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Acadia Realty Trust (NYSE:AKR)

Q4 2013 Earnings Conference Call

February 13, 2014 12:00 PM ET


Amy Rancanello – VP, Capital Markets and Investments

Ken Bernstein – President and CEO

Jon Grisham – SVP and CFO


Jay Carlton – Green Street Advisors

Todd Thomas – KeyBanc

Craig Schmidt – Bank of America

Christine McElroy – Citi

Rich Moore – RBC Capital Markets

Mike Mueller – JPMorgan


Welcome to Fourth 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

Good afternoon and thank you for joining us, for the fourth quarter 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 may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934, and actual results may differ materially from those indicated by such forward-looking statements.

Due to a variety of risks and uncertainties including those disclosed in the company’s most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, February 13, 2014 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.

Ken Bernstein

Thank you, Amy. Good afternoon. Thank you for joining us. Today, I’ll start with an overview of our 2013 accomplishments then Jon will review our fourth quarter and year-end operating results as well as our guidance for this year.

Last year, notwithstanding a fair amount of volatility in the REIT markets, we experienced steady and significant value enhancement to our real-estate portfolios across both our Core and our Fund platforms.

First, the assets in our existing Core portfolio achieved strong same-store NOI growth of more than 7%. Then on top of that, this portfolio also benefited from well observed cap rate compression which was most noticeable for the types of high-quality retail assets that we now own. Then furthermore, we grew that portfolio by roughly 20% with over $220 million of accretive street retail acquisitions.

With respect to our Fund platform, during the year we continued to make important leasing and development progress at asset including City Point in Downtown Brooklyn, Lincoln Park Center in Chicago. And similar to our Core portfolio, our operating Fund assets ranging from our Lincoln Road properties in Miami Beach to our Cortlandt Town Center in Westchester New York, they also benefited from cap rate compression.

And then finally, we completed $123 million of additional Fund acquisitions as well. So, not only did our portfolio’s values increase but most importantly looking ahead, both platforms are well positioned and well capitalized to build on last year’s value with a solid collection of existing assets, strong embedded growth as well as plenty of powder.

So, with that in mind, let’s begin with a review of our Core portfolio. I’m going to leave a detailed discussion of our operating results to Jon. But overall our Core portfolio performed well in 2013, and that was on the heels of a strong 2012 and looks very promising for 2014 as well.

And with more of our recent acquisitions joining the same-store pool, our operating results are beginning to validate our thesis that high-quality assets located on the nation’s key street retail corridors such as those that now comprise a significant portion of our existing portfolio. That those assets are well positioned to provide both reliable and ultimately superior growth.

In terms of our Core portfolio acquisition activity last year, consistent with our goals, we added $221 million of high-quality properties to our Core portfolio with about $100 million of these acquisitions closing during or subsequent to the fourth quarter.

We acquired these assets at a blended going in yield of about 5% with strong embedded growth potential. These acquisitions strengthened our existing foothold in the vibrant live work play cities of New York, Chicago, Washington DC, as you’re aware, in recent years, our acquisition activities have been weighted towards street retail and response to the continued evolution of retailing.

Over the next several years, we expect to see a further separation between the have locations and they have not with the key locations capturing a larger percentage of tenant sales and therefore able to sustain more robust growth.

First in Chicago, in early 2013, we made an important acquisition in the North Michigan Avenue. Later in the year we added two more gold post assets located in the nearby Rush and Walton corridor. We now control a significant stretch of Walton Street including two of the key corners were to intersect with Rush Street.

Tenants at our properties include Mark Jacobs, YSL, Brioni, Barber, Lululemon. We’re also achieving similar scalability in several other markets such as in Georgetown and Washington DC where earlier this year we added our seventh asset there, which is located at the market’s best corner of M Street in Wisconsin Avenue.

Then, closer to home, while New York continues to be a highly competitive market, last year we added to our presence in a number of Manhattan sub markets including Union Square, Bowery and then most significantly in Tribeca.

Our acquisition at 120 West Broadway represents our first investment in Manhattan’s affluent Tribeca neighborhood where the median household income is approximately $180,000.

Not only is the long-term trajectory for this prime sub market strong, but also the square block of retail that we acquired is an ideal combination of high quality long-term cash flow and above average near term growth driven by the re-tenanting of a couple of spaces that are expiring with below-market leases.

This off-market transaction utilized OP units and demonstrates another means for us to add valuable assets to our portfolio on an accretive basis.

On the capital recycling front, we continue to selectively prune our asset base disposing of lower growth properties and rotating into higher quality assets. During the fourth quarter, we completed the sale of our A&P Shopping Plaza in Boonton, New Jersey, at attractive sales price of a mid-fixed cap rate.

And thus, through an appropriate blend of disciplined new equity issuance, OP Unit issuance and then recycle proceeds from asset sales, we’re able to achieve last year’s acquisition goals on a substantially leveraged neutral basis.

Looking ahead to 2014, we expect that our Core acquisition pace will be similar to last year with another $200 million to $300 million of transactional volume, but we’re already well on our way to achieving this goal with $92 million of Core acquisitions currently under contract.

It’s important to note that in less than three years, we’ve increased the size of our Core portfolio by roughly 70%. And in doing so, we’ve also significantly upgraded its quality. For example, more than 80% of the portfolio’s values now concentrated in the Nation’s top 10 MSAs. We’ve increased our urban street retail concentration from approximately 15% to 50%. Our transactional activities have increased the portfolio’s three-mile population from a solid $180,000 to now nearly $300,000 while still maintaining strong household incomes.

Furthermore, we’ve elevated our average base rent by 45% from under $15 a square-foot to now over $21 a foot.

Finally, the assets acquired over the past three years now comprise more than 90% of what we consider our top cortile, nearly 65% of our second cortile meaning that our already solid portfolio has only gotten better.

In the short-term, we can debate the merits of our shift to higher quality assets as we continue to see decent short-term NOI growth across most segments of the retail sector. However, in the long-run, given the clear and inevitable changes in retailing, we’re confident that our portfolio contains the types of assets that retailers are going to want to occupy and that the investment community will want to own.

Turning now to our Fund platform. During 2013, we completed $123 million of acquisitions although this volume was below our goal, our volume picked up during the fourth quarter. And in general, we believe that having discretionary capital is a great asset as long as it’s disciplined in its execution.

Our investments were consistent with our four key strategies, for street retails and emerging street markets, distressed retailers and then fourth is opportunistic with last year included both distressed, debt as well as high yield investments.

With respect to our street and urban acquisitions, during the fourth quarter, we acquired a highly visible asset located at the corner of 67th Street and 3rd Avenue in Manhattan’s Upper East Side. The asset street level retail space is currently occupied by Lucky brand jeans with a below-market rent. Their lease expires this year providing a near-term opportunity to mark that rent to market.

During the fourth quarter, we also acquired another Chicago property located at the heart of Lincoln Park’s thriving North and Clybourn Corridor. The property is currently occupied by restoration hardware as well as Sephora. But our expectation is that we’ll have an opportunity to recapture and then re-anchor the restoration hardware where we can create a multi-level flagship quality space.

With respect to our opportunistic acquisitions during the fourth quarter, we added to our high-yield portfolio with the acquisition of a grocery-anchored center located in Washington DC metro area. We were able to acquire this property at an attractive 9% cap rate due to the grocery-anchor’s near-term lease expiration. Then we successfully negotiated in extension of the lease to 2023. And as a result we were able to obtain attractive financing and generate current leverage yields in the high-teens.

Separate new investments during 2013, our existing $1.2 billion Fund portfolio appreciated in value driven by both leasing progress as well as strong growth in market rents and cap rate compression as well.

In terms of leasing progress, at our City Point project in Downtown Brooklyn, we completed the lease-up of levels two through five with Century 21, Target and Alamo Drafthouse, increasing the project’s pre-leased rate to about 65% on a square footage basis.

However, on the basis of anticipated rental revenue from the street level retailer was still now only 40% pre-leased enabling us to continue to benefit from the ongoing strengthening of Downtown Brooklyn and Fulton Street.

At our Lincoln Park Center in Chicago, we executed a lease with design within reach to re-anchor the side of Borders books. And then given the strength of the capital market, last year we monetized over $200 million of stabilized Fund assets in addition to $446 million in 2012.

So, now having sold a significant portion of our stabilized assets that’s balance of the portfolio is poised for strong organic growth over the next several quarters. Today, about 25% of this portfolio is comprised of development assets this is not only our large City Point development but also a number of smaller projects ranging from shopping center developments in high barrier to entry New York suburbs to street retail developments on M Street and Georgetown and in the Bowery in New York.

Another 25% of the portfolio is comprised of high yielding investments with a blended leverage return in excess of 20% on those. And the balance of the portfolio is comprised of our leased up asset with the majority being street retail assets located in markets where rental growth is very often exceeding our expectations. This includes Lincoln Road in Miami as well as our recent acquisition on the Upper East side of Manhattan.

So, in conclusion, in 2013, we made steady progress across both of our operating platforms. And as a result saw the value of our real-estate appreciate materially. Looking ahead, we remained well positioned, well capitalized and highly motivated.

I’d like to thank the team for their hard work last year. And now I’ll turn the call over to Jon.

Jon Grisham

Good afternoon. I’d like to recap 2013 results and then I’ll go to 2014 expectations. First related to 2013 earnings.

FFO for the fourth quarter was $0.27, there are a few items to keep in mind related to this result. First, it included $2.3 million or $0.04 of non-cash retirement expenses, primarily related to divesting of unvested stock compensation from Mike Nielsen, who retired effective year-end 2013.

It also included acquisition costs of $1.4 million or $0.02 on the Core and Fund deals that we closed during the fourth quarter. And there are few other pluses and minuses which more or less netted each other out during the quarter. So, adjusting for the combined $0.06 FFO would have been $0.33.

And then looking at the year, FFO as we reported was $1.20. And in addition to the $0.06 in the fourth quarter that I just covered, we had another $2.1 million or $0.04 of acquisition costs incurred to the third quarter. So, adjusting for this total of $0.10, our normalized 2013 annual FFO was $1.30.

This is well above our original 2013 guidance range of $1.17 to $1.25, which was also before acquisition costs. And it also exceeded our most recent updated guidance range which we provided last quarter of $1.26 to $1.29.

Our Core portfolio performance for the quarter and year-to-date also exceeded our original and revised expectations.

Looking at same-store NOI, year-to-date NOI increased 7.2%, again well above our original forecast and 20 basis points over last quarter’s revised forecasted range of 6.5% to 7%.

The driver of this growth was an 8.5% increase in NOI from revenues which was offset a little by 1.3% reduction in NOI from increased operating expenses. This 7.2% growth includes the effect of two key re-anchoring projects at our Bloomfield and branch Centers, which we’ve discussed at length in previous calls.

Excluding the year-over-year increase in NOI from these projects, same-store NOI was 4.1% for the year, which is 100 to 200 basis points above our original forecast. As both of these projects were completed prior to the fourth quarter of 2012, the quarterly NOI growth for the fourth quarter 2013 over fourth quarter 2012 of 4.3% is a clean result, i.e. it does not include any incremental NOI from these re-anchoring activities.

Occupancy at year-end was 95.2%. Our original expectation at the beginning of 2013 was 94%. We revised this to 95% last quarter and finished out the year consistent with this level.

Leased versus physical occupancy stood at 97.1% at year-end. And on a same-store basis, leased occupancy was up over 200 basis points over 2012. And looking at our occupancy within the major components of our portfolio, street retail was 98.5% occupied and our suburban portfolio was 94.7%. And within the suburban portfolio, year-end shop occupancy was 89.1% which represented 240-basis point increase over 2012.

Looking at our year-to-date leasing spreads, we continue to see an increase in pricing power as occupancy in the portfolio increases. Although 2013 average re-leasing costs were up nominally over 2012 from $17 to $19 a square-foot, rent spreads were up significant.

On a GAAP basis, 2013 spreads were 18% compared with 2012 spreads of 6%. And on a cash basis, ‘13 spreads were 7% compared with 2012 that was essentially flat.

As an aside, on leasing spreads and we said this before. Our results can vary quarter to quarter given the relative size of our portfolio and the volume of leasing. The fourth quarter on a standalone basis included only roughly half of our normal quarterly volume and furthermore included no street retail. So, we tend to look over a more extended period in evaluating performance.

Shifting to our expectations for 2014, as we announced yesterday, we are forecasting a 2014 FFO range about $1.30 to $1.40. Some highlights as it relates to this. Again, as a reminder, our guidance is before acquisition costs.

First, we’re targeting Core acquisitions of $200 million to $300 million and then the Funds, acquisitions of $250 million to $500 million. And for these acquisitions, for both the Core and Fund, we assume on average mid-year closing and funding on the leverage neutral basis, keeping in mind that on the Fund side, we tend to use slightly higher levels of leverage.

A little over half of our external growth this year is expected from our targeted 2014 acquisition goals with the balance resulting from the full-year effect of the acquisitions that we have already completed during the fourth quarter of ‘13 and January of ‘14.

Expected fee income from the Funds is down slightly. But this is not inconsistent with prior years where it has varied some, both our band down but usually within a band of give or take 10% in either direction. SG&A is expected is to be down $1.5 million.

Our expectations in terms of Core portfolio performance are, one, same-store NOI growth of between 4% and 5% is our forecast. Our street retail portfolio is expected to outperform the suburban assets by 100 to 200 basis points. And it’s worth noting that for 2013 the NOI from our 2012 acquisitions represented about 20% of 2013 NOI that was not included in our same-store result for ‘13.

And similarly for 2014, there is about 15% of our total NOI that is from our 2013 acquisitions, all street retail which are not included in our 2014 same-store NOI metrics rather these will show up in 2015.

In terms of occupancy, our expectation is that occupancy will end up consistent, give or take with our current leased occupancy of 97%.

So, putting all these pieces together, we believe we have a scalable model which most importantly should generate superior NAV growth. But it will also allow us to achieve sustainable high single-digit, low double-digit year-over-year earnings growth.

For 2013, we generated 15% plus growth. And the high-end of our ‘14 guidance would represent high single-digit growth.

In terms of the balance sheet, we continue to maintain a low-risk, low-cost capital structure. We remain disciplined in our use of leverage our net debt to EBITDA was 4.9% at year-end. Our all-in cost for the entire debt portfolio is sub 5%, with about 90% of this fixed rate with laddered maturities.

And we’ve expanded our use of unsecured debt by adding $15 million in unsecured term debt during the fourth quarter and we’ll continue to develop our capabilities in this area.

Related to our use of equity, we have been and plan to continue to exercise discipline in issuing new equity. For 2013, we raised a total of $114 million from the issuance of new shares and OP Units at an average net price of $26.92. $81 million of this was raised through our ATM of which all but $5 million was raised during the first half of the year.

And well, recently during the fourth quarter, we issued $33 million of OP Units for 120 West Broadway deal at a price consistent with our ATM issuance is earlier in the year.

Looking at our 2014 capital needs, in terms of our current $92 million Core acquisition pipeline, the majority of this will be Funded to the conversion of an existing first mortgage investment as well as cash on hand.

And for our remaining 2014 target acquisition activity, we have sufficient dry powder both in terms of liquidity and leverage, to Fund these without being overly dependent on the capital markets for new equity.

And then our Fund platform, we’ve deployed about $100 million of the Fund for committed capital, leaving us give or take $1 billion of additional purchasing power to drive Fund growth over the next couple of years.

So, having the current pipeline covered in terms of funding and the strong balance sheet to provide us flexibility to Fund our remaining projected 2014 Core and Fund acquisition goals, we’re positioned very well to execute on our growth strategy in both the near and long-term.

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

Question-and-Answer Session


(Operator Instructions). And our first question comes from Jay Carlton from Green Street Advisors. Please go ahead.

Jay Carlton – Green Street Advisors

Hi, great. Thanks. Hi, Jon, just a real quick question, you mentioned 4% to 5% same store NOI. Press release said 3.5% to 4.5%. Is there a change there or is there a difference in those numbers?

Jon Grisham

It’s really not a change, 4% to 5% is the right now. So, we should straighten that on the press release. But it is 4% to 5%.

Jay Carlton – Green Street Advisors

Okay, great. And then, I guess just on the re-leasing spread front, can you kind of give us a sense of what you’re looking at maybe from the street retail perspective versus the Core perspective. I know you kind of addressed it but are you thinking that over the next couple years that portfolio is an out-performer and is there a way to kind of quantify or how you’re thinking about that blended re-leasing spread?

Jon Grisham

Yes, so, for 2013 there wasn’t a lot of turnover in terms of the street portfolio components. So, there is not a good empirical result that we can look at to demonstrate our thesis in terms of the out-performance of that segment of the portfolio.

As these leases roll, it will be over the next two, three, four, five years. I think our expectation certainly is that it will outperform the suburban category. But again, we’re just going to have to let some time lapse here in order to prove out the thesis.

Jay Carlton – Green Street Advisors

Okay. And Ken, maybe just a follow-up on that. You mentioned 100 to 200 basis points of out-performance on the street retail NOI versus suburban. Is that kind of like a long-term run rate to think about or is it still too early in the transformation, or how should we be thinking about that next couple years?

Ken Bernstein

Yes, and I think there is a few different important components. First of all, it’s the contractual growth, which is about 100 basis points higher than the contractual growth that we achieved in our suburban portfolio. And that’s just a difference in our leverage as we negotiate street retail leases versus negotiating with Kroger or with TJ Maxx or certainly with Target as well as including the smaller spaces in suburbia.

So, there is about 100 basis points of contractual growth. Then on top of that what we have experienced is stronger market rent growth in the street portfolio. So, as we get back spaces or as leases come due for renewal, we’re also seeing another – it could be 100 basis points, it could be more than that, it could be several hundred basis points of superior growth.

And what I pointed out there and Jon’s right, if you look at the contractual leases, it’s hard to say that in the second quarter of next year we’re going to have lease spreads of blank. But what we’ve seen in our street retail leases is more often than – certainly more often than the suburban leases, the leases have built-in mark-to-markets so their tenants have option to renew but those options are predicated on fair market value. We don’t see that in our suburban leases.

And that because it’s a much more fragmented business in street retail, if a given tenant is not succeeding there – they are much quicker to be willing to give up that lease, then a discussion that we might have with the Bed Bath & Beyond or TJ Maxx etcetera. So, we also find that we can get additional growth above that 100 basis points due to the negotiator recapture space or the mark to fair market value.

And that doesn’t even begin to then address the potential risks that we see to some other formats where there is downside that we’re not experiencing so far in terms of street retail.

Jay Carlton – Green Street Advisors

Okay, great. Thanks, guys. Enjoy that weather.

Ken Bernstein

Thank you, Jay.


Thank you. And our next question comes from Todd Thomas from KeyBanc. Please go ahead.

Todd Thomas – KeyBanc

Hi. Thanks. Good afternoon. So, first question, Jon, so guidance excludes all acquisition costs. So, if we strip out all the noise in the fourth quarter, essentially, it sounds like we get to about $0.33. So, that’s $1.32 annualized. And then if you build up from the same-store guidance that’s another $0.04 to $0.05 or so plus the non-same store growth and acquisitions and so forth.

I was just curious then looking at the range, $1.30 to $1.40, what are some of the moving parts that could really get numbers down either below the midpoint or even toward the low end which would really imply roughly flat or 0% normalized FFO growth?

Jon Grisham

Yes. So, probably the most significant item to keep in mind and it’s not a moving part at this point. It’s just – it’s an event that’s already occurred had to do with the monetization of the Fund II. So, we sold Fordham and Pelham in the fourth quarter, and that does create some transitory dilution, i.e. until we reinvest those into Fund IV, there is some earnings impact in the interim.

And so, certainly from a NAV perspective, it’s accretive. We take that money that we’ve invested in Fund II plus profit. And we redeploy it in Fund IV. So, again, from an earnings perspective the risk is temporary downtime as it relates to that capital.

So that sets us back $0.04 to $0.05 at the starting point of 2014. That’s why we have that low end of the $1.30 which presumes modest acquisitions. I think that the mid-point of our guidance is very much attainable. But that’s probably the biggest reason why you’re seeing that low end of $1.30.

Todd Thomas – KeyBanc

Okay. And then, Ken, as you think about Fund IV investments from here, one of your peers that’s been involved in RCP-type investments mentioned several days ago that they expected it to be more active in ‘14 than they have and that there seems to be a lot of opportunity for that type of investment. I know that you haven’t participated in those types of transactions so much lately, but I was just curious if you’re seeing that same sort of opportunity unfold perhaps?

Ken Bernstein

Yes. We opted not to participate in large club deals recently for a host of reasons, even though those large club deals have been very successful. But at the retailer level Todd, you’ve seen us acquire good real-estate where there were troubled retailers. We’ve just been doing it on one-off basis.

And now we’re beginning to see opportunities on the pool basis. So that is certainly an area that our team is focused on. And it wouldn’t surprise me as you see the ongoing evolution of retailing and that there will be some more opportunities there.

Todd Thomas – KeyBanc

Okay. And then just two last detail questions on a couple of properties. I was just looking in the supplement, so at 161st Street in Fund II, the anchor-lease expires this year. I was just wondering what the expectation there is in terms of that tenant renewing or if you’re expecting to sign with a replacement tenant, maybe what the spread might look like?

And then also, Ken, you mentioned the 67th Street acquisition in Fund IV. I was just curious, you characterized it as being a below-market lease – the lease is expiring this year as well. Any color on what that mark-to-market might look like as well?

Ken Bernstein

Sure. I’m not going to predict the spreads in either case 67th Street is though a good example of something I was discussing earlier. So Lucky brand jeans lease expired, they have an option to renew at fair market value. We have several other tenants who are very interested.

So it’s our expectation that we get that space back and re-tenant it to another tenant at a much higher rent. When we get that done, I’ll show you the spreads and that will look very good. 161st Street, similarly still a little early, our expectation is we get the space back, that’s our business plan. And then it gets re-tenanted to multiple tenants.

Todd Thomas – KeyBanc

Okay. Thank you.


Thank you. And our next question comes from Craig Schmidt from Bank of America. Please go ahead.

Craig Schmidt – Bank of America

Thank you. I just wondered if you could talk a little bit about a street retail and possibly using the Rush and Walton Corners in the degree you feel you have some control in those assets?

Ken Bernstein

Yes, Craig. And it’s an important part of our thesis which is to focus on certain markets where we already have a presence and then can add to it and understand what’s going on in those given street. Having intimate understanding of tenant sales trends etcetera.

So, you could look in Lincoln Park, Chicago at Clark University, where we have now amassed a significant amount of the retail square footage on that corridor. And then as you pointed out on Rush and Walton, which is to some degree the Madison Avenue of Chicago, although Chicago is the other way around and appropriately.

So, but this is the area of high street retailer for the more boutique tenant. As I mentioned, we have tenants ranging from Brioni to YSL as well the more mainstream the Lululemon’s of the world etcetera.

We have been able through a series of four transactions to amass the majority of the retail square-footage in that corridor. Now there is still the ability to double and triple the amount of ownership right there.

And I think over the next several years you’ll see us do that with Walton Street and Oak Street being fabulous streets for our retailers. And our retailers are telling that’s where they want to land if North Michigan Avenue is not the right format for them. So, you’ll see us do it on M Street, you’re certainly seeing it at the Fund level on Lincoln Road, and then the Rush Street Corridor is just another example.

Craig Schmidt – Bank of America

Thank you.


Thank you. And our next question comes from Christine McElroy from Citi. Please go ahead.

Christine McElroy – Citi

Hi, good afternoon, guys. Just following up on the street retail question. You talked about five caps on the recent deals on average. I assume that’s on ‘14 numbers. You also talked about contractual rent growth higher market rent growth, early recapture of space. I’m just wondering what sort of level of five to 10-year IRR’s you’re underwriting into some of these deals?

Ken Bernstein

Good question. Because the problem with IRRs and is here then making some kind of assumption on exit cap. And these assets that we’re acquiring for the most part are in our Core where we plan on holding them for an infinite life.

What I would suggest is, we will do better than 100 basis points of relative out-performance in terms of the NOI growth. A stabilized supermarket anchored center should roll-off between 1.5% and 2.5% growth. And a discounter anchored center probably has slightly lower contractual growth.

Our street retail, as I said should have at least 100, maybe 200 basis points higher growth. Then, on top of that when you think about the residual value to get to 10-year IRR, what our retailers are telling us is that flagship locations, branding locations, street retail locations are where they’re going to put most of their efforts into in terms of growth given the realities of omnichannel retailing.

And so we expect that the growth profile 10 years from now will look even stronger than on the other asset classes. And thus, we think that the cap rate on exit will be superior. Now the reason I’m dancing around what exit cap rates would be 10 years from now is obviously interest rate are going to be a big portion of that guestimate. And I absolutely am not going to forecast for you where interest rates are going to be 10 years from now.

What I will tell you is we believe, on a relative basis, we are making the right decision for our shareholders selling our A&P anchored center in New Jersey at about 6.5 cap, and buying this higher growth that are protected on the downside, more upside opportunity, higher growth assets going in at about 5 with superior growth. I’ll defer to you as to the 10-year analysis on that. But we think that our shareholders would be well rewarded for.

Christine McElroy – Citi

That’s helpful, thanks. On the same property occupancy data, Jon, you had a 230 basis point jump in the leased rate, but then physical occupancy’s up only 40 bps year-over-year, what does that spread between leased and commence mean for the level of sort of economic impact or occupancy upside that you expect in ‘14 guidance?

Jon Grisham

Yes. So, give or take, so when you look at 4% to 5% and it is 4% to 5% run by the way. Looking at that same-store NOI growth, probably somewhere around 150 basis points give or take relates to that spread between year-end occupied and leased occupancy.

And it primarily relates to really half of it give or take relates to our crossroads asset, where we are re-anchoring the former A&P supermarket there. That should commence the latter half of 2014. And then the other half is various handful of losses throughout the balance of the portfolio. So again, stripping that out same-store NOIs 3.5% approximately, so that’s the impact as it relates to that spread.

Christine McElroy – Citi

Okay. And same-store expenses, just looking at that number, just down pretty meaningfully year-over-year, wonder if you could address that and then also within that 4% to 5% same-store NOI guidance, what are you expecting for revenue growth versus expense growth?

Jon Grisham

So, we think similar to 2013, it’s driven by revenue growth. Depending on how many more snow-storms we have, like the one I’m looking at outside the window, we’ll see what the expense variance looks like. But assuming for the most part, normal weather patterns, I think again there will be some drag from expenses but mostly just inflationary give or take. So not all that different, in terms of distribution between revenue and expenses as we saw in ‘13.

Christine McElroy – Citi

Okay. And then just lastly, the $1.3 million impairment of the asset that flowed through the Funds in disc ops in the quarter, it didn’t look like that was backed out of FFO. What was that charge?

Jon Grisham

Yes. So that relates to our pre-recession investment in some land in Sheepshead Bay. And we bought that for give or take $20 million. And we’re selling it for give or take $20 million.

And the impairment relates to primarily development fees and some other carrying costs that were capitalized during that hold. So, given that it is un-depreciated land, it is included in FFO in terms of debt impairment charge.

Christine McElroy – Citi

Got you. Thank you very much.


Thank you. And our next question comes from Rich Moore from RBC Capital Markets. Please go ahead.

Rich Moore – RBC Capital Markets

Hi, good afternoon guys. When you look at acquisitions or I guess both the Fund and the Core going forward. Is it almost entirely street retail, is that what you’re thinking Ken at this point?

Ken Bernstein

No, Rich. At the Fund level, we’ll buy high yield. We bought a supermarket anchored center just South of DC. We bought it at 9% yield because the supermarket lease was short-term and then we extended it. Where we can buy high-yields we’ll buy high-yields, where we can buy debt, we’ll buy debt and RCP will take us to a lot of different places.

And so the nice thing about the Fund business is we certainly can do a lot of different things within our wheelhouse of expertise. But it can vary in asset quality because I don’t mind buying, trading sardines at the Fund level. I’m not comfortable at the Core buying assets where we have to time the exit, because it’s a lot harder with Core assets to buy and trade, at the Fund level it’s relatively easy.

The only other piece of that is our biases has been, I don’t want to say just towards street retail, but listening to our retailers and understanding that most of their interest in expanding. When I ask our retailers, where are you most willing to pay us more rent five years from now, it is in the more dense, the more urban, the more 24x7 live, work, play markets.

So, whether we’re talking to Target and TJ Maxx or we’re talking to more high-street retail soft goods retailers, their enthusiasm, the opportunity for growth, the opportunity for entrepreneurial returns seems to show up there. So, that’s why you’re seeing a fair amount of activity there.

Rich Moore – RBC Capital Markets

Okay, all right. Thank you, Ken. And so, is the – I guess is the competition heating up at all for these kinds of assets because it doesn’t seem like the public guys are gravitating all that much, I mean, you see them occasionally but they don’t seem to gravitate quite as heavily as you guys have towards this sort of asset. Is there other competition now, this is becoming more difficult or I guess how do you size that up?

Ken Bernstein

Well, I really hope the rest of the public guys stay away. Although on Lincoln Road, we bought a nice chunk of real estate down there and on our last call everyone was asking me about general growth acquisition on North Michigan Avenue.

So, they are certainly around periodically. And I wouldn’t discount SL Greene’s activity in New York either. Yes, there is plenty of competition there always have been Rich for high-quality assets. There is institutional capital, there is private entrepreneurial capital. We’ve always been comfortable with the fact that these are competitive markets. We’re good at that.

And we have discretionary capital, we have a very good balance sheet, we have a very good track record and a lot of credibility. So, when we see an asset, we want, I know we’ll stand a good fighting chance of acquiring it providing it makes sense.

And the fact that there is less public company involvement is due to the fact that some of these assets are smaller acquisitions. At our size, we can afford to amass the assets the way we’ve been doing on Rush and Walton, the way we’ve been doing on M Street. For the large guys, I get that that’s not a scalable business. So, that may give us an advantage within the public market. But then I clearly recognize there is plenty of competition and we’re up for that fight.

Rich Moore – RBC Capital Markets

Okay. I got you. And so the $92 million that you have under contract in the Core is that more street retail?

Ken Bernstein


Rich Moore – RBC Capital Markets

Okay, great. Thank you. And then, I wanted to ask you guys two on Kroger. I think you had a, promote in the quarter on some of those assets, on the sale of some of those assets. Is there more of that, I guess, you’re expecting and I saw the guidance didn’t really have much in the way of promotes. And I assume that was more Fund level type promotes, Funds II and III. But I mean, is there, is there more of the Kroger type stuff or the opportunistic retail stuff that you might give promotes on?

Ken Bernstein

Yes, not for 2014 Rich. So, Fund I, the promote related to, we had $12 million seller financing that we collected on in the fourth quarter and we distributed our proceeds and recognized to promote. That’s really it for Fund I in terms of expected promote.

Jon Grisham

On Kroger but.

Ken Bernstein

On Kroger. We still have remaining RCP, could be some there as well to the extent that there is additional value in the Mervin’s portfolio, which we think there is some. And the timing of that obviously, we can’t be certain of that. But we don’t expect – don’t expect too much of that in ‘14.

And then as it relates to future promotes, Funds II, Funds III, that will be a ‘15 and beyond event and don’t expect anything in the near future as it relates to that.

Rich Moore – RBC Capital Markets

Okay, great. Thanks guys.

Ken Bernstein



Thank you. And our last question will come from Mike Mueller from JPMorgan. Please go ahead.

Mike Mueller – JPMorgan

Hi, I missed the beginning of the call. I apologize if this was discussed. But I heard the acquisition guidance, is there anything in the plan whether it’s in guidance or not but being contemplated in terms of additional monetization’s of Fund assets that could be significant?

Ken Bernstein

Not significant, we have a couple of Fund II assets and we’ve talked about these before to 16th Street potentially. We have one remaining self-storage property at Liberty Avenue, one or two others. But in the aggregate no more than say $100 million.

Jon Grisham

Plus then phase III of City Point, which that we do expect that to monetize in this year.

Ken Bernstein

Correct, correct, although obviously, no earnings dilution?

Jon Grisham

Right, right.

Rich Moore – RBC Capital Markets

Okay. So if we’re thinking about dilution, I mean, nothing like storage or nothing like the fourth quarter stuff?

Ken Bernstein


Rich Moore – RBC Capital Markets

Because at this point it seems like, got it. Okay, that was it. Thanks.

Ken Bernstein



Thank you. I will now turn the call over to Ken Bernstein for closing remarks.

Ken Bernstein

Thank you all for joining us. Those of you on Eastern Seaboard, I hope you are someplace safe and warm. Those of you on the West Coast, we forgive you. Speak to everybody soon.


Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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