so we can take advantage of a wide array of opportunities as then they arise. And we’re now besides where we’re beginning to see the benefits of scale and but we’re still also small enough that we can move the needle.

So, with that I’d like to thank our team for their hard work over the past quarter and turn the call over to Jon.

Jon Grisham - Chief Financial Officer

Good morning. We’re pleased with first quarter results both in terms of our core portfolio performance and earnings. First an overview of the portfolio. Same store NOI; as we reported was up 10.9% for the quarter. And re-anchorings that we completed during 2012 drove about half of this positive result specifically at our Bloomfield and Branch Centers.

The comparative impact from Bloomfield will diminish starting second quarter as the new anchors took occupancy in second quarter last year. Branch will continue to contribute to same store growth through the third quarter of this year. The remaining 5.6% NOI growth for the quarter was generated across the balance of the portfolio. The out performance above and beyond was driven by a combination of factors including a better credit loss experience and higher CAM recovery in 2013 and that of an increase in winter-related expenses relative to 2012.

Occupancy as expected was down first quarter versus year-end from 94.2% to 93.6%. It’s worth nothing that the 60 basis points of decrease represents only about 26,000 square feet and the decrease is in large part from two former Fashion Bug stores in our portfolio that were closed following and seen acquisition of Charming Shoppes. We are in the final lease negotiations at one of these locations at a new rent over double that of the former and continue to REIT, work on releasing the second. Our third former Fashion Bug store was REIT and it did prior to quarter end at a 50% increase in rent and thus had no impact on quarter-to-quarter occupancy. So while these are clearly very positive spreads these locations are predominantly single-digit rents so that the earnings impact doesn’t quite as dramatic.

Our renewed 2013 portfolio occupancy guidance anticipated a short-term occupancy decline of a 100 basis points to 200 basis points with us then finishing the year out at around 94% which is similar to our 2012 year-end occupancy. Based on our releasing progress to-date we now expect this temporary decline will be closer to the 100% basis points as oppose to the 200 basis points and all else being equal we currently expect a total of perhaps another 25 to 50 basis points of additional short term decline in the next quarter or two before getting back to 94% by year end.

Leasing spreads were 6% on a cash basis 23% on a GAAP basis this compares with 2012 spreads of minus 1% cash and positive 6% GAAP. Although there can be quite a bit of variability for us in this metric quarter-to-quarter and certainly one quarter does not itself a trend make this is also clearly a positive result. So for 2013 so far we like what we see in our core portfolio performance.

That being said it's obviously way too early to be declaring victory in revising guides for 2013 but we’re clearly trending to the high end of our original expectations. Similarly we are pleased with earnings for first quarter as we reported FFO was $0.31 and this includes $900,000 or $0.02 of acquisition expenses related to our purchase of 664 North Michigan. This should be stripped out in comparing to our 2013 guidance of $1.17 to $1.25 which as we discussed was before any acquisition related expenses. And during the quarter there were also additional items of income aggregating $0.02 to $0.03 which aren’t necessarily recurring every quarter.

As it relates to our dividend we increase this by 17% for the first quarter as a result of 2012 earnings growth and expected 2013 growth and the related increase in taxable earnings. In terms of the balance sheet we continue to maintain a low risk, low cost capital structure. Our net debt to EBITDA for the Core is at four times and including our share of our fund, it’s five times.

During the first quarter, we created the optionality of being an unsecured borrower as we close on a previously announced $150 million unsecured line of credit and this facility which can be accordioned up to $300 million replace to our existing $65 million secured facility. That being said, we will remain opportunistic and continue to selectively borrow on a secured basis to take advantage of extending maturities at attractive rates that continue to tighten. Over the last quarter spreads compressed another 25 to 50 basis points and are down 100 basis points over the last 12 months.

Looking at our equity our ATM continues to be an efficient low cost vehicle for match funding or acquisition program. During the quarter we raised $50 million to purchase 664 North Michigan and we also renewed the program for up to another $150 million. In Fund IV we have a little under $500 million of remaining committed equity which gives us about $1.5 billion of purchasing power in that platform. So, we continue to maintain a low leverage capital structure, we've established unsecured line availability and have sufficient low cost core and fund capital to execute on our strategic plans for the foreseeable future.

With that we’ll be happy to take any questions. Operator, please open up the lines.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas - KeyBanc Capital Markets

Hi thanks good morning I am on with Jordan Sadler as well. First Ken your comments about pricing and gateway markets, am I reading that right that cap rate compression they cause acquisition activity in the core to decelerate a little bit, it sounds like you’re still expecting to meet the $150 to $300 million assumption that's embedded in guidance and $86 million of that's already complete but can you just, I hope reconcile your comments a bit and maybe talk about the pipeline today for what you’re saying for the Core?

Kenneth Bernstein

Sure. First of all yes we do expect to meet our goals so lets put that aside for a second. Cap rates are compressing and as a buyer we’d rather cap rates not compress but in terms of existing inventory it makes us feel pretty good but so our borrowing cost and while we’re not a heavy user of debt it does make a difference as well and we are very careful about making sure for our core acquisitions that we are match funding and that we are achieving a positive spread and even with the compressing cap rates, we are able to do that. Now, we are not alone. There is a lot of people out there, who have either very aggressive cost of capital or are willing to be more aggressive than us.

So, we need to recognize that there is always plenty of competition that’s been the case almost forever thankfully our acquisition goals in terms of absolute dollars as you just pointed out are relatively modest. We can pick our spots. The markets we know, we know well and we know how to execute well in them. So, yes things are expensive but if we can lock in long-term borrowing rates accordingly we’re not going to lever up to do these acquisitions so we’ll match fund and we can do that responsibly and profitably.

Todd Thomas - KeyBanc Capital Markets

Okay. And then the Magnificent Mile deal that you just closed or do you plan to place permanent financing on that asset? And I guess, in the meantime that was completely funded with equity on an un-levered basis?

Kenneth Bernstein

Yes. We’ll probably put some form of debt on and I’ll defer to John as to exactly how he executes on this. But I think he has been pretty clear that we’re going to increase the number of unencumbered assets that we expect to have in our portfolio long-term and either use our unsecured line and then at some point probably step up into the bond market. But irrespective of secured versus unsecured and exactly what’s attributable to that specific asset overall we’re going to make sure we’re match funding and continuing to swap out to longer-term interest rates because these are rates are what got us into the global financial crisis and we’re not going to fall back into that. So, irrespective of what you see at the asset level, you can rest assure we’ll be maintaining our long-term fixed rate exposure at the appropriate levels for assets like that.

Jon Grisham

And we talk about selectively financing certain assets on a secured basis. This is probably a good asset to do that with given the quality of it and we can probably get very attractive pricing on something like this. So, so 60% leverage on an asset like this probably make sense. That being said on an overall basis, we’re going to continue to maintain our current leverage level. So, we might lever up a little bit on an asset like this potentially but then you’ll see us not use leverage elsewhere to maintain that overall low leverage structure.

Todd Thomas - KeyBanc Capital Markets

Okay. And then John also for you, same-store NOI growth it was - it was pretty strong almost 11% and even 5.6% excluding the impact from the re-anchoring was that - was that in line with your internal forecast for the quarter. It seems like the 2% to 3% will be pretty difficult to achieve for the year at this point unless you are sort of expecting growth to really flatten out or maybe go negative in the back half of the year?

Jon Grisham

Yeah that can exceed our expectations. So, so again it’s the first quarter let’s see how the next quarter two play out but we’re clearly trending towards if not the higher end of our guidance even beyond that. But like I said let’s - let’s let it play out for another quarter or two and then we’ll revisit that and talk about guidance.

Kenneth Bernstein

Okay, great. Thank you.

Operator

The next question comes from Craig Schmidt with Bank of America. Please go ahead.

Craig Schmidt - Bank of America

Thank you. I have a question is there any indication what the air rates might go for at City Point to a multifamily developer?

Kenneth Bernstein

A lot more than we thought or feared few years ago when we stepped up and bought out the residential partners during the financial crisis in Brooklyn. The residential demand, the overall demand in Brooklyn is so strong that we’re seeing a fairly robust demand for those kind of areas, I’m not going to quote it on this call, because whatever I say I’m sure will be wrong one direction or an other. But you probably are reading press accounts of different transactions and from what we can tell there is a very deep market and deep demand for it.

Craig Schmidt - Bank of America

Great and you know in regard to the sales productivity and the rent levels that are achieved on Fulton Mall, your interiors for lack of there were malls especially space, well that go at a similar level or it could it go for a higher level?

Kenneth Bernstein

Well first of all Craig, bunch of our leasing team are groaning right now, because you called it interior mall space when in fact this is going to be a real exciting connection between Flatbush Avenue and Fulton Street, what we call Prince Street extension. But to the extent it is, in close you are correct, and we’ll have to see, we have a lot of interesting tenant interest for the street level that will be the piece we will lease last, because we’re leasing successfully from the top down, which is the right way to do a project like this. And then we will fill it in with the right tenants, because the shoppers changing in Downtown Brooklyn, our Dekalb Market that we opened last summer is an experiment, but really helped show that the Brownstone Community will come to this market will shop this market and will add a whole another dynamic to its already a very strong Fulton Street.

Craig Schmidt - Bank of America

Okay. And then just lastly, the upcoming ICSC Convention, are there any objectives you are hoping to accomplish through that convention?

Kenneth Bernstein

We will certainly be spending a lot of time showcasing and talking to our retailers about the six or seven important projects that we have going on, City Point certainly one of them. But Lincoln Road, I think we’re pretty down close to being the largest retail landlord on Lincoln Road. We have about half of our space and with the opportunity to turn it over the next 24 months or so and our retailers are very interested in that corridor in Miami. So, that we spend a lot of time talking to our fashion retailers about their entrant into Lincoln Road. We have two or three other very exciting developments and redevelopments ranging from the Bowery in Manhattan to a small redevelopment in DC. So, I would expect the leasing team to dominate the ICSC and I would expect their time and effort to be spent on those projects. But it’s also a very good venue for us to catch up with all of the more traditional retailers, that TJ Maxx's of the world were very important to us, our supermarket tenants were very important to us and here from then different trends, different issues they have, different opportunities. And so it’s a worthwhile, but very busy few days.

Craig Schmidt - Bank of America

Okay thank you and my apologies to the leasing team.

Kenneth Bernstein

They forgive you.

Craig Schmidt - Bank of America

Bye.

Operator

The next question is from Christy McElroy with UBS. Please go ahead.

Christy McElroy - UBS

Hi, good morning guys.

Kenneth Bernstein

Good morning.

Christy McElroy - UBS

Ross is with me as well. Jon, just with regard to your comments about better credit loss experience in higher CAM recoveries in the quarter, can you sort of quantify how much of that was maybe one-timish and may have had an impact on the same-store NOI growth in Q1. And can you give us a sense sort of what the recovery rate should look like for the balance of the year?

Jon Grisham

Yeah so for the first quarter our recovery rate was 90 - low 90s, 91%, 92%. Normally I would expect that to be somewhere around 80% plus and so that is give or take 10% above what I would expect to see over the normal course of the year. In terms of the contribution to first quarter the CAM recovery is probably a 100 - 150 basis points about 5.6% of what the rest of the outperformance, being very broad-based and but as you mentioned credit loss is part of that. But that - specific to that CAM piece about a 100 to 150 basis points.

Christy McElroy - UBS

Okay. And then Ken I just wanted to follow-up on some of the comments you made at the beginning of the call in regards to the divergence in public versus private market trends. It seems like there has been some private market compression in cap rates over the last six months in suburban or secondary markets you know somewhat driven by the cost and availability of financing. Would you say that has there really been the case in your view or is your argument that the compression has been greater among higher quality assets and if you look at the fundamental side. How would you quantify the difference in same-store NOI growth performance for your assets for suburban versus your infill?

Kenneth Bernstein

Sure. And let me take it backwards. In general and this is a broad base because Jon talked about Fashion Bug as a example of our less infill assets where there is a lease spread due to a tenant failing and etcetera or the financial crisis where there is an uplift in some of the suburban but on a stabilized basis when your tenants are healthy in a suburban center versus in a street sector contractually when you add up your anchors plus our shop growth versus in street-retail is about a 100 basis points advantage. That we are seeing in our street-retail portfolio. Now that’s in a theoretical all things equal marketplace which is never the case but what we’ve seen on top of that is put the contractual aside we’ll have market rents grown and we’ll have softened and again in similarly we’ve seen greater market rent growth sometimes substantially some in the key urban and street markets. So you could see rents reported in so how up 50% or 100% whereas in our more traditional suburban locations and we are happy when rents held or we’re up to a 3% over a five year period. So it’s that combination of contractual growth and the support for when you get the space back market rent increases and that continue to make us more positive about the long-term growth portfolio for those locations.

Now this is not a secret and thus we are seeing that in terms of cap rates and this was my point. What we are seeing amongst the buying community in terms of buying the real estate and whether we are talking about our peers in the public markets or private REITs or sovereign wealth or high network individuals those who are buying assets is they recognize they are buying illiquid assets and for the most part people would rather with a few exceptions and buy assets where they think that there is a descent shop a long-term embedded growth rather than trying to catch up volume nice. So we have seen cap rates compressed in the private markets both for suburban, primary and secondary assets as well as for urban and high-street asset. We’ve seen them compressed more for the high-street assets and on a very simplistic basis when a five cap compresses to a four that’s obviously more than when a 10 cap compresses to a nine.

The question is that when point and who wins this so called the day because the public markets have said we like the yield opportunity and I’m very sensitive to that. I recognize that what we believe is that you can make a lot of money buying high yielding assets. You just better be very nimble, quick, get out of those assets fast enough and too often you can’t and so the private buyers probably recognized trying to out guess in a lower barrier to entry market which tenant survive which don’t which move which don’t which shrink which don’t is a tougher game. On the private side we are seeing them recognize that these are locations over the next five, 10, 15, 20 years beyond and that seem to have the wind at their backs. So we recognize there is competition for that we right building this portfolio for the core assets that we can hold for a long period of time. We like that but if cap rates continue to disproportionately compress on the trophy assets as oppose to the secondary because of our dual platforms we can play in high yielding assets as well. So that’s why I said we’re also relatively agonistic to it. One last point on this our North Michigan Avenue property we priced it as I said about a year ago. Cap rates compressed from the low 5s into below 4.5 from the time we priced it in another asset traded as we were closing this. So I don’t see the cap rate compression slowing up right now and I suspect that all of us are going to have to take out our pencils and look at NAVs especially for the higher quality assets since they allow as low as these seem NAVs maybe had to go up cap rates may still be coming down.

Ross Nussbaum - UBS

Hey Ken it’s Ross Nussbaum.

Kenneth Bernstein

Hi, Ross.

Ross Nussbaum - UBS

A real quick question on City Point. Is there really any reasonable probability that the I would say up tick in volume from the unions I believe will cause a delay to Phase II?

Kenneth Bernstein

No. No, Phase II is under construction as we speak the financings in place it’s funding we’re proceeding and we made a host of important commitments to the City in terms of minority hiring, local hiring, women-owned business hiring. We are meeting those commitments and we are certainly engaged in a continuing dialogue with the unions that you mentioned and we welcomed their participation but we are going full speed ahead.

Ross Nussbaum - UBS

I appreciate it. Thanks.

Operator

The next question comes from Josh Patinkin with BMO Capital Markets. Please go ahead.

Josh Patinkin - BMO Capital Markets

Hi. Good morning. I am curious on the $0.02 to $0.03 of nonrecurring income what that was?

Kenneth Bernstein

A combination of factors probably the most notable is we actually recovered an amount that we had reserved against an old note this is going back to 2009 and we actually we’re paid off in full on the note and so that accounted for on a pro rata basis about $500,000 of income.

Josh Patinkin - BMO Capital Markets

Okay. In the mortgage notebook you guys have about a $100 million there that’s up from $50 million in 4Q ’12, can you describe what’s going on there and how you see that playing out over 2013?

Jon Grisham

Sure. I mean in terms of total book amount we’ve talked about previously how we were targeting anywhere from 5% to 10% of our equity cap is the right amount as it relates to that book so I think we are right in that sweet spot in terms of size. Most of what we are investing in are assets that we would love to own if the opportunity arises or we’d be very happy just collecting our coupon on the note on that will be a great return as well. So that is our expectation for 2013 and you’ll see us for example we got paid back on a small note this quarter $5 million so we’ll recycle that and probably redeploy that into additional mezzanine investment. It’s worth noting that a significant portion of what we’re calling mezzanine is really first mortgage investment so that’s an important distinction obviously.

Josh Patinkin - BMO Capital Markets

Okay.

Jon Grisham

But you’ll see us maintain a similar book 2013 and beyond.

Josh Patinkin - BMO Capital Markets

Very good. And going back to a street retail discussion, do the merchants that you have there report sales?

Jon Grisham

It runs across the board to the extent that we inherited leases that don’t report then we count on our leasing team to make sure that we are having off the record conversations and to understand which streets are working well for our retailers what their rent to sale ratio should be how they think about all those kind of things.

Josh Patinkin - BMO Capital Markets

Right. And as the rent to sale ratio is that similar to what you’d see at some of the high quality mall portfolios.

Jon Grisham

To some extent but we are seeing retailers take advantage of when desiring to control their brand on certain streets. And at best we can tell it seems as though the rent to sales ratio that the tenants are willing to pay for street retail is somewhat higher, high teens plus in some instances where as it seems as though it’s lower in the A mall. What I’d attribute that to is as omni-channel retailing becomes more and more important for these retailers as they have to figure out different ways to make sure that they are extending their brand awareness to the shopper. Then it’s a combination of order fulfillment needs the ability to be identified as being whether it’s on M Street in Georgetown or Lincoln Road or down in SoHo or a North Michigan Avenue that there appears to be and when we discuss that with our tenants they can’t always necessarily specifically quantify it but there are different additional benefits that cause them to remain enthusiastic at what seem to be increasing rents and it’s profitable for most of these tenants there is one or two examples you probably read where tenants have opened up on 5th Avenue or in Madison Avenue where they are saying they’re not making a profit thankfully it’s not deals we owe but I think it’s a positive sign for these locations that tenants want to be there as aggressively with what they do.

Josh Patinkin - BMO Capital Markets

That’s interesting. Does rent on these streets is it more function of what other locations are commanding is it more function of sales?

Jon Grisham

Well, so I would say first and foremost is sales tenants are in the business of making a profit and they are not setting up these locations purely for advertising, marketing branding or order fulfillment purposes although if you had a store in Times Square you’re meeting a whole bunch of different need so that would be kind of one experience. Yet those sales are really compelling as our 5th Avenue as our Lincoln Road but when you get to the kind of properties we own I would say almost without exception our tenants are making very healthy process and able to pay us rents and growing rents accordingly where if the tenants are not profitable it’s very Darwinian and so for every brand that perhaps has lost it’s way for multiple quarters and needs to move on you have the Lululemons coming in and if a street is generally doing $900 to $1000 a foot of Lululemon knows with confidence they’re going to do twice that. So our tenants are profitable, those that are tend to move on and because that business is so much more fragmented than our consolidating suburban business and we like our suburban business but we are not expecting that there will be more office supply chains 10 years from now than there are today, we are not expecting more electronics or book stores. But I would be really surprised to see the handbag business consolidate considerably, I’d be really surprised to see fashion or a bunch of these other areas go through any kind of consolidation way like we are seeing in suburban. So there will be a fair amount of competition demand to pay these rents but you’re going to have to get your sales right if you get your sales right more often than not our tenants are they are very happy in these locations.

Josh Patinkin - BMO Capital Markets

Very good. One last question along this line and then I’ll cede the floor. The leasing characteristics provide you escalated growth or the elevated growth. Are those annual bumps are - would you just mind describing how the leasing works and if there is any pegs to CPI for these assets?

Kenneth Bernstein

Yeah, and it runs the gamut and we’ve been pleasantly surprised as we acquire more of these, they are different somewhat interesting provision. So we have leases that go beyond pegging to CPI just mark-to-market every five years option to renew F market. I assure you that none of our supermarket leases have that provision as they go on for the next 30, 50, 60 years with fixed non-CPI options. So that’s one way we can get there. There are others that have rental contractual bumps every year, 3% a year that works too. And then any combination in between so it maybe that it bumps every five years that straight-line out to the 3%. But let’s not fall in love with contractual growth because I could show you a lot of shopping centers we own that had great contractual growth and didn’t live up to it.

What we need to make sure is that there is good contractual growth and then backstopping it is a market demand based on the tenant sales that we are talking about, the profitability and then just a fragmented and favorable landlord tenant supply demand ratio that makes locations like North Michigan Avenue or like Lincoln Road in Miami wherein general anytime a tenant calls us and says I’m thinking of leaving. That’s a good news call for us and we had Geox who is a great brand. They were not achieving their goals on Lincoln Road and they said we’d like to leave and we took this space back putting our money and rents increased I think 30%. So you need the ability not just have the contractual growth though we like it, not just to have the CPI or mark-to-market really good but also the demand overall so that if you get that phone call it’s a good news call not a bad news call.

Josh Patinkin - BMO Capital Markets

Right. Thank you.

Kenneth Bernstein

Sure.

Operator

The next question is from Michael Mueller with JPMorgan. Please go ahead.

Michael Mueller - JPMorgan

Yeah hi. I guess first of all are there any updates to the disposition plans relating to the funds this year?

Jon Grisham

So we talked about last year, year-end about looking to monetize some of these stabilized fund assets and that is still ongoing. So we identified some of the fund to assets that potentially would be sold and that is still the plan. So stay-tuned and hopefully we’ll see something this year.

Michael Mueller - JPMorgan

Okay. And then looking at the development, re-development pipeline City Point is obviously under construction, you have a whole host of other projects listed in the - I guess the design category. What are the prospects for some of those moving into the construction camp at this point in 2013?

Kenneth Bernstein

Jon I’d let you answer specifically when you take it from in design through but what I’ll tell you from a leasing and process perspective Mike is we’re working with some real exciting tenants and that ultimately is how we drive the decision to proceed on this in which if we can put those pieces together and a bunch of the other logistics associated with some of these is there is two or three that I’d be very hopeful that our team gets well underway this year.

Jon Grisham

So for example two of those Cortlandt Crossing up here in Westchester we’re very active in terms of predevelopment activities as well as Broad Hollow Commons out on the Island again very active as it relates to predevelopment and either or both of those you could see us start preliminarily additional activities as for year end.

Kenneth Bernstein

The key is also if we remember not too long ago when developers found themselves in harm’s way the key is not to start something before you have all your ducks in a row. Don’t start something you’re not ready to finish and then when you start it get it right. So we’d love to see these start this year and we’ll keep you posted as to who is coming in etcetera but our focus will be lets get those right we can afford to be patience and we’ll do that.

Michael Mueller - JPMorgan

Okay. Great that was it. Thanks.

Kenneth Bernstein

Sure.

Operator

We have no further questions at this time. So, I’ll turn the call back to Ken Bernstein for any closing remarks.

Kenneth Bernstein - President and Chief Executive Officer

Great I thank everyone for joining us. And we look forward to speaking to all of you again next quarter.

Operator

Thank you ladies and gentlemen. This concludes the first quarter 2013 Acadia Realty Trust earnings conference call. Thank you for participating you may now disconnect.

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Acadia Realty Trust (AKR): Q1 EPS of $0.31 beats by $0.02. Revenue of $42.2M. (PR)