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Acadia Realty Trust (NYSE:AKR)

Q3 2010 Earnings Call

October 27, 2010 12:00 pm ET

Executives

Kenneth Bernstein – President and CEO

Jon Grisham – SVP and Chief Accounting Officer

Michael Nelsen – SVP and CFO

Analysts

Todd Thomas – KeyBanc Capital Markets

Christy McElroy – UBS

Craig Schmidt – Bank of America/Merrill Lynch

Michael Mueller – J.P. Morgan

Andrew Dizio – Janney Montgomery

Quentin Velleley – CitiGroup

Sheila McGrath - KBW

Rich Moore - RBC Capital Markets

Operator

Good day, ladies and gentlemen. And welcome to the third quarter 2010 Acadia Realty Trust earnings conference call. My name is Alicia, and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We’ll facilitate the question-and-answer session towards the end of this 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 anticipated by 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 Acadia'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 discussion, there will be an opportunity for all participants to ask questions.

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

Kenneth Bernstein

Thank you. Good afternoon. Thanks for joining us. Today I’ll start with a brief overview of the progress we made in the third quarter and the trends we are seeing. Then Jon will review our earnings, operating metrics and key drivers. And then Mike, Jon and I will take any questions.

As an overview, we’re pleased with our third quarter results which were consistent with our expectations in evidence with respect to operating fundamentals, a stabilizing and slowly improving leasing environment, and with respect to the real estate capital markets, a significant strengthening driven most significantly by the effects of low interest rates, declining borrowing costs, and capital returning to the real estate markets especially for high quality assets.

Today, we will discuss what we are seeing in the key components of our business, most importantly our core portfolio, our external growth platform and our balance sheet metrics. In terms of portfolio performance, in the third quarter our same store performance for the quarter and year-to-date was consistent with our expectations and as we discussed on our last call.

Although fundamentals continue to stabilize, significant cross currents remain in the economy. Even as the economy hopefully continues to strengthen, these cross currents are likely going to create challenges, volatility and opportunities in the shopping centre sector with certain regions, product types and retailers being disproportionately impacted both positively and negatively.

As we discussed on the last call our same store NOI decline this quarter was concentrated in our two previously discussed vacancies and our 180 basis point decline in occupancy was primarily driven by our recapture of the former Bon Ton lease which we simultaneously re-leased and will result in a blended positive rent spread of more than 50%. But as a result of the Bon Ton transaction there will be a short term negative impact on both same store NOI and occupancy until the two new tenants reopen in the mid 2011. Although we generally prefer NOI inoccupancy improvements, we welcome headline volatility when it is in connection with long term value creation.

In terms of existing tenant performance into fall, in general we continue to see improvements in the performance metrics of our existing tenants. One area that has received attention lately is the financial and operational strengths of certain supermarket operators and their impact on the shopping centres that they occupy.

As a general overview, approximately half of the shopping centres in our core portfolio contains supermarket tenants. Within that pool of centres, they fall into two categories: first those where the supermarket is the dominant anchor and the significant driver of traffic to the center, and the second is where the supermarket is just one of several anchor tenants. Our portfolio is about evenly split between these two categories that is about 25% of our core portfolio has supermarket as their primary anchor.

A&P Supermarkets is one of the tenants being closely watched by the financial community. As they are a significant tenant of ours, we have four A&Ps in our core portfolio and one in our Cortlandt Manor acquisition. Of those five properties, A&P is the dominant anchor in two of the five. In general, all of these locations are solid performing stores for A&P and in our discussions with A&P in reviewing their sales performance it appears that these are not locations that they are likely to electively dispose of. That being said, the ultimate resolution of A&P remains to be determined and there is always a high level of uncertainty in fragile situations it seems.

The reality is that tenant strengths comes and goes more often than we would like. We don’t look forward to the financial deterioration of any of our retailers. In tenant bankruptcies, if they occur, at a minimum creates short-term disruptions; however, our acquisition and development focus has first and foremost centered on acquiring or redeveloping high quality, high varied entry location properties as opposed to simply following hot retailers. And as a result, in many instances over our company’s history, we based anchor tenant bankruptcies and have been able to use these situations as opportunities to create significant value through the recapture and re-leasing of those spaces.

Whether it was the recapture of a bankrupt Caldor lease in Methuen, Massachusetts where we then subsequently re-tenanted it with Wal-Mart at more than three times the then base rent, or in Elmwood Park, New Jersey where we recaptured a Grand Union Supermarket lease out of bankruptcy, replaced them with Walgreens at twice the rent whether it was in connection of the bankruptcy of Bradley’s, or Ames, or Caldor, or Kmart, Grand Union or Pathmark, we have been through this trail before.

Now, we are not saying we will always make money in the tenant bankruptcy process, Penn Traffic and more recently, Circuit City are two less exciting examples, nor are we always successful at recapturing valuable space from bankrupt retailers. In fact, this inability to recapture certain anchor leases or even when we were successful having to pay what we viewed as legal extortion to buy back these leases led us to create the retailer controlled property or RCP venture through which we subsequently completed the Mervyn, then Albertson’s transactions amongst others. It is going to be interesting to see how these issues play out – both in terms of our existing tenants and existing properties as well as future investment opportunities.

Turning now to external growth, first I would like to talk about our existing fund investments where we continue to make steady progress in the third quarter, in terms of our New York urban portfolio, the most significant efforts were at our CityPoint or downtown Brooklyn redevelopment. As you recall at the end of our second quarter, our (inaudible) acquired all of our residential joint venture partner’s interests in the projects thus giving us full control of the entire 1.5 million square foot project at an attractive cost basis and has allowed us to pursue a somewhat more simplified and more expedited course of development.

We commenced construction on the first phase which is 50,000 square feet of retail. Our goal remains to complete the construction of that phase in 2012 and during that time we also expect to finalize the design for and pre-lease a significant portion of the Phase II development which will add about 500,000 square feet of retails to that project.

And then finally the third phase of that project will most likely be a standalone parcel containing a base of commercial or retail but more importantly a residential tower of approximately 650,000 square feet. We will keep you posted as to our progress on that project.

Returning quickly to self-storage. As you can see on page 37 of our supplements, on a blended basis, the portfolio gains 270 basis points in occupancy over the prior quarter and is now 76.5% occupied. Recently we made important operational additions to the storage post management team by bringing in Bruce Roch and several of his key personnel to the operating platform. Bruce Rock was the founder of Safeguard Self Storage in 1989and served as its CEO until its sale in 2009. During this time, he built one of the largest private self-storage companies here in the Eastern U.S. He and his team’s experience in operational expertise have already begun to make a significant impact on our portfolio and should further enhance the value creation options for this platform.

Elsewhere in the portfolio, Westport, Connecticut, our Main Street redevelopment, at the end of the third of quarter, we executed an important lease with the Gap to consolidate three of its divisions into our location. Gap will join Brooks Brothers to anchor the redevelopment. That redevelopment now is more than 75% pre-leased and construction is under way. Gap is anticipated to open during the second half of 2011 and the remaining spaces primarily the retail fronting on the Parker Harding Plaza entrance.

A quick note on Cortlandt Manor where we last week accomplished a refinancing of that project. As you may recall on 2009, we acquired a property for $78 million and we are at the time fortunate to secure $45 million of debt at 400 basis points over libor.

Subsequent to the acquisition, we leased the vacant Linens and Things to Bed Back and Beyond and now where we stand the 2011 and why we will bring us to about a 10% unlevered yield on cost before reserves with still the former 40,000 square foot levied space left to lease.

This week we completed a refinancing of the project where the spread was reduced to 200 basis points over Libor. The initial funding was $50 million but more importantly, assuming that we lease off a small portion of the levied space which we are currently working on we will have the ability to draw down on another $25 million for a total of $75 million debt on that project and even as the $50 million debt level, our current levered return depending on what you want to (inaudible) is in the high 10s to low 20s current yield.

We can discuss the implications of the shift in the debt market certainly during the Q&A. Terms of new investment opportunities while the third quarter remained painfully quiet in terms of announced transactions, we are finally beginning to see high quality attractive investment opportunities arising primarily out of the inevitable de-leveraging of the commercial real estate industry. While these transactions are not all going to be as simple or straight forward as acquisitions like Cortlandt Manor, we are finally seeing an increase in the volume of potentially attractive opportunities driven by several factors including the fact that not all financial institutions are continuing to simply kick the can down the road.

The exact timing and size of these transactions remains unclear but we remain confident in our ability to recycle our drive powder in highly creative ways.

So to conclude while we would have liked to have put more of our drive powder to work in the third quarter, we are pleased with our performance and to continue to improving the climate that we saw in the third quarter.

We remain well-prepared for a bumpy road ahead before full recovery but we like the trends that we are seeing. Capital is returning especially for high quality, high demand assets in major urban markets, disposed well for the value of our existing real estate both our core portfolio and our redevelopment pipeline. And while there is a full supply of capital, maybe an oversupply for high quality stabilized assets for more complicated or value added transactions where restructuring, recapitalization or property level stabilization is required. The imbalance is not nearly as severe and it seems that the opportunities are finally beginning to emerge. Given our strong capital position both in terms of our current liquidity and our investment fund platform, we believe that we are well-positioned to capitalize on these opportunities.

I’d like to thank the team for their hard work during the third quarter and now, I’ll turn the call over to Jon.

Jon Grisham

Good afternoon. As Ken mentioned, our core portfolio continues to improve. Year-to-date we have outperformed our original 2010 guidance and the portfolio continues to operate inline with our updated guidance from last quarter. Adjusted occupancy is 92.9% when taking into account the temporary vacancy as result to the New Loudon and Green which puts us at the high end of our 2010 expectation and year-to-date seems to run away, performance is negative 80 basis points which again is consistent with our updated guidance range of zero to minus 2%. And in general, our tenants continue to hold up well within our portfolio. Both year-to-date bad debt expense in tenant defaults continue to run at about 50% of last year’s level.

Looking at leasing as we mentioned in the release, current quarter results were largely driven by one lease at our one and only Ohio property in the core and in evaluating our year-to-date result, we call my discussion last quarter of the impact of Best Buy at Bloomfield Hills on reported leasing spreads and excluding the impact of this one lease on a year-to-date basis, cash basis leasing spreads for the portfolio would have been down 4% and on a GAAP basis actually slightly positive up 1%.

Interesting side note on this metric, we report leasing spreads on leases for which rent commence during the quarter. An alternative is to calculate the spread on leases that were signed during the quarter which is arguably a much better real time indicator of leasing trends. So we will evaluate which methodology is more useful to everyone and revise our disclosure accordingly. Maybe the right answers will be the disclosed votes, we will see.

Turning to our mezzanine portfolio, as we reported we have repaid all principal and accrued interests on one of our Georgetown loans, the large $40 million loan. This represents about 15% annual return on this 2008 investment. This is obviously a great return for any era of investment but even more amazing given the fact that this one was made just months before the collapse of Lehman in 2008.

And for those of you who have established reserves for our mezzanine investments in calculating our (NAB) this monitization represents an (acquiative NAB event). For our remaining mezzanine portfolio, it totals about $84 million of which the 72nd Street loan and the other smaller Georgetown loan, the $8 million loan together comprised about $60 million. More importantly from a balance sheet perspective, these redemption adds to what was already a very strong financial position for us. Obviously it increases our liquidity by $50 million and looking at our net debt EBIDTA for the core portfolio it was just under five times. Now with this redemption, it is four times. And our net debt yield for the quarter was 17%, now it is 19%.

Lastly, although our primary focus is in (NAB) in the balance sheet, the repayment of mezzanine obviously impacts earnings until we redeploy the capital. As the Georgetown loan was paid off right at the end of the third quarter, third quarter earnings did not reflect this event.

In comparing projected fourth quarter to the third quarter, we expect the reduction in the interest income will be counter- balanced by an increase in transactional fee income. In order to achieve the high end of our core guidance of $1.20 to $1.25, some income from our other income category will have to be realized which can include promote income from our funds, income from our RCP investments or income from potential acquisitions.

So to conclude, we continue to experience recovery in the core portfolio as evidenced by our year-to-date results although we remain concerned about the fragility of this economic recovery. As such, we remain focused on maintaining the strength of the portfolio and the strength of our balance sheet. With that at this time, will be happy to take any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Todd Thomas from KeyBanc Capital Markets. Please proceed.

Todd Thomas – KeyBanc Capital Markets

Hi, good afternoon I’m (inaudible) with Jordan Sadler as well.

Kenneth Bernstein

Hi, good afternoon.

Todd Thomas – KeyBanc Capital Markets

H. Just looking ahead to 2011, you got repaid on the larger Georgetown loan I was just looking – Should we assume that or some of the remaining mezzanine investments get repaid in 2011? How are you starting to think about some of the remaining piece of that portfolio as you put your budget together for next year?

Kenneth Bernstein

Few big shifts are – I think you should assume that for high quality assets 72nd street and Georgetown, which are the 2 largest that we have been talking about that borrowers are going to have a lot more choices, so if they want to they can go ahead and effectuate refinancing either through sales of some portions of the asset or all of the assets etcetera and the sale market is open as well. As relate to the smaller part of Georgetown, they have exercised their options to extend and in my discussions with them, they are not planning on a capital transaction for that portfolio next year but that could change.

On 72nd street, thankfully that project has been performing I’d say beyond most of our expectation and so again they will have a wide variety of choices. It is not clear to me what they will do and I am not going to, as Jon was pointing out, these are high return investments we made at a very tricky time so I am not going to apologize too much when we get money back, plus the (inaudible), plus returns.

And for budgeting purposes we recognize we are sitting in plenty of capital to deploy so our guys are not worried about where the money is coming from. We have plenty of capital and we will find good deals and put it to work.

Todd Thomas – KeyBanc Capital Markets

Okay, are there any prepayment penalties throughout the portfolio or can they all be prepaid without any penalties?

Kenneth Bernstein

With those transactions I was just talking about, I don’t believe that there is prepayment penalties as much as – as you may recall there were accruals in different pieces of the field and at different cost people were focused on this question. “Will you capture the accrued portion?” We will absolutely capture the accrued portion. We will absolutely capture the accrued portion. So, on 72nd street for instance there is an accrual or kicker and we get the benefit of that on exit. Drilling down beyond that, there may be prepayment penalties. Again, it is not a significant moving piece one way or the other.

Jon Grisham

There may be on one of the two smaller deals, but in general prepayment penalties are not an issue in the portfolio.

Todd Thomas – KeyBanc Capital Markets

Okay, that is helpful. And then I was just wondering, you mentioned about how you report your leasing spreads. I was just wondering, if you can give us a sense of the leases that were signed during this quarter that will commence in future quarters as well? What those leasing spreads look like?

Jon Grisham

We hadn’t had an opportunity at this point to go back and recalculate what it would look like. Anecdotally, obviously if you look at for example the re-anchoring of New Loudon, those leases are at 50% increase over the former Bon-Ton store, so that would lead to an extra 65,000 square feet. So that would lead to I think a very favourable results as it relates to leasing spreads for the quarter so again we are in the process of talking to everybody to see what makes sense and what is most useful for everybody, but certainly reporting on leases that commenced during the quarter is reporting on negotiations that happened two, three quarters ago potentially. It is really not indicative of the current environment. We will go through and look at it and determine what is best presentation but I think in general, it probably would look or present more favourably if we use more current leasing activity as opposed to deals that we are negotiated some time back.

Todd Thomas – KeyBanc Capital Markets

And then just (inaudible). There has been some recent report, I know A&P but there has been some recent reports about Food Emporium being for sale. And I was just wondering if you have an interest in that given your exposure in New York City and the boroughs, whether or not you expect something to happen pre-bankruptcy or if there is anything interesting in that portfolio for Acadia.

Kenneth Bernstein

Without commenting in any way about specific tenant division etcetera, certainly one of our businesses has been historically buying real estate from retailers and or buying retailers where the real estate is a significant portion of the value. So, we are always going to spend some time looking at a wide variety of situations and whether through the existing Albertsons platform in some instances or in other transactions if we think we can make money owning real estate in high quality retail locations, we jump on it.

Todd Thomas – KeyBanc Capital Markets

Okay, thank you.

Kenneth Bernstein

Sure.

Operator

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

Christy McElroy – UBS

Hi, good afternoon guys. Jon, just following up on comment regarding an increase in transactional fee income; what is driving that increase and what are the different components that drive that line?

Jon Grisham

Yeah. Primarily it would be related to activity at our Canarsie project n Brooklyn, BJ’s will take occupancy and start paying rent prior to year end, our expectation and so there will be a corresponding leasing commission that we will recognize related to that. That will more than counter balance the decline in interest income.

Christy McElroy – UBS

And that is just in Q4 or that is sort of going into next year?

Jon Grisham

That is just in Q4.

Christy McElroy – UBS

Okay, and then just following up on the leasing. Given the impact that some of these big bucks renewals and refinancing you had on your releasing spreads, are there any more that we should be aware of over the next year or so where you expected they go roll down? It seems like the in-placed rent on next year’s anchor aspirations are a little bit higher than average.

Jon Grisham

No, there is nothing specific in terms of roll downs that we are expecting in the core portfolio.

Christy McElroy – UBS

And I apologize if you mentioned this: What would your cash in GAAP releasing spreads have been in Q3 excluding that (one tenant at) Mad River Station?

Jon Grisham

They would have been – first of all it would have been only about 3 or 4,000 square feet excluding that one lease, so it truly is meaningless.

Christy McElroy – UBS

Okay.

Jon Grisham

I think it would be minus a couple of percent or something, nothing significant though.

Christy McElroy – UBS

Okay, and just lastly. With regard to the new Gap leasing in Westport, you mentioned 3 divisions. Will that include Banana as well or you are just consolidating the Gap, the babyGap, and the GapBody that are currently down the road?

Kenneth Bernstein

Just consolidating the other three, we will not include Banana.

Christy McElroy – UBS

Okay, thank you.

Kenneth Bernstein

Sure.

Operator

Your next question comes from the line of Craig Schmidt from Bank of America/Merrill Lynch. Please proceed.

Craig Schmidt – Bank of America/Merrill Lynch

Thank you. I was wondering if you guys are seeing or hearing from Wal-Mart and then their efforts to gain entry into urban markets was some slower footprints.

Kenneth Bernstein

Yes. Again, I am not going to comment specifically negotiations specific site etcetera, but it is a fascinating trend and it is one of the many trends that you are seeing in the supermarket sector. Where Wal-Mart is now taking a new and different look at how they may penetrate high barred entry and urban markets, where you may see them come into certain market and as you have been reading 30,000 square feet on the small end and maybe somewhat larger in other cases. It greatly expands their ability to penetrate various market that historically they couldn’t be competitive in.

Craig Schmidt – Bank of America/Merrill Lynch

Okay. I guess in the same vein, would you be inclined to put all these into your centres?

Kenneth Bernstein

It really depends on the centre there are – the reality is the supermarket business and the supermarket anchored shopping business is going to continue to evolve over the next decade. And what we once thought of as this pristine full-sized supermarket and a simple strip along with it have been changing as supermarkets get larger and larger and now it is changing as shoppers have a host of different alternatives so that in various different markets, shoppers will do some of their shopping in the supermarket, some at the higher end, whether you want to think of whole foods or more boutiquey like at Trader Joe’s, they will go to wholesale clubs and don’t discount obviously Wal-Mart in both full sized and now maybe some of their other formats or Target etc.

So this whole business is going to change and if you have the right property that needs a real deep discount thrift provider, whether it would be a Dollar Store or an ALDI, you have to consider if that is best in high issues. I say in most instances our assets don’t fall into that category. In the very urban markets, where the income level is that is ALDI level there is such population that is usually other best than high issues. But I have nothing against any good to great retailer who drives traffic and brings in the right kind of shopper.

Craig Schmidt – Bank of America/Merrill Lynch

Okay, thank you.

Kenneth Bernstein

Sure.

Operator

Your next question comes from the line of Mike Mueller from J.P. Morgan. Please proceed.

Michael Mueller – J.P. Morgan

Yeah, hi. Ken I want to follow up on your comments about seeing I guess more activity and seemingly more optimistic about being able to put capital to work. Just going back to the (inaudible) and what has been repaid off, in the run rate looks to be about $0.15 a year of dilution until the capital is redeployed, I mean off the small earnings base it – it’s a notable number and is your best guestimate that this capital would be redeployed the next couple of quarters do you think? Do you think we will start to see some traction by year end or do you think we are on to 2011?

Kenneth Bernstein

Let me divide the question into a few different pieces, and the piece that I will provide you with the least help on is the exact month that we will redeploy capital. But first why are we seeing increased activity? Fortunately a host of the financial institutions that we do business with, that we borrow from etcetera have gotten to a point and I thing you are going to see this more and more, where they have marked their debt position down realistically. And in fact in some instances they are no longer looking at how they market down and looking where do they think the value is.

So we are seeing debt notes trade, we are seeing transactions where the debt is priced realistically and then the borrower can then recapitalize. And we are seeing what had taken a painfully long period of time from an acquisition perspective but is an essential part of working through the significant wall of debt that is in front of us, trillion dollars. We have seen that now to start to activate. That is good for us because we have not traditionally been able to create nearly as much value buying very simple unencumbered assets at auction, meaning being the winning bidder. Sure when a Cortlandt comes along, periodically and there is a moment of distress in the capital market we jump on that. But more often than not it is associated with recapitalizations, it is associated with redevelopments, it is associated with (RCPSF).

These are trickier deals, it is hard to predict exactly what month any of these (inaudible), but at least we are seeing them. You cannot open open the wall street journal any given week and not see some story about debt trading at a material discount. And debt trading is the other aspect to this, there is a lot of recourse debt out there. There are a lot of interesting components to this that play into our core expertise. So my focus is not going to be so much about which month we plug an earnings hole and Mike it wasn’t that long ago that you – and I were talking about geez what kind of reserve should we be thinking about or should the street be taking on these assets as we get this money back making 15% plus. My goal is to see that we put it back to work. Whether it goes back in similar style transactions, perhaps; or whether it says it simply are co investment piece into our fund II and fund III assets. I am fine, because as I just walked through on Cortlandt we are clipping high pins now 2011 on our Cortlandt call investment.

I realize that the lengthy answer I was saying, I don’t know what quarter it hits. Our goal is to invest this money profitably and to make sure we don’t invest it imprudently. We are a business that is very focused and capable of putting this money to work and we will do it. And when that happens I am sure we will hear a mixed bag of comments on the investment. I remember watching our stock price drop when we announced the Cortlandt acquisition. So good luck with the modelling we are going to focus in investing profitably.

Operator

Your next question comes from line of Andrew DiZio from Janney Montgomery. Please proceed.

Andrew Dizio – Janney Montgomery

Yes, thanks, good afternoon guys. Can you talk a little bit more about the changes in the Storage Post’s platform against specifically we notice the Storage Post is operating location Acadia does not own. Could that management business consolidate more private self storage facility under its umbrella and really have Acadia participate in any management team associated with that?

Kenneth F. Bernstein

The answer is we do participate and the answer is we could. This was the focus; we had a very capable what all refer to as merchant development team and Storage Post capable of finding and building some very good location and that was the genesis of that business. When a recession hit and as the self storage business has evolved it became clear as that they was level of operational expertise required in terms of revenue management, in terms of expense management, and my friend Bruce Roch who I have known for many years has sold his business. He and his team were available and we brought them in so that they could first and foremost drive profits at our properties. They will then have the opportunity to bring in additional assets whether they are in the form of consolidating operations or acquisitions. Acadia participate – has the right to participate anyway we want if we think that there is good to great uses of our capital. We have got plenty of capital. I would continue to say that our focus within self storage has been and will continue to be really focused on where we can bring self storage as part of our urban primarily New York City redevelopment or we can put self storage on top of retail development and it gives us certain synergies and competitive edges. So as the redevelopment business kicks in I very much look forward to our ability to include Storage Post in that if there is additional acquisition opportunity, Bruce has very good access to capital. We would participate in the general partner level but whether or not we would put significant additional capital we have looked at on a case to case basis.

Andrew Dizio – Janney Montgomery

Okay, that is helpful and then just another question on the progress safe way portfolio which there have been such a search for yield out there right now. Is there a possibility to monetize that once the anchor (Inaudible) separation is dealt with next year?

Kenneth F. Bernstein

Yes. I would say compared to a year ago the opportunity to monetize just about anything look so much better and in some cases it is going to be very compelling and we will do it. The great news within our FUND platform is we have the discretion to be patient when we to want to be. If the market is not there – but certainly we well incentivized commoditized. So we will pick and choose our spots but if the market is willing to – the model we have setup is a capital recycling model. We like that model. It means that when we see opportunities we can acquire them. Maximize the value and then it also affords us the necessity to have the discipline to sell when there is great opportunity. Sometimes that creates meaningful promoting camp. We try to separate that out so that you do not confuse it with standard cash well. Sometimes it creates the delusion or positive event delusion of having made a lot of money and getting your capital back. So progress safe way falls into that category and other aspect as may well.

Andrew Dizio – Janney Montgomery

Alright, great that is all for me.

Operator

Your next question comes from line of Mike Mueller from JP Morgan. Please proceed.

Michael Mueller – JP Morgan

Just one follow-up on AMP. When you are looking at the 5 locations and if you are just generalizing about the rents in place versus are they blow market or up market. I mean how would you cut that up?

Kenneth F. Bernstein

You know it is a mixed bag Mike in terms of trying to figure out and identify which one is we think are significantly below market and which one is do we think are either closer to market, at market etc. One of those leases was done in the past ten years. Just about ten years ago and the others have significantly older leases. You can kind of look at the vintage and it is in our stock and extrapolates from there. I am hesitant to point the specific assets partially cause we are involve in a lot of different discussions associated with it.

Michael Mueller – JP Morgan

Okay that is great thanks.

Kenneth F. Bernstein

Sure. Thank you.

Operator

Your next question comes from line of Quentin Velleley from CitiGroup. Please proceed.

Quentin Velleley – CitiGroup

Future transactions might not be simple or straightforward. So I am just wondering whether you can elaborate on some of the potential structuring that might be involve in such transactions and then secondly given this has been high competition for high quality assets, I guess what kind of competitively advantage do you have in sourcing some of this non-simple and non-straightforward potential acquisitions?

Kenneth F. Bernstein

Sure. Let us start with the simple and straightforward and those are going to be really tough. Simple and straightforward means a well located property that is easily financeable. There is no debt issue; there is probably no anchor issue and the queue up at this point now. For it will [Inaudible] is pretty significant. And I suspect when you start breaking through to some very, very low cap rates, our competitive advantage to buying those simple and straightforward is simply that we do not do it. So now let’s shift to where we think we will spending more of our time. If you have an over-levered asset, let us start with the debt, there is a few difference pieces to that but the question is who holds the debts? Is it the lender that is ready to sell the note? Will they try to foreclose? Is there mezzanine debt behind or what is the borrower looking for? And then what happened at the asset? As this financial crisis has worked its way through the system a few things have happened. For those asset that are over levered more often than not they have not gotten the attention they deserve at the asset level and overtime weaker assets require a fair amount of capital so they start to deteriorating at the asset level as well. So we look at the debt and we say this financial institution who just wants to sell a note. One of our competitive advantages is they just want to sell a note? We are happy to do that. We have capital lined up. There are no issues. We are not against them we are only buyer. What is the borrower looking for? Do they want to stay involved in the property? We certainly had done transactions like that. Are they looking for tax protection? One of the advantages we have is we can afford to provide for developers who are facing recapture a wide variety of tax protections. And then ultimately, what is required at the asset? If the asset has [Inaudible] fragile we just spent good chunk of today talking about fragile tenant. We would be happy to acquire well located property at the right price where the tenant may not be currently financeable. Long term that has worked very well for us and made a lot of money for our stakeholders. These are complicated deals – now we are standing the competitive advantage that I think we have amongst which is that we have been doing this for 20 years. There is a lot of competition out there so I do not expect us to get every deal but given that we have what I like to think of is about a billion dollars of mind power. For a relatively small company when we find the right deals we can drop everything we are doing. All of them probably just call and we can go after those deals more often than not I am please with the outcome.

Quentin Velleley – CitiGroup

And then just secondly you commented that potential transaction volume had improved and you sort of have similar comments last quarter so I know why you cannot sort of you what the volumes of transactions (Inaudible) just curious – what you think – are you think sort of $500 million of potential transaction for day versus last quarter was only 300 and at the start of the was 200. Is that kind of growth that you are seeing coming through?

Kenneth F. Bernstein

Yes and if you dial the pack of quarter to before it – it was feeling kind of like zero because so many of the assets in transactions we would work on when we got to the closer to the execution, the financial institutions said we cannot afford to take the realistic marked down that we need to. Remember debt cost was substantially higher spreads that can track in fair amount. So it was not just that lenders were being less realistic in kicking the can down the road. It was also the transaction were more expensive to complete. Now I think you are seeing a nice overlay of realistic cost of debt maybe actually I think debt cheap right now. You are seeing better visibility in terms of the market place in general. That is all leading towards where I think you will see increase transaction activity. Hopefully a lot of it is ours but I think in general you will be reading about more and more assets trading associated with lenders being able to do the right thing.

Michael Mueller – JP Morgan

Michael speaking is there sort of acquisition – do you have any sort of entity type deals where your currency in terms of your stock is going to be a use to buy?

Kenneth F. Bernstein

Maybe and we are always having a serious of those type conversations Michael and yet if you think about it historically we have done just a handful of OP unit deals over the past 10 years. I was actually more hopeful about entity level stock per stock deal when there was real cash illiquidity because you could turn into institution and you say “Look Mike my currency is precious but you do not have any other alternatives”. Right now currency affords an opportunity if the pricing is very compelling and you are offering tax deferment, benefits, etc. Depending on where tax rates go – depending on whole bunch of different things. We will see how that plays out but in my view of how we grow I think its first and foremost putting the cash that we have both on our balance sheet and in our Fund Level to work if right entity level deals come, great but they need to be compelling and they need to justified using our currency that way.

Michael Mueller – JP Morgan

And how active is our CP in terms of going back towards the retailing landscape and (Inaudible) troubles (Inaudible) retailers – is that an area of focus?

Kenneth F. Bernstein

Yes.

Michael Mueller – JP Morgan

High level of focus today.

Kenneth F. Bernstein

It is increasing every month. There was a period of time because you needed the right combination of events including the retailers being willing to transact and it is evolving both because I do think that are going to be some bankruptcies out there and then also you are seeing ownership looking at the bunch of different alternatives. Ownership at their retailer level. So we think that they should be some interesting opportunity to acquire real estate from retailers in one form or another and we like that business.

Michael Mueller – JP Morgan

Okay. Thank you

Operator

Your next question comes from line of Sheila McGrath from KBW. Please proceed.

Sheila McGrath - KBW

Good afternoon. Ken, I notice in the supplement you did disclosed Citipoint at 200 million. I was just wondering if you could review if this is retail only. How we should think about the timing? And if you can reduce the cost bases in that, lower by selling the residential portion.

Kenneth F. Bernstein

Yes. Yes we can. The way we are accounting, still very rough numbers and until we lay out for you who the tenants are and exactly who we are doing turn keys for versus doing just cold vanilla boxes or otherwise, that number will fluctuate. That 200 million includes effectively are cost bases on the project in terms of land cost with a relatively small amount of cost bases associated with a non-retail pieces. So if residential on phase 3 were sold for where we see the market today, that would provide a pretty significant cost bases reduction below the $200 million that we have right now. Do not want to count our chickens before they hatch. It will be a little ironic but we are happy to take profits associated with the residential piece. Ironic in that our main focus is making money on the retail side and we think we will, but it is a pleasure to see that residential market coming back and FAR values which a year so ago were perhaps zero; you could not justify building anything even if you are given the land for free, coming back pretty meaningfully.

Furthermore we have locked in here 421A tax abatements, ICIP benefits that are also going to add significant potential value per square foot to whoever the future residential developers are. So hopefully you will see the bases shift, more importantly and what I outlined before is assume plus or minus we are going to spend $200 million on the retail component. It will be plus or minus 550,000 square feet over phase 1 and 2 and should have attractive yield supplemented by the potential sales for however we handle the residential piece.

Sheila McGrath - KBW

Are phasing that retail portion? It said in the supplement you started part of it so are you going to do as you lease or what is the status?

Kenneth F. Bernstein

Yeah. Well, in order to lock in the 421A and ICIP benefit on a phase bases and other pretty compelling benefits, we had agreed to start the phase 1 which is 50,000 square feet. The balance -- so we are going to complete that 50,000 square feet, the entrance way if you will, in the next 12 months or so, that is certainly in 2012. During that time period, it looks as though we will be able to put the other anchor pieces in a more compelling part. You have a 500,000 square feet, we will put that together and thus it will effectively, to the outside world look more like one continuous development of 550,000 square feet.

Sheila McGrath - KBW

Ok, thank you. Quick question on the convert, (inaudible) and lead 11. How are we should be thinking about that at this point?

Kenneth F. Bernstein

Right now, there is sufficient cash on the balance sheet. Worst case, they will just pay that off obviously, the full gauge with the market looks like later on in 2011 and respond accordingly.

Sheila McGrath

Okay. And last question, on the Westport lease, in order to consolidate the Gap leases, did you have pay them out? Pay them additional money to take out the existing leases.

Kenneth F. Bernstein

No, no. The leases were maturing and this is a good opportunity for them. We are very happy with the deal. It was more or less right in line with what we have originally assumed. The only less take away from it is, we are simply moving tenants around. We did not owned the other buildings but my point is not that – it is not a great time here Gap expanding in Westport. It is a good sign that they are re-affirming and signing new long term leases there. I think the next phase, what we are going to see in some of these hot street markets whether it is etcetera etcetera is new tenants coming in and that will be a positive sign as well.

Sheila McGrath - KBW

Okay, thank you.

Kenneth F. Bernstein

Sure.

Operator

Your next question comes on line of Rich Moore from RBC Capital Markets. Please proceed.

Rich Moore - RBC Capital Markets

Hello guys, good afternoon. Ken a question for you on Fund III. You have I think about 18 months left to deploy the remaining 350 million of commitments and I am wondering, do you need to start thinking about maybe a FUND IV, a backup plan of some kind in case you do not get everything out there in the next 6 or 8 months?

Kenneth F. Bernstein

Yes. And I would not call a backup plan Rich what we think about. And we sit down annually at the board level and talk about strategically if do you want to do a Fund IV whether we spend all the 350 or most of it etcetera. Each time it is time to think about a new fund, it certainly a consideration. I have a high level of confidence and a much higher level of confidence than let us say a year or two ago. That if we want to do a Fund IV, absolutely Fund IV will be available and my best hunch based on the returns that we provided for our Fund investors is that they would roll whatever dollars were not used and will recommit. And based on the dialogues that we have with our investors, what we hear is no one I probably doubling the signs of their commitments. Some are going to cut back but there are other new investors who are coming and spending time with us so whatever (inaudible) Fund we decide, Fund IV should be – I am comfortable we can get that done and whether or not some of Fund III capital is shifted in to Fund IV. Look, it is long enough away Rich that we will figure it out at that time; my focus is for us to profitably invest as much of the dollars as we have and not a penny more.

Rich Moore - RBC Capital Markets

Okay. So when you think about Fund IV Ken, would you need to start marketing that in some point if I could say be open to a broader audience than just money left over from Fund III? As I recall you market for quite a long period of time actually before you closed. At least on the other 3 Funds and I am guessing would start sometime next year probably with the marketing of Fund IV if you do that?

Kenneth F. Bernstein

Probably. Look we have been fortunate that the discussions start about a year ahead of time and we get a sense of how it plays out over the course of a few months in term of an existing investors really going to fill our needs and how much do we have to go out to new people. New people, new investors have been in our offices and that process continues in an informal basis. We do not generally hire an outside adviser. We do not generally go through a very rigorous marketing period. We have been at this now as I said so 15, 20 years, 15 plus in the Fund business. So it is nothing we can do without becoming this huge drain on resources.

Rich Moore - RBC Capital Markets

Okay, I got you. Good, thank you. And then on Storage Post if I can go back to that for a second, you made some substantial changes and improvements. How should we look for improvement over the coming quarters in what we see that you present to each quarter in Storage Post, I mean should we expect to see increases in the operating metrics or should we expect to see some announcements that you got some new projects under way or some redevelopment under way? What should we see in the supplemental and the press release?

Kenneth F. Bernstein

First and foremost, I want to see the occupancy getting stabilization because until the property gets stabilization the ability to really drive those rents in cash flows is a little more difficult. So first and foremost, let us continue to monitor the occupancy, I want to put those in every quarter. Then I think you will see significant cash flow improvement and that always makes us happy and we will certainly be giving more, more metrics on that. As we relates to new investment, let us see where that goes. The reason to make these changes was to make sure that we were maximizing the value of this portfolio. I remain very interested and supportive to see what the team can pull off and I think some exciting will happen but first and foremost look at the existing operating matrix.

Rich Moore - RBC Capital Markets

Okay, good and thank you. And then you kind of hinted a bit when you were talking about asset sales on the opportunistic side of things but are you actively marketing or thinking of marketing any of your stabilized maybe non-core operating assets?

Kenneth F. Bernstein

We are not actively marketing any. None are being held for sale. I think you would agree that there is few companies who sells as many assets as we do. So if the price is right and compelling, Rich, we are certainly open to it.

Rich Moore - RBC Capital Markets

Okay, good. Thank you guys.

Kenneth F. Bernstein

Sure.

Operator

Ladies and gentlemen, there are no further questions at this time. This thus conclude the question and answer portion of a call. I would now like make a call to Mr. Bernstein for closing remark. Please proceed sir.

Kenneth F. Bernstein

Great. Thank you all for taking the time. Look forward to speaking to you again in the near future.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. This concludes the presentation. You may now disconnect. Have a great day.

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