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Acadia Realty Trust (NYSE:AKR)

Q1 2010 Earnings Call Transcript

April 28, 2010 12:00 pm ET

Executives

Kenneth Bernstein – President and CEO

Jon Grisham – SVP and Chief Accounting Officer

Analysts

Todd Thomas – KeyBanc Capital Markets

Christy McElroy – UBS

Sheila Mcgrath – KBW

Michael Mueller – J.P. Morgan

Quentin Velleley – Citi

Paul Adornato – BMO Capital

Craig Schmidt – Banc of America

Rich Moore – RBC Capital Markets

Andrew Dizio – Janney Montgomery Scott

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2010 Acadia Realty Trust earnings conference call. My name is Amika and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session toward the end of the conference. (Operator Instructions)

Please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Actual results may differ materially from those indicated by such forward-looking statements. Due to the variety of risks and uncertainties, which are disclosed in the company's most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures including funds from operations and net operating income. Please see Arcadia's earnings press release posted on the website for reconciliation 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 discussions, there will be an opportunity for all participants to ask a question.

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

Kenneth Bernstein

Thank you. Good afternoon. Today, I am going to start with a brief overview of the progress we made in the first quarter and the trends we’re seeing and then John will review our earnings, operating metrics, key drivers and then Mike, Jon and I will take questions.

As a general overview, why we feel we’re still in the early stages of a recovery in the first quarter, we saw further strengthening of operating fundamental as the economy continue to stabilize. We also saw a surprisingly robust improvement in the capital markets with increased availability and stronger pricing for both debt and equity. So today, we will discuss how these improvements are impacting the key components of our business, most notably our core portfolio, our balance sheet and our external growth platform.

In terms of portfolio performance in the first quarter, the improvements in the economy led to the portfolio performing at the higher end of our expectations while thanks to NOI and occupancy did decline, these declines were driven by the two previously discussed vacancies and excluding them would have produce another Y positive result. Furthermore, along with the leasing environment, the new space improving in the first quarter, we also saw improvements in the performance of our existing tenants in terms of default collections sales performance.

As we discussed in our last call, we originally expected to see our portfolio occupancy decline in the first and the second quarters of the year and then recover ending the year at flat or higher rates. Now, one quarter into the year and borrowing any unforeseen setbacks, it looks as though we found about in the first quarter and the declines were milder than anticipated. And while NOI growth will still lag occupancy increases by a couple of quarters, we see declines bottoming out this year as well and likely reversing as we head into 2011.

Second, in terms of our balance sheet and liquidity, the improvements in the capital markets also benefited our already strong balance sheet. If you review the financial ratios and data set forth in our earnings release in on page 23 of our supplement, you will see that we continue to focus on maintaining a strong balance sheet with plenty of flexibility.

Third, finally our external growth initiatives. In general, in the first quarter, we saw the continuation of the phenomena on that began at year end. The various reasons not withstanding inevitable multi-year de-leveraging process that our industry is going to have to go through.

In the first quarter, there remained a shortage of quality assets to acquire. This shortage is causing the balance where albeit on a very limited volume, there are more buyers and sellers, especially for higher quality assets and that’s causing cap rates to compress significantly and in some instances actually return to almost pre-cash levels. While it’s hard to tell how and when this imbalance plays out.

On one hand, we had a trillion dollar commercial real estate debt wall to climb over. And on the other hand, capital’s becoming more and more available to take down assets as they come to market, thus greatly reducing the risk of that commercial real estate is the so called next shoe to drop.

Either way, the impacts of Acadia is likely to be both positive in terms of our existing core portfolio and even more so our redevelopment pipeline. And then perhaps negative in terms of easy deployment of our dry powder for distressed opportunities. But the reasons that I’ll outline we believe that we’re well positioned or hedged irrespective of precisely how these competing forces play out.

On the positive side, existing inventory is clearly worth more than we feared a year ago. This appears to be true for most assets but even more so for higher barrier-to-entry assets and supply constraint markets where tenant, lender and buyer demands improves significantly. This is the case not only for our core portfolio but our redevelopment pipeline as well.

As Jon will discuss our redevelopment as they head towards stabilization and with the increased likelihood that we reach our projected yields, they can start to make meaningful contributions in terms of both earnings and residual value.

Furthermore, as it relates to our fund redevelopment as we shift from contemplating potential losses or reserves to contemplating potential profits. The structure of our promotes or process participations and additional incremental value to our stake in these investments. And while we are not fans of counting chickens before they’ve hatched, redevelopments in dense markets like Canarsie, Brooklyn or affluent markets like Westport, Connecticut can become important drivers of our value.

Now, on the negative side, the increased liquidity in the markets may make it less likely that there will be the wholesale liquidation of high-quality real estate at distressed prices like we saw in the early 1990s. Nevertheless, as the real estate capital markets recover we still think that there will be several speed bumps in the road, especially on the private side and that should create more than our fair share of opportunities.

But the days of 1990s RTC like portfolio acquisitions may not occur in this cycle and while it's generally a lot of fund to shoot fish in a barrel, our Cortland Manor acquisition was probably as close as we recently gotten to that. Our company structure and competencies have never limited us the bottom fishing. In fact, our most profitable deals are the last cycle whether you looked at our Wilmington Delaware turnaround, our Kroger Safeway acquisition, our RCP venture which include Mervyns and Albertson’s, they were done in 2003 through 2006 which was well after the so called bottom.

Furthermore, given our size and discretionary fund structure, we don’t need the floodgates to open to create value. We have about $350 million of Fund III equity, less to deploy and that gives us about a billion dollar of buying power and keep in mind that every $100 million of debt billion dollar deployed to contribute approximately $0.02 to $0.03 of assets all to our earnings and more significantly can be a major source of value creation.

So for those companies who need to put significant dollar to work very quickly in order to move a needle, this transition period is likely to be frustrating and for us we recognize that increased competition for stabilized assets, mainly that going forward the best acquisitions will look less like our Cortlandt Manor acquisition and more about fixing broken properties or broking capital structures or being opportunistic and those are the things that we’re good at.

But in any event, even a moderate amount of opportunities will enable us to significantly move the needle. So to wrap up my portion today as we look at the improving climate in the first quarter both in terms of the capital markets and the property level fundamentals, we still think that is prudent to remain prepared for a bumpy road ahead before we are in a full recovery.

But however, this recovery take shape, we do feel strongly that we’re well positioned, well position to capture value in our existing inventory and well position to capitalize on new opportunities as they arise. So with that, I’d like to thank our team for their hard work in the first quarter and turn the call over to Jon.

Jon Grisham

Good afternoon. In general, first quarter results in the performance of our core portfolio were at the higher end of our expectations. And to briefly recap earnings, which we discussed in detail in our press release, FFO for the quarter was $0.25 per share. And from an earnings perspective, it was the relatively straight fourth quarter with no significant anomalies or unusual activity.

Turning to the core portfolio, we’re encouraged by what we've seen so far in 2010, in terms of the operating metrics within the core. So far our performance in general has exceeded expectations. Recall, on our last call in February, we forecasted minus 2 to minus 4% same-store net operating income for 2010 and that minus 2% of this alone would be attributable to the re-anchoring of two locations, the marketplace at Absecon and Chestnut Hill in Philadelphia.

In fact, same-store NOI for first quarter 2010 came in at a better than expected minus 1.3%, and excluding the impact of these two re-anchorings, the balance of the portfolio experienced positive growth of 1.2%.

Also in our last call, we talked about our expectation for occupancy and that would be flat, just slightly up by the end of the year with the trend being down in the first half. And in fact, in didn't dip in the first quarter as we anticipated, given the fact that the departure of orders at the Chestnut Hill location was offset by leasing gains at other locations in the portfolio.

Turning to our 2010 guidance, given these strong first quarter results, we have a bias towards the upper end of our range which is we call as $0.95 to $1. And also we called that our current guidance is before any contribution from external growth potential acquisitions or from other what we call other income category which includes Promote Income from our funds, income from our RCP investments and our lease termination income.

And to also reiterate what we discussed in our last call, this doesn’t suggest that we don't expect any of this activity to occur in 2010 rather that the timing in the earnings from these types of transactions has much inherent variability and therefore making a specific prediction is obviously difficult. So we opted to keep the guidance clean.

That being said, we have as much as $7 million of Promote Income based on the current value of Fund I assets. And when that monetized, will obviously depend on various factors including assets specific, factors as well as general market conditions. And then furthermore, our investments in the RCP platforms, Albertson's and Mervyn's still include a significant number of locations which we expect, could also be monetized in the near to mid-term future.

And lastly, while Ken discussed the acquisition environment, it's important to know that we also had embedded earnings growth in our current Fund II redevelopment pipeline. Our expectation is that upon stabilization, these projects would generate incremental, net operating income of $22 to $25 million at the fund level, which after debt service translates into additional FFO to Acadia, of approximately $2.5 to 3.5 million or $0.06 to $0.09.

This alone represents 6% to 9% earnings growth before any additional earnings contributions from any other, other earnings components. In addition, the Promote Income from Fund I represents an additional $0.16 to $0.18 of future FFO. So in total, we have embedded FFO growth of $0.22 to $0.27 from existing investments.

So to conclude, we are seeing continued signs of recovery in our sector and this is translated into positive first quarter results for us. That being said, it's still early in the recovery process and we are still early in the year but our outlook is favorable, as it relates to our earnings guidance and again biased towards the upper end. So, at this time, I will be happy to take any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Todd Thomas – KeyBanc Capital Markets

Hi. Good afternoon. I'm along with Jordon Sadler as well. Ken, as you think about acquisition opportunities today and based on, as you indicated the improvements in leasing activity with the help of retailers and even some sense of bottoming in fundamentals, I guess, later this year, perhaps, if you had to characterize what type of opportunities you suspect you'll see first, maybe RCP type of investments or value adder or other redevelopment opportunities, just the way you are seeing the world today and looking at deals come across your desk. How do you think this will sort of play out?

Kenneth Bernstein

Probably, the most likely area is where it is still the most stressed, and if that is on the private side, from developers, owners as that are over levered. Because if you are running the risk of being foreclosed, losing the asset, getting kicked out by your investors, you are going to be a lot more motivated. And then if you own an asset, with very little leverage on it and highly stabilized, and you are putting it to market and we've seen some of those trades go at very aggressive prices.

So we are seeing, not withstanding this recovery and not withstanding the fact that the public markets have been able to de-lever, a need for de-leveraging and that's going to include low quality assets but also high quality assets. We always have a bias towards the higher quality. So that's what I suspect our focus will be.

Todd Thomas – KeyBanc Capital Markets

Okay. And are you still optimistic or even hopeful that there will be other RCP-type investments to be made or has that sort of changed, given the improvements we've seen in the economy?

Kenneth Bernstein

So, let me be clear. I was thinking the one that I bought, first shows out which is – where is the most stress right now – some over leveraged assets and working through the de-leveraging process. I think that redevelopment. I think that even development, especially in unique areas will eventually start coming online and being attractive. And the same thing for RCP, we've made a lot of money with our partners, Klaff Realty and Lubert-Adler and some of the other members that joined us in Mervyn's, Albertson's et cetera. And we’d be happy to entertain whatever the next version of RCT 2.0 might look like. It still feels a little bit early and I'm not to spend in this call because I could spend the balance of the time talking about, what attributes we look for in retailer owned real estate and make it actionable for us. It still feels a little bit early on that side. This opportunity is there to just may not be as bad as some of the others.

Todd Thomas – KeyBanc Capital Markets

Okay. And then looking at your core portfolio in the shop spaces where occupancy was up about a 100 basis points sequentially. Should we expect that this stage in the cycle to really start to see a pick up there is that where you think there is also some additional growth, it's going to take place over the next couple of quarters?

Kenneth Bernstein

Certainly, occupancy in general and leasing activity in general has picked up. And we feel fairly good about it. In terms of the small tenants, another metric to look at that that perhaps provides good color as it relates to the condition of our small tenants is, if you look at items like defaults and/or bad debt expense for the quarter, defaults are down 50% from the high end 2008 and bad debt expense as well was about 120,000 for the quarter versus an average of 250,000 each quarter in 2009. So, in general, small tenants in the portfolio are doing much better than last year and holding up well.

In terms of net occupancy gains wouldn’t surprise me to see pick up in that area given the improving help of that category of tenants. Hard to come up with an exact number obviously, but wouldn’t be surprised to see some net occupancy gains on the shop space.

Todd Thomas – KeyBanc Capital Markets

Okay. That’s helpful. And then, just shortened, is that question regarding the investment side, Ken, as you are answering, I mean, are you talking about private owners. Would you look to participate in debt structure or mezz structure to extend your partnering within over leveraged private owner? I mean is that so of interest, may be mezz interest?

Kenneth Bernstein

So the good news, we have done just about every different structure over the past 10 or 20 years whether it was we come in and take control and issue OP units like we did up in Burlington from when it was a bankruptcy we needed to work through to some of our what I called non-participating, non-controlled mezz which we felt on our risk adjusted basis made sense. So we would do anything. What I would say is we are leaning much more towards, if we come in having a high enough level of control because even though we are seeing recovery both in terms of the capital markets and recovery in terms of the fundamental. I would not be surprised to see some bumps in the road and we feel much better, when we are in control in those situations. So yes, wide variety structures but probably higher levels of control then during other point in the cycle.

Todd Thomas – KeyBanc Capital Markets

Are you seeing mezz deals out there?

Kenneth Bernstein

You are seeing a need for them and you are starting to see capital step up for it. We are certainly seeing people come to us and say, hey why don’t you take a 100% of the equity risk for mezzanine return that our response is pretty clear, we’re little happy to take equity returns for equity risk. This will work its way through the cycle. It moves very fast in the public market, the privatize are still getting over the shock of the past year and now figuring out where to they in fact have value and we note that.

Todd Thomas – KeyBanc Capital Markets

Thank you.

Kenneth Bernstein

Thanks.

Operator

Your next question comes from the line of Christy McElroy with UBS. Please proceed.

Christy McElroy – UBS

Hi. Good afternoon, guys. Ken, just following upon some of your comments, if I understand you are right, you expect mostly opportunities to be among distress sellers or distress properties, redevelopment opportunities. I’m just thinking about high quality in sell centers specifically. What’s your view of the cap rate compression that’s occurred? Do you think it’s sustainable or we need to be a pull back a little bit as more products comes to market?

Kenneth Bernstein

I think the cap rate compression for asset like the ones we are developing in the five areas [ph] has been tremendous and I think it should stick. But that’s wishful thinking. So do I think that there is some bumps in the road, yes, here is the think. I was dead wrong, in thinking that debt maturities, we are going to be a catalytic event for a wholesale floating real estate or creating huge opportunities.

The lenders have effectively kicked the can down the road and I think it has worked to the benefit of the industry overall. So I don’t think that simply debt maturities will do it and the question then would be, what would be the next catalytic events. Certainly, if there was a move in interest rates, debt accretive or what we are seeing now is high quality asset are not being forced out in the markets, they’re not being pushed. But they’re being priced out into the marketplace.

And we may some more of that. The final piece that we are seeing right now, irrespective of whether the high quality asset or a lower quality location. Retail real estate requires a fair amount of PI dollars to stabilized, if a capital intensive industry and so a shopping center can last a year or two or three without capital being put in for re-tenancy but as you get through as the final part of this cycle, we are seeing enough assets, irrespective of the debt level that are going to need contribution of capital and/or the skills to fixed them.

You are seeing that in Midtown Manhattan office buildings and you are seeing that in high quality urban shopping centers and you’re certainly seeing low quality. So we think we will also see opportunity that way that will be able to deploy our capital.

Christy McElroy – UBS

Okay. And then regarding the Georgetown net investment and maybe to a lesser extent from 72nd Street, because it doesn’t maturing for next year. And you said in the past that you expect the borrowers exercise their extension options. Given the improvement in the capital markets what are your expectations today? For those and have you had any discussion within other plan to extent?

Kenneth Bernstein

Sure. And I will get into used detail, you asked about Georgetown and that’s an interesting example. The capital market has improved, which is a huge sigh of relief for all of us. And in Georgetown because we really like street retail, it opens up by variety of potential opportunities in the future, both to back to your specific question on the debt. Are mezzanine loan matures after options in 2012, I believe, but the underlying first mortgage which is really the key driver of what a borrower wishes to do. It’s in attractive interest rate, fixed rate maturing in 2016.

So it makes a that much less likely that a borrower we choose to prematurely refinancing entirety just to take out mezzanine. And even though I guess theoretically you could go through the brain damage to gain a couple of 100 basis points of taking out existing mezzanine with new mezzanine, I’d be surprised that they do that. Now if they do free country and considering with only a few calls ago, everyone we are saying should we cut your position by $0.50, 50% or more. If we get paid back, we will find good places to redeploy that capital.

But I would for only total budgeting et cetera, I assuming that they exercise their option and while we would be more than happy and assume we do explore the opportunity to own this or turn a fine and life investment into an infinite life form. We are also more than prepared to take a capital back and redeploy.

Christy McElroy – UBS

Okay. And then just lastly, Jon, the additional FFO, do you expect from Fund I the $2.5 to $3.5 million, do you spoke about, how much of that is from incremental leaseup of the completed redeployment project in Fund II and how much is that from, how much of that is from new development?

Jon Grisham

Okay. I think you mentioned from Fund I, it’s from Fund II, right?

Christy McElroy – UBS

I think I say Fund II, I meant to say.

Jon Grisham

Okay. The $2.5 to $3.5 incremental FFO in terms of the existing completed portion of the pipeline probably about half of it, specifically, the completion of lease up of Fordham office, Pelham and Canarsie and then the balance of approximately the second half is from the projects that are in design face through an adversity point et cetera, so about 50-50.

Christy McElroy – UBS

And based on discussions that you are having currently what would you anticipate the timing of the redevelopment leaseup?

Jon Grisham

Well, as it relates to the first three that I just mentioned in the next year or too. As it relates to in design phase later, three, four years ish.

Christy McElroy – UBS

Okay. That’s helpful. Thank you.

Jon Grisham

Yeah.

Operator

Your next question comes from the line of Sheila Mcgrath with KBW. Please proceed.

Sheila McGrath – KBW

Good afternoon. Ken, I was wondering if you just could you give us an update on the progress, leasing progress that both Canarsie and Pelham?

Kenneth Bernstein

Sure. Start with Canarsie, we signed one lease in another lease in the first quarter that brought us to a pre-leased 86% that was with (inaudible) and we are excited about that deal. Pelham is a big event. Their first quarter with the opening of Fairway Foods quite adjacent to Pelham Manor and they had a strong opening and they are going to act even though we don’t own the Fairway Foods, they are going to act as a very positive additional anchor.

So we see some nice activity, I’m not going to detail it right now. But what I will say is there has been a shift, both in my sentiment and our leasing team sentiment a year ago. If a tenant was willing to step up, we were signing those leases. You saw that in terms of that buying Bloomfield Hills, Michigan where we lost our Circuit City. You saw that in a couple of other cases of these Cortland Manor where you had a good tenant ready to go. You took it and you didn’t quibble over a dollar here or there.

We’re seeing a much improvement in the marketplace and that we can afford to be a little bit more patient especially in places like Canarsie, Brooklyn where we’re at 86% pre-leased. I’m less focused on whether we get a 96% pre-lease then I’m making sure we get the best deal. So it will be very interesting to see both their Pelham elsewhere, now that the economy is improving not just the speed with which we sign leases but also hopefully seeing better and better terms.

Sheila McGrath – KBW

Okay. And just going back to the funds, in terms, of the promotes, I wonder, how you might walk through to maybe investor today looking at the prospects of promotes for like Fund II and Fund III, walking through, understand that versus what you might have a couple of months ago?

Kenneth Bernstein

Yes. And thankfully, what a difference the couple of months make?

Sheila McGrath – KBW

Okay.

Kenneth Bernstein

Okay. I guess, I would start with any investor by saying the two obvious things. We don’t have chicken before it is hatched and past performance is no guarantee of future performance. That being said, if you look at our Fund I performance and in general, our goals which is mid-teen plus returns over a three to seven year period which depending on exactly how the structured odd be able to get you pretty down close to a 2X on equity. That being most over the case Fund I which were already north of that. If you look at RCP which is a subcomponent of both Fund I in terms of Mervyn and then Fund II that’s already at 2X and so then when we look at the balance of Fund II, the vast majority of it is our urban portfolio which on a macro level, we’re very bullish on and now that the market is stabilize and we feel better that we can get to that 8% yield that we’ve been talking about, unlevered and that residual values now should enable us depending on whether you value it at a eight cap in which case obviously our profits winded at to just our profit at RCT, if you view it at a seven cap then we’re much closer to meaningful promote and as you get below seven, it starts to be a lot of fun to talk about. So, I mean, you could do the math yourself. Jon, maybe, you want to throw at a few numbers.

Jon Grisham

I mean, just to put a number to do it. If you look at the RCP investment, the equity that’s been put to use in that area has been about $50 million. We have got 2X on it with a 50 million of profit there. Assuming, in the balance, the equity has been invested in the urban redevelopment platform. So presuming you get your equity back on the urban, no better, you just get your equity back on the urban platform then obviously there is 50 million of profit that is promotable, if you will. And then to the extent that we get better on equity back on the urban platform and obviously that’s incremental income at eligible growth profits, eligible for promote as well as on the RCP platform, there could be an additional turn or profit as it relates to that platform as well, given the fact that there is still a significant number of locations that’s owned by the RCP ventures. So just some quick numbers but gives you some sense of the potential out there in terms of promote income.

Sheila McGrath – KBW

Okay. That’s helpful. Thank you.

Jon Grisham

Thanks.

Operator

The next question comes from the line of Michael Mueller with J.P. Morgan. Please proceed.

Michael Mueller – J.P. Morgan

Hi. Jon, when you look over the next few years at management income, leasing fee income. Does anything change dramatically one way or the other?

Jon Grisham

Both. As it relates to the next couple of years, given the fact that there is work in the pipeline. I think that stays relatively stable. Obviously, going out four or five years, it’s a function of what else is in the pipeline. I think for the foreseeable near future, I think it’s a relatively consistent number.

Michael Mueller – J.P. Morgan

And I guess the other question just following up on that going out four, five years, it depends on what’s it in the pipeline. Seems like the focus has shifted more at least past quarters to not the redevelopment or at an acquisition but something that’s little more in line, otherwise – not necessarily stabilized, we’re pretty not close to it. I mean, do you expect that the shift again so once we get to the end of this pipeline that you are working on now. We’re not going to see a significant drop-off in that fee income.

Jon Grisham

And by that way, I don’t view – we don’t wake up and say we’re going to do an investment because we want to do a redevelopment because it’s creates construction fees. Let’s keep in mind and I’m sure the next question from some one will be G&A because it’s not cheap to do a turnaround and especially to do it right. We have always tried to remain agnostic as to whether or not, it’s a right time to be developing new assets or acquiring and hopefully, we get it right such that we develop high-quality assets and make sure that we can exit profitably and when we have opportunities to acquire, add discounts to replacement costs, we do that.

So we don’t view ourselves as purely a development company nor do we view ourselves as purely an acquisition company. And if you think about the types of yields, we’ve done over the 20 years we’ve been in business or the 12 plus years we’ve been a public company, it had a nice balance, Mike. A year ago, lot of companies said that they would never develop another property again. We didn’t say it. We may have felt like it at times but we didn’t say it and conversely, we don’t feel like we need to just buy Cort. When we bought Cortlandt, everyone was running for the hills and we said wow! here is an opportunity to buy an asset at close to a nine cap, had a vacant Linens. We signed one lease, not a lot of fee income but I loved the deal. And obviously, things have worked up very well there. We would just have to see where the opportunities present themselves. Our focus is going to be creating a high risk-adjusted total return and then if it brings on fee income grade, chances are it will and if it just brings a lot of profits, I think that works fine too.

Michael Mueller – J.P. Morgan

And you may have touched on this earlier but for the components of the $0.06 to $0.09, the margin will drive us about or so and what are the main projects that are going to be driving that.

Kenneth Bernstein

I did touch on it. About half of it is the lease up of the existing constructed portion of the urban pipeline, i.e. Fordham, Pelham and Carnasie and then the other half is the design (inaudible).

Michael Mueller – J.P. Morgan

Okay. Anything on the City point?

Kenneth Bernstein

We’re making continued progress. I think, what we said last quarter still holds, other than obviously everything in the world is feeling a little bit better.

Michael Mueller – J.P. Morgan

Okay. That, I think is a – thanks.

Kenneth Bernstein

Thanks, Michael.

Operator

The next question comes from the line of Quentin Velleley with Citi. Please proceed.

Quentin Velleley – Citi

Good afternoon. Jon, actually, the core portfolio you spoke about is obviously getting better from the occupancy side. You are previously expecting a deep in occupancy through the first half but the down to the downfall, same times during the wide forecast, you still back in the garden, I’m assuming. Just wondering, why you didn’t improve that times for gardens and projection is that something that you’re still concerned about in the portfolio?

Kenneth Bernstein

There is nothing specific that alarms us. We’re into the first quarter here and we think it’s probably a prudent thing to let get one more quarter under our belt and then we will reexamine guidance and revise it if may be. But we just felt it was a little bit early both in terms of the year and even in the economic recovery process, we’ve been to one half of an economic storm here and we think it’s the right course of action just to be again prudent and take this slowly and at the right pace.

Quentin Velleley – Citi

Okay. And then looking at the new license you saw on the spreads, the cash spreads were down at 30% [ph], I think was only four laces but can you just throw about what made us drove those spreads downs?

Kenneth Bernstein

It was really driven primarily by, for the most part, one lease and we attended it, it was a former cost plus at our Brandywine Town Center. We put in hhgregg and there was a roll down in the rent there and then the couple of other locations were essentially flat as it related to new leasing. So that was the primary influence on that metric.

Quentin Velleley – Citi

So for the rest of this year you would expect that the new leasing spread to be much better than the same percent negative?

Kenneth Bernstein

No. hard to say, obviously, the tenants still have a lot of negotiating power. So it certainly is getting better. We will say that in terms of leasing spreads but it will take time for this two – for the power to tangle on this back the other way.

Quentin Velleley – Citi

Yeah. And Ken, may be you can just talk a bit on potential retail acquisition in the Northeast and who is some of your main competitors are looking at acquisitions at the moment?

Kenneth Bernstein

Our main competitor is ourselves. We are not interested in the deal. I find we are not even remotely close to being winning better. There are a broad enough group of private and public companies that are capitalized and talented and able to pull the trigger and some of them has stepped up, others are probably gearing up to step up. What I’d say is compared to other points in the cycle or over the past 10 years, if you will, the number of all cash buyers here in the Northeast is power center. So even though there is plenty of competition today and they are always will be here in the Northeast, lot of well respected companies here but even though this competition right now the issue has been less about whether or not there was someone who beat this out. We haven’t come on second place in anything in a long time. We’re doing in fifth place or we win. So I worry less about that and then I do focusing on a bunch of the different issues that we’re facing which is improving fundamentals but no where near as quickly as let’s say, the capital markets and debt spread have move in. and finding that right balance so that we don’t find ourselves rushing to do a deal for the sake of doing a deal and then waking up two years from now, we’re regretting it.

Quentin Velleley – Citi

Okay. Okay. Perfect. Thank you.

Kenneth Bernstein

Thank you.

Operator

Your next question comes from the line of Paul Adornato with BMO Capital. Please proceed.

Paul Adornato – BMO Capital

Hi. Good afternoon. I was wondering if you guys have looked at other urban areas beside New York City, I know, you obviously have a project in Chicago but are other metro areas attractive during this period when New York city might be a little bit slower than anticipated?

Kenneth Bernstein

Yeah. We have in general, preferred to pursue high barrier entry markets as often as not, is that really means urban? Sure Greenwich – Avenue Greenwich, Connecticut, the high barrier entry market but that’s the exception to the rule, et cetera. So we have looked at and you could probably come up with the right lift of those urban markets as they have the appropriate metrics in terms of employment, in terms of population, in terms of shoppers, in terms of retail density.

In general, as we go into those markets, we want to make sure that we’re right several different ways. One is anytime you get into a new and complicated market, you got to be very thoughtful about what is the dumped tax that you are potentially paying for getting into those markets and that tax goes up and down depending on where the market cycle is. So we spend a fair amount of time looking at several other markets waiting for opportunities to come because depending on how much opportunity hits a given marketplace, it may be compelling because there may be a lot of capital there.

Whereas, in New York, there may be more competition than in Chicago but then there is another benefits to New York including its (inaudible) backyard, including it is one of the few markets in my view that are, it still remains under retail and it is a very intermediating market for most people to penetrate, so we do like playing here. It has not been slow in New York. It has been slow. It’s not as though we’re seeing the yields that make us say, oh, I wish we were based in another city. It is the fact that most sellers have been on the sidelines because most lenders have enabled them to do so. I think that’s going to ship, whether it creates opportunities in New York City or from D.C. through New England, we are extremely well covered or whether or not, it takes us to other markets we will see. We can make a lot of money in our existing footprint. We can also step up and making money elsewhere if the opportunities are there.

Paul Adornato – BMO Capital

Okay. Thank you.

Operator

Your next question comes from the line of Craig Smith with Banc of America. Please proceed.

Craig Schmidt – Banc of America

Thank you. I am wondering the deal solution team are talking about now and say – maybe talking about the Spring ICFC [ph]. What is the timing of the stores to be open?

Kenneth Bernstein

It really varies and so I’m hesitant to give a specific date. I can't think of too many deal that were working on now where they are saying, will sign now but we don't want to open, through another entire season. So for the most part it really depends on who the retailer is because different retailers, different types have, as you know, different windows when they are not willing to open et cetera. We seem to be facing more of that than people saying, I'm also lost the 2000 and '11, so this is the conversation we are willing to have now, but in 2012.

And that as to large extent because – just as perhaps, we were wrong in terms of the amount of products we saw, we would be there to acquire. A bunch of our retailers came back and said yeah, we saw that we would be able to do Circuit Cities and Linens 'n Things forever.

So after we build up our plate on vacant Circuit Cities, we then fill up our plate on vacant extra wide. And obviously that hasn’t occurred either. So they are coming back. They are realizing, especially for high barred entry market. They can't just wait for chapter seven and they have to step up and negotiate. And those who have open order to buy, are stepping up and saying, I want to get this done quickly and I will open it when the next window period occurs. So I apologize. I can't give you specifics but it's really going to property-by-property dependent.

Craig Schmidt – Banc of America

Okay. And then I know you talk about a little of the pick up here in the, leasing in the market. Is that both junior big box and the smaller inline tenants space?

Kenneth Bernstein

Yeah. Yeah, it is. The junior and figure box is more consistent with what I was talking about, in terms of the lack of inventory coming from other failed retailers. And in terms of in line, we are starting to see tenants and entrepreneurs stepping up more to the point. The number of Mom and Pops who outright sales during the last cycle was much fewer than we fear.

Craig Schmidt – Banc of America

Okay. And the fact that the access to small businessman loans hasn't opened up quite a degree, as other avenues, does that present a problem this summer?

Kenneth Bernstein

It does. So I suspect that will be later in the improvement of the cycle, when they can access capital. But for a lot of the Mom and Pop retailers, this is our soles source business. If they shutdown they have go into a job market which is not friendly yet. So they are staying open, and we see them turning the corner.

Then some of them are doing well enough that their ready to open a second or third or fourth store. And I don't want to extrapolate too much on that. But we are seeing them step up and they are coming up with capital, and one source to another even if it's not a traditional bank lending that historically enabled them to expand.

Craig Schmidt – Banc of America

Great. Thanks a lot. Thank you.

Operator

Your next question comes from the line of Rich Moore with RBC Capital Market. Please proceed.

Rich Moore – RBC Capital Markets

Yeah. Hello, guys. Ken, on the story trend, where are you guys or that is still as exciting in businesses, as it has been to you?

Kenneth Bernstein

Yeah. Probably more exciting than it used to be if I was 20 years younger. I would probably say, I'm going to self storage business rather than retail, but we are retail company and that's where our main focus will be. And what still excites me from a tedious perspective, is the focal point that got us into this, which was in the New York Markets and it maybe true in other urban markets. But especially it's been New York. If you are going to do urban, you are going to go vertical. And that means almost by definition, mixed use.

And we still believe there is a great lease of – when you do redevelop and one, second, third, fourth level that's the highest leases, not retail, doesn't lend itself for office or residential. Self storage complements the retail development very nicely and they are very few companies, storage companies willing to do a retail development in order to get a storage location and vice versa.

So we like that thesis, we like that niche. And we, do the extent we are doing developments in urban, redevelopment here. We think we are going to continue to exploit that.

Rich Moore – RBC Capital Markets

Okay.

Kenneth Bernstein

I'm sorry.

Rich Moore – RBC Capital Markets

Go ahead.

Kenneth Bernstein

In terms of the self storage portfolio overall, what we seen and it's outlined in our supplement is the stabilized properties are doing what they are supposed to do. They lost a little bit of occupancy during the seasonality of the first quarter, but the same-store alike for that still went up.

So while our retail went down, self storage stabilized went up and then those that we don't and were putting outlines were gaining nice occupancy on it. So our goal is to have this million plus square foot portfolio, not to own it for ever but to stabilize it and we think it will be in very high demand at the right time..

Rich Moore – RBC Capital Markets

Okay. As you look forward, are there more opportunities in storage you think or with that – sort of a one-time, one area kind of investment?

Kenneth Bernstein

I think that the self storage industry is right for consolidation especially here in the Northeast. I don’t think we will be direct consolidator, it’s not our main area of focus. I don’t think we need to do that. I do think we and our stakeholder could benefit from the consolidation and we are working on some interesting and exciting ideas in that front. We are not going to be renaming our company Acadia self storage company. And again, I think that there is other very talented people who we may align with who can play in that and I think it will be very exciting for them. And I think it should be profitable for us but our main focus in our main growth will be in the retail and then the urban mix used, since to extent that mix used in corporate way.

Rich Moore – RBC Capital Markets

Okay. And on the retail fund, could that include individual retail asset, say, in the city in Manhattan, that the single tenant type retail asset that you see?

Kenneth Bernstein

If it’s profitable and if it’s something that we can make sense absolutely.

Rich Moore – RBC Capital Markets

Okay. Okay. I got you. And then Ken, you mentioned that it’s trouble, the trouble guys as you are looking for, those trouble with debt. Are you talking to the special services, is that very fruitful at this point or is that gotten so much better to that you can really find anything going that row?

Kenneth Bernstein

Yeah. So yes, we speak to special servicers and we speak to the companies that own special services and we speak to the various different tranches of debt holders to see we are deal flow may come from. What I would tell you is the special services are still ramping up in terms of their deal flow. They are spread so thin and the number of assets that are going to be referred from massive servicer to special servicer that numbers going to increase ex-financially and they staffing womb [ph].

So it’s going to be fascinating to see how they run their process, I wish a very simple. I have taken about the launch and getting the great inside track they are going to run a very formal processor do you think play out 1.5 to be prepared to understand the real estate underwriter prepared to by the debt, did the asset in for closer however is plays out. But the special servicer’s will be at the center of launching it.

Rich Moore – RBC Capital Markets

Okay. I agree. Thanks. And then you talked about defaults getting better in collections getting better and you can quantify those and you also make sales performance, is getting better. Do you have any – I don’t have the exact because I realized it’s tougher in between in this kind of business. But do you have any thoughts on the improvement in sales by your tenants I think that you are talking about?

Kenneth Bernstein

Yeah. Any thoughts something we published, so these are just in my analytic conversations with our top tenants any tenanting how was last month, how was last month in our property, how with this region et cetera. And lot more happy conversations to in year ago or even few months ago.

Rich Moore – RBC Capital Markets

Okay. Very good. Thank you, guys.

Operator

Your next question comes from the line of Andrew Dizio with Janney Montgomery Scott. Please proceed.

Andrew Dizio – Janney Montgomery Scott

Yeah. Thank you. I just have one question. You talked a lot about different way did you could be acquiring property being [ph] et cetera. But I want to know if you have seen any interest in your unit is currency acquired centers?

Kenneth Bernstein

Yes. We often have those conversations and one who followed us over the past 10 years or so know that we done that in the past. But we also treat our currency as a valuable item. So we are just going to spread it around with that being very thoughtful of the asset. I think you may start actually seeing more of it interestingly in a as reprises improve, when you did a year ago foreign stock are cheap. So we will see with that goes, but it is a nice tool for public company have?

Andrew Dizio – Janney Montgomery Scott

Great. Thank you.

Operator

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

Kenneth Bernstein

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

Operator

Ladies and gentlemen, this concludes the presentation. And you may now disconnect. Thank you. And have a good day.

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Source: Acadia Realty Trust Q1 2010 Earnings Call Transcript
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