Acadia Realty Trust (AKR) Q4 2011 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter 2011 Acadia Realty Trust Earning Conference Call. [Operator Instructions] I’ll now turn the call over to Amy Racanello, Vice President of Capital Markets and Investments. Please proceed.

Good afternoon, and thank you for joining us for the Fourth Quarter 2011 Acadia Realty Trust Earnings Conference Call. Participating in today’s call will be Kenneth Bernstein, President and Chief Executive Officer; Jon Grisham, Chief Financial Officer; and Michael Nelsen, Senior Financial Principal. Before we begin, please be aware of statements 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 8, 2012, 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.

Thank you, Amy. Good afternoon. Thanks for joining us. Today I’ll begin by updating you on the progress of our key initiatives, and then Jon will conclude with a more detailed review of our fourth quarter earnings and our operating metrics as well as our earnings forecast for 2012. Throughout 2011, our team was focused on creating value through 2 broad components of our business. First is within our core portfolio, where the key drivers are our accretive re-anchoring and lease up projects at 3 of our existing shopping centers, coupled with the acquisition of a host of high-quality assets as part of our asset recycling and core acquisition initiatives. Then the second component is through our external growth platform, where since our last call we executed new opportunistic and value-added acquisitions, continued to develop, lease-up, stabilize and monetize our existing investments; and in the fourth quarter, we also made important progress with respect to our formation of Fund IV, which we expect to launch by the end of the second quarter of this year. So I’ll begin today’s discussion with our core portfolio activity followed by an update on our Fund activity. First, with respect to our core portfolio operating fundamentals, when we look at our fourth quarter results and strip out the noise from our 3 re-anchoring projects, same-store NOI increased by 130 basis points on stable occupancy and positive leasing spread. This is consistent with the mild recovery that we appear to be in. But notwithstanding a mild recovery as we look forward over the next year or so, we expect pretty significant occupancy and NOI gains driven by our 3 previously announced re-anchorings, being Bloomfield Town Square as well as 2 properties that formally had A&P supermarkets here in New York. As Jon will discuss, beginning in the second half of this year, we’ll begin to add what will total on a run rate basis, an increment of 3.5% to 4% to our occupancy, $3.5 million to $4 million to our NOI, and approximately 8% to our earnings base. These re-anchoring projects are now in aggregate 77% pre-leased and we’ll lease the balance this year. Rents on average for the new leases should represent approximately a 50% increase over the prior rents for those spaces. These tenants are scheduled to begin opening in the second quarter of this year, and the balance should be in place by year end. Now while the NOI and earnings contribution is a little too back-ended to have full impact on 2012 numbers, they will contribute significantly to our second half 2012 as well as to our 2013 growth. As is the case with our current re-anchorings of former A&P location, our portfolio anchor leases, especially here in the Northeast, tend to be older centers with anchor rents that are generally below market. And while it’s hard to predict when, if ever, we get the opportunity to capitalize on the recapture of these leases when we can, whether it’s recapturing Caldors or Grand Union or Bradley’s or Ames or more recently A&Ps, the value creation can be meaningful. Most recently, there has been significant discussion regarding Sears and Kmart. While it’s probably not productive to use this call to ponder Kmart and Sears’ overall prospect, with regard to our portfolio we have 3 Kmarts and one Sears in our core. Current weighted average base rent is approximately $5 a square foot. All of these leases appear to be below market, with our property in Westchester New York being at a fraction of market rent. Now that being said, given that these stores all have strong sales volume, it’s premature to anticipate the opportunity to recover any of these existing leases. But separate from our existing leases has been most recently the case with A&P when tenants become to stress and close stores, it tends to also create new investment opportunities. For instance, 2 of our more recent fund acquisitions were formally A&P anchored centers. So as Kmart continues to evolve as a retailer, we’ll watch this process and keep you apprised. Along with this 8% net growth contribution from the 3 re-anchorings, the second key driver of our core growth is from our asset recycling and core acquisition initiatives. Our focus in 2011, and now continuing into 2012, is to do some modest pruning of certain assets that aren’t consistent with our core strategy, and then more significantly to add properties that we think over the long-term have the potential to significantly outperform the asset class in general. Over the past year, as we have seen further evidence of the separation of the haves and have-nots with respect to retail real estate locations and a better understanding of the secular shifts in retailing, the focus for our core investing has been primarily on urban and street retail properties in the major gateway cities. Thus in 2011 and to-date, for our core portfolio, we have entered into contracts that were closed on 31 street or urban properties for approximately $180 million. These properties are in 4 important gateway cities, New York City, Chicago, D.C., and most recently the greater Boston area where in the fourth quarter we entered into an agreement to acquire a property in Cambridge, Massachusetts, that’s anchored by a Whole Foods. And then more recently, we entered into agreement to acquire the adjacent parcel that currently is anchored by a below market Rite Aid Drugs. The Rite Aid parcel acquisition will be a OP unit transaction, the aggregate consideration for both properties will be just under $20 million. With nearly 500,000 people and average household income of nearly $100,000 within a 3-mile radius of the property, this property is a high barrier to entry location with solid tenant performance below market rents. And while we don’t anticipate having the opportunity to recapture either of these spaces in the near term, with a going in unlevered yield of approximately 6%, and long-term upside, we feel this is a nice addition to our core portfolio and very consistent with our growth strategy. These $181 million of core acquisitions, once fully closed, should contribute approximately 5% to 6% to our earnings base, and they’ll comprise approximately 20% of our core NOI, and more importantly increase our portfolio stability and diversification. They are all in key supply constrained markets with locations that will remain relevant to our tenants and to their shoppers not only today, but even more so 3 years, 5 years, 10 years down the road. When we look at our portfolio composition at the completion of these acquisitions, urban and/or street retail real estate should represent over 40% of our portfolio, including our pro rata share of our fund investment. The balance of our portfolio has been fairly evenly split between supermarket anchored centered and value or discount anchored centers. To-date, of the now $181 million of core acquisition pipeline, we closed on $74 million, having completed the acquisitions in Georgetown and New York. And we closed on 7 of the 20 Chicago assets, we’re currently awaiting lenders’ final approvals for the assignment of the debt for the balance of the acquisitions. Complementing our core growth initiative is the second major component of our business, which is the external growth generated from our fund platform. In the fourth quarter through our Fund III, we closed on 3 investments with an initial acquisition cost of approximately $50 million, and are under contract for a fourth property for approximately $30 million. Thus including these transactions over the course of 2011, we have entered into or are closing on approximately $170 million of fund acquisition. These new investments are consistent with our general investment themes, which are first, value-add investments in high quality urban or street retail properties with re-tenanting or repositioning opportunities; second is opportunistic acquisitions of well located real estate but that is anchored by distressed retailers; and then third is opportunistic purchases of debt or restructurings or motivated seller transactions. To briefly give some color on our most recent fund acquisitions. First, New Hyde Park, which is a well located property in Long Island, we’ll have the opportunity to re-anchor and redevelop that property. Second, Parkway Crossing in Baltimore is consistent with our other distressed retailer acquisitions. Here we acquired this asset, it was previously anchored by an A&P super market, and then prior to closing, we signed a lease for that vacancy with Sharpridge supermarkets. Lincoln Park Centre in Chicago, this is an extremely well located property, it’s at the three-way intersection of Clybourn, Halsted and North Avenue in the heart of Lincoln Park. The project was anchored with a now vacant Borders bookstore, which creates an attractive re-anchoring opportunity. The property sits right across from a new iconic Apple store, and tenants in the market range from Restoration Hardware to J Crew. Interest in the Borders space ranges from exciting fashion retailers to active lifestyle and better home furnishing retailers. Finally, 654 Broadway in Noho in New York City, we purchased the debt, securing this property at a discount, and simultaneously restructured the loan with the borrower thus enabling us to take control of the property on a consensual basis. The property has a below market lease with a regional operator and we have the opportunity to upgrade the property. Tenants on Broadway in Noho range from Crate & Barrel to Adidas and from Swatch to Urban Outfitters. In order to stabilize these 4 investments, we expect that we will likely spend $15 million to $25 million of additional capital for the re-anchoring or redevelopment. And we believe that these properties should stabilize with unleveraged deals in excess of approximately 8%. After taking into account these transactions, we have approximately $100 million of Fund III equity remaining to deploy. And based on what we’re seeing in the market place, we believe that we’ll be able to find interesting opportunities for its investment over the next couple of quarters. Accordingly, we expect our Fund IV to launch at the end of the second quarter of this year, and to have terms and sizing similar to our Fund III. With respect now to our existing fund investment, details on all of our urban and street retail development projects can be found in our reporting supplement. Our team continues to make progress with respect to the overall portfolio. Of particular note, at our City Point project in the fourth quarter we made significant progress with plans for the 2 anchors that will occupy the majority of the second, third and fourth levels of the entire project, as well as occupying the majority of Phase 1 of that project. This leaves the first floor street level retail and the concourse remaining to be leased. Construction on our Phase 1 will be completed this spring. Construction of Phase 2 will begin this summer, and Phase 2 should be ready for occupancy in 2015. Now, since the devil is in the details, and we have not yet signed these leases nor formally announced to the tenants, we’re not going to do so yet, we’ve been patient with this multi-year process, and we’ll continue to make sure that we get this right. In the fourth quarter also with respect to City Point, we commenced process for obtaining our construction financing. We anticipate utilizing the government sponsored EB-5 program for this financing. This process is proceeding well and upon its successful completion, should provide us with necessary senior financing for the project. Turning now to dispositions. In the fourth quarter, we sold 15 of our 18 remaining properties in our Kroger/Safeway portfolio. So far to-date, that investment has returned a 20% IRR over approximately 8 years, and a 2.3 equity multiple on our investment. Looking forward, we expect to see more asset sales of fund assets and are very pleased to see the pricing levels and demand in the market for stabilized asset. So in conclusion, the progress that we made on our key growth initiatives during the fourth quarter and throughout 2011 is beginning to have a significant impact. Within our core portfolio, the strong growth from our re-anchoring projects combined with the new acquisition should contribute significantly to our earnings growth in the second half of this year, and more importantly further enhance our core portfolio quality. And combining this with our opportunistic and value add investments made through our fund platform, enables us to create value through a broad range of investment activities. Finally, the anticipated launching of our Fund IV will position us to take advantage of a wide array of opportunities as they arise over the next few years. I’d like to thank the team for their hard work. They did a solid job last year, and more importantly are very excited about our plans for 2012 and beyond. So now, I’ll turn the call over to Jon Grisham, who in January assumed the role of CFO. Jon, Mike and I congratulate you, thank you for everything. And Jon, please review our fourth quarter performance and forecast in 2012.

Thank you, Ken. I appreciate that. Good afternoon. First I’ll recap 2011 results, and then I’ll discuss our 2012 guidance. From an earnings perspective, FFO for the fourth quarter of $0.25 and $0.97 for the full year 2011 was consistent with guidance. One item to note for the fourth quarter, as Ken mentioned, we sold 15 of our 18 Kroger/Safeway locations, which generated promote income of $2.4 million or $0.06 for the quarter. Looking at our core portfolio of performance for 2011, for the fourth quarter we’ve experienced an uptick in same-store NOI of 130 basis points, as Ken mentioned. And compared to third quarter, which was a 50 basis point increase, we see that the recovery continues and the performance of our core portfolio continues to strengthen. When looking at same-store NOI, as Ken mentioned also, the impact of the 3 core re-anchorings created a negative drag in terms of same-store NOI for the fourth quarter of 6%, such that the headline number was minus 4.7%. And for full year 2011, same-store NOI, again excluding the impact of the re-anchorings, was effectively flat which was consistent with our original guidance for 2011, which called for minus 1% to positive 1% of same-store NOI. Occupancy at year end was 89.8%, including the re-anchoring leases that have been signed but not yet opened were 92.7% leased. And then upon finalizing the leasing of the remaining re-anchoring space, that will add another 90 basis points, which will put us at 93.6%. So now turning to our 2012 earnings forecast, we’ve detailed on Page 14 in our year-end supplement, our projected 2012 FFO range of $1 to $1.5. And consistent with prior years, we divide our income into 5 categories: core portfolio and joint venture income; asset based fee income; transactional fee income; G&A; and then other income which includes promote, RCP, and lease termination income. First, I’d like to drill a little bit further into our expectations for the core for 2012. So for the existing core, we’re forecasting the following. First, in terms of same-store NOI, recall again that the 3 re-anchorings created a 6% drag on same-store NOI in the fourth quarter, and will continue to create some drag at the beginning of 2012. Such that the first quarter will be negative, but then the impact from these re-anchorings will moderate through the year, and towards the end of the year this will actually flip, and these will be a positive driver of NOI in the second half of the year. As a result, same-store NOI for the year on a whole, inclusive of the re-anchorings, was expected to be between 2% and 3%. Importantly, as Ken mentioned, these 3 re-anchorings will generate $3.5 million to $4 million of NOI when they’re fully online. We expect about a third of this, or $1,500,000, $0.03, to hit in the second half of 2012, and the remaining $2.5 million or about $0.05 to come online in 2013. Lastly, we expect occupancy by year-end to be around 94%, primarily a result of these re-anchorings coming online. So now looking at core acquisitions. And before I get into a discussion of the details, recall that as we’ve previously discussed, every $100 million of core acquisitions on a leveraged neutral basis generates approximately $0.03 of FFO or 3% earnings growth. So for 2011, we had $181 million of acquisitions, which we’ve closed on $74 million. On a run rate basis, these acquisitions will generate $0.05 to $0.06 of FFO. Although, the majority will be realized in 2012, there will be $0.01 to $0.02 that will not be realized until early 2013, presuming that we close at the end of this quarter on the remaining $107 million of deals that are under contract. In addition to these acquisitions, we’re also assuming in the forecast additional acquisitions in the core of $100 million to $200 million, and we assume a mid-year deployment of those investment dollars. Related to our opportunity funds for 2012, Fund I, following the sale of the 15 Kroger/Safeway locations, now has investments in Tarrytown -- Tarrytown Shopping Center, 3 remaining Kroger/Safeway locations and a portion of the RCP Mervyn's investment. Our expectation is that we’ll monetize most, if not all of this, during 2012. And as a result, we’ve included some level of promote income in our forecast. For Fund II, 2011 NOI at the fund level was $22 million, primarily in our New York urban redevelopment portfolio. We expect for 2012 that this NOI will increase to $27.5 million, primarily as a result of the full year effect of 2011 rent commencements and additional lease up. For Fund III, for 2012 we’re projecting new acquisitions of between $150 million to $300 million, again assuming a mid-year investment. Turning to fee income. Our forecast presumes that we’re moving forward with Fund IV, as Ken has mentioned, and we’ve projected additional asset management fee income as a result. Anticipated transaction fee income of about $6 million is comparable to 2011. A key component for 2012 is construction fee income related to Fund II City Point project, and this is expected to be more weighted in the second half of the year, when scheduled activity for Phase 2 ramps up. So to recap 2012 guidance, core re-anchorings in the current acquisition pipeline will be key drivers for 2012, primarily in the second half. And 2013 earnings generating in total, approximately $0.14 of growth, half of this will be in 2012, and the second half 2013. The other thing to note about earnings for 2012 is the distribution over the individual quarters. Typically, we have not given quarterly guidance, and we’re not giving specifically quarterly guidance, but in terms of the distribution, we expect that given the timing of the re-anchorings, closing on the existing acquisition pipeline, timing of fee income, that 2012 earnings will be lower at the beginning of the year, accelerating into the second half of the year. So while first quarter 2012 will be in the low-20s range, importantly, third and fourth quarter will be closer to 30 and represent high-quality recurring earnings, which will be a nice platform to build off of going forward into 2013. So now turning to the balance sheet. We have historically and we’ll continue to maintain a low-risk balance sheet. Our current net debt-to-EBITDA including our pro rata share of funds is about 5x, and our debt to total market capitalization is in the low 30s. And we think that this is the appropriate level to operate in. And looking at our capital needs, vis-à-vis our current acquisition pipeline, we have sufficient cash on hand and line availability to fund the equity component of these deals. And the launching of the Fund IV will importantly provide continued capital to fund growth in our opportunity fund business. And as we announced last month, we’ve established a $75 million ATM, or at the market program, which we anticipate will use to match fund potential new acquisitions and our pro rata share of fund acquisitions to the extent needed to maintain our low-risk balance sheet. So in conclusion, our 2011 results, both in terms of our core portfolio and earnings, met our expectations for the year. Our core re-anchorings and current acquisition pipeline will be key drivers to core earnings in 2012, more so in the second half of the year, and more importantly into 2013. And in addition, our core acquisition program will contribute to future earnings, as well as the expected launch of Fund IV will continue to drive growth in our fund platform. With that, we’ll be happy to take any questions at this time. Operator, please open the line up for question-and-answers.

[Operator Instructions] Your first question comes from the line of Craig Schmidt with Bank of America/Merrill Lynch.

I’m wondering the 2 A&P stores, are they expected to be occupied in 2013 and be rent paying?

Yes.

So it will be almost a year from now, or possibly a little more?

Well, we hope and expect them to open preferably before that, but certainly they will be in place by 2013.

Our expectation, Craig, is right at the end of 2012. So we are talking fourth quarter in terms of timing.

Okay, great. And I saw the -- in the news that Shaw's announced the closing of 5 New England stores today. I’m just wondering, how do you feel about the -- I think you have 3 of them? It’s just 3 Shaw’s, sorry, but not the pre-closing.

I have not seen that list today, so I don’t know where ours would fit into. Shaw’s and SUPERVALU have been going through that evolutionary process that the supermarket industry in general is doing, and Shaw’s has really struggled to find its footing. You’ll recall, we just recently last year bought another Shaw’s where we think there’s strong releasing opportunities. Case-by-case, we have different plans for each of them, probably a little early to outline. But our expectation is that Shaw’s is going to have to engineer a pretty significant turnaround, either internally or through a sale, for them to really regain their traction.

Great. And then just, I know you don’t have any specifics on City Point, but on the first level, like are you expecting to lease to specialty fashion, or is there some other direction that you’re thinking it’s going?

It looks like it will be specialty fashion, but there’s a lot of new demand with H&M now opening, and the tenants are ranging, Shake Shack just opened on Fulton Street, and there’s lines around the block. Fulton Street is changing pretty significantly. And over the next couple of years, we think that, that will continue both in terms of the existing Fulton Street shop, but probably as importantly is the significant demand from the brownstone communities all around Downtown Brooklyn, that don’t, historically, have not yet shopped on Fulton Street, but we think that Downtown Brooklyn will become an important shopping destination for them.

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

I’m on with Jordan Sadler as well. Ken, it seems like you continue to find a good amount of investment opportunities, and the deals are fairly attractive. I’m just wondering if you can talk about how you sourced some of the more recent deals, and whether or not you’ve seen an increase or any change in the level of competition for some of the latest acquisitions?

The competition has been fierce, but frankly it’s been fierce for almost as long as we’re in business. Every now and then there is a period where there’s not a lot of other buyers. I think when we bought Cortlandt Towne Center from Centro, that might have been that rare exception. But our team has done, and continues to do, a very good job of sourcing transactions from a variety of different ways. And the shifts and changes that I see right now, to answer your question specifically, is I think we are continuing to work past that phase, that 2-year period of the financial institutions kicking the can down the road. And so we are seeing more transactions that one way or another, directly or indirectly, are precipitated by borrowers or existing owners recognizing that they’re going to have to at this juncture transact, that their lenders are not going to continue to simply support the transaction. And that will happen as we see large debt pools trade hands, and opportunity funds become the acquirers of those pools of debt. Obviously, the tone shift in that dialogue with the borrowers. We’re seeing, and 654 Broadway is an example of lenders saying, we’re now ready to sell our debt at a fair price. And that puts us in a good position because we can work with existing borrowers, as we did in that case, to take control of the asset on a consensual basis. The last thing that we’re seeing is just enough interest in OP Unit transactions, that it seems like the past couple of calls we have talked about buyers -- excuse me, sellers coming to us on a relatively short list of potential opportunities to take our stock in the form of OP units in connection with the transaction. Now that doesn’t mean that we don’t have to pay a full price for those transactions, but it certainly reduces the competition, if you will, of who we are working against. So to sum it up, plenty of competition out there, but deal flow does seem to be increasing, whether it’s through distressed retailer opportunities like some of the A&P deals that we recently did or the fabulous Borders location that we just acquired, distressed retailer opportunities will be there, debt opportunities seem to be growing. And then if can do an OP unit deal here and there for great assets that we want to own long-term, we're thrilled with that.

Okay, that’s helpful. And then in terms of pruning the portfolio, the core portfolio, and selling assets. It seems like after the Ledgewood Mall, there were just a few properties left to shed. And I’m just wondering, you mentioned in your prepared remarks that you’re happy with the pricing in the market today. So I was wondering if there are additional sales after reviewing your portfolio that you’re contemplating today?

Yes, I think that any company, no matter how much they love their own real estate, should be very carefully looking at and prepared to sell, let's say 5%, whatever assets they think the market will reward their shareholders for shedding in most years. So obviously, if there is a financial crisis and there’s no good selling market, I think that it pays to have a strong balance sheet, so you don’t have to. But we’ll always look to shed one or 2 assets, and continue to upgrade our portfolio. I think you should expect to see that in 2012. But what I’ll point out is, we’re not talking about any material amount of dilution. We’re not talking about major shifts, we don’t have to. Over the course of the past 10 years, we probably sold over 50% of our portfolio, but I’d rather do it gradually and opportunistically, and I think that’s what you'll see.

Okay. And then just lastly, with regard to the mezzanine investment portfolio. First, I guess do you expect to make any additional investments? And then on the notes that are currently outstanding, what’s your view of what might be retired in 2012, or I guess what’s baked in the guidance?

Why don’t you deal with the guidance first?

Sure. In terms of guidance, so let’s take a step back. Our current balance in terms of mezzanine or notes receivable investments is about $33 million. There are notes maturing and new investments being made, mostly smaller investment, so there is a continual rotation throughout the year. That all being said, we think about the level in total, and $33 million might even go up a little bit over the next year or 2, and we could envision it growing to, say, $50 million. Wouldn’t want it to be much larger than that. Certainly nowhere near the level, recall back in 2010, we were up as much as $120 million in mezzanine investments. So we don’t foresee that. But certainly at this level we’re comfortable. And we'll continue to, no doubt, invest in some good opportunities here and there.

Your next question comes from the line of Sheila McGrath with KBW.

Yes. Ken, I was wondering if you could talk about Fund IV, the timing, the size, and will the fee structure be the same as Fund III? And also how far long you are on the fund raising process for that fund.

Sure. So what we have said, and what I hope to be case, and every indication we’ve had from the investor meetings is that the size should be about the same, the fee structure, our expectation, should be about the same, very closely. We’re comfortable with the balance of how Fund III is set up in terms of the preferred return hurdle, in terms of the fees, we think it’s fair and balanced for all parties involved. And so far the investor interest we have, and the dialogue, seem to be consistent with that. So that’s what I would assume. In terms of timing, I would pencil in towards the end of the second quarter, because that’s when our Fund III is likely to finish its primary investment period. And if things work well, and there's always caveat, but when things work well, you go from one fund then into the next, and that would be our expectation.

Okay. And Jon, there was a fair amount of promote income in fourth quarter, and you did give some guidance in 2012. I was just wondering if you could give us any visibility on first half of the year, second half of the year, should be back-end weighted?

In terms of overall earnings?

Contribution of the promote.

Promote, right?

Yes.

So I wouldn’t give it any specific weighting. It’s all, obviously, a function of the timing of these sales transactions in Fund I. And it’s difficult to pinpoint exactly which quarter that will occur in, but we're, like I said, confident that it will most likely be a 2012 event at some point.

Okay. And last question, Ken. Just on City Point, could you give us an update on your thoughts on the residential entitlement there? Is that something that you would consider monetizing via sale, or you get a good joint venture, what are your thoughts at this point?

The residential is fully entitled, fully conceived, there will be affordable housing component and a rental component in Phase 2. And then we will have on Phase 3, a effectively vacant land parcel. All of those will be sold off to, owned by and developed by very seasoned, accomplished residential development organizations, not by our organization. I may someday want to rent an apparent there, but that’s about as close as we will get to the residential component.

Your next question comes from the line of Cedrik Lachance with Green Street Advisors.

Ken, just looking back to Fund IV, when I look at your stock, you probably trade at -- in our numbers about 20% premium to NAV, which means that a public market can be a fairly cost effective partner from an equity perspective. So when you think about getting equity from the private side, what is the attraction at present?

And if we could fund everything perfectly, and if we agreed with you in terms of your estimates, et cetera, I suppose there are theoretically companies that have been able to grow pure play in the public, and having only one source of capital. I’ll tell you on the strip center sector side, that really hasn’t been as good a recipe, we think, as what we’ve been able to afford our shareholders, which is while we make our fair share of mistakes, that for the value add and opportunistic deals that tend to arise -- when we talked I mentioned briefly that our acquisition of Portland Manor -- they tend to arise when our stock is not only on a relative basis, not at a premium, but on an absolute basis maybe half of where it was a year or 2 before. So we announced, or agreed to acquire Portland Manor, our stock, Cedrik, was at $9 a share I think. Now, it wasn’t our fault, there was this minor Lehman Brothers problem, but the opportunities to be opportunistic and take on 0 cash flow yielding investments, whether they are Mervyn’s or Albertson’s or some of these others, to put up 20% of the equity for 40% of the profits while we still grow a high quality core portfolio, we like that lend, we think it works for our shareholders, we think it prevents us from having to join what is sometimes referred to as the pie eating contest and growth for growth sake. And finally, one of the problems in the pure public place is company tends to grow and not shed assets, they tend not to be disciplined sellers. Being in a fund business where your focus is buy something, fix it, stabilize it and then monetize it, not that you have to sell every quarter, we have a tremendous amount of flexibility as to when we want to monetize. But having that embedded discipline, we have found, creates shareholder value over time. Losing that discipline seems to hurt other companies. So it may not be the best model, we like it, we think it works, we think it works well for our shareholders.

Okay. And in terms of the geographic distribution of future acquisitions and when you we look at Baltimore, it’s not a core market of yours. And going forward, are there any new markets you’re looking to enter over the next year or 2, or is what you have right now, what you’re looking to grow into?

So, let’s -- and that’s a perfect example. And you’re right, Baltimore would not be where you would see our next core acquisition. So for the core acquisitions, I would expect them to remain in major gateway city markets, where we think that our retailers are going to want to be, and be able to pay us more rent over the next many years going forward. And that has to do with a wide variety of some of the secular issues of how we shop, as well as how the capital markets will view gateway cities as opposed to secondary cities. For the opportunistic side, we can be more flexible. And we just talked about our monetization of Kroger and Safeway. And I challenge you to find one of those properties that would be in market that we would consider core to our long-term strategy, yet we made a 20 IRR with very low leverage on that deal, over 2x on equity, because we can afford to be opportunistic. In the case of Baltimore, we took our time, but ShopRite said they wanted a location at that center. We were able to buy it, whereby putting in ShopRite, fixing up a few other things, we'll get to about an 8% yield. And we think that, upon stabilization in the next 12 to 24 months, that we will find enough good exit opportunities with those kind of transactions. So we can be more flexible as long as we think the returns are there, because we don’t expect to own those type of assets long term.

Okay. Those markets are likely to be on the East Coast, correct?

Yes. Yes. We’re happy to come visit you in California, but so far we have found that we’re most competitive and able to really move fastest in the key markets, Chicago and East.

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

I just wanted to follow-up on Craig’s question earlier. Jon, I just want to make sure that I understand the occupancy commencement timing. Is the entire 400 basis points of upside related to the re-tenanting, so there is no other leasing in there. And given that NOI timing that you talked about, does that imply that the bulk of the commencement will occur in Q4?

That’s all correct. There is some additional leasing uptick beyond the re-anchorings, but they constitute the majority of the occupancy increase for the year, yes.

Okay. And then how do you expect sort of expense recoveries to behave with the, as occupancy recovers?

So prime example, you look at these re-anchorings, I think it will correlate fairly tightly. So as we re-anchor these spaces, expense recoveries should follow suit.

All right. And then just on acquisitions, you mentioned in the core $100 million to $200 million in your 2012 guidance. I assume that’s above and beyond the $107 million that you already have under contract?

That’s correct. And again, it’s a midyear assumption in terms of time.

Have you put anything else under contract subsequent to year-end?

Nothing that we've announced or talked about.

Okay. And then, with that $107 million as you close on it, I think the bulk of this is expected to close this quarter. How much of the ATM would you expect to use on that stuff?

Virtually none, if any at all. So the equity component of that $107 million is about 50% of it or $50 million. As of year-end, we had $60 million of cash on hand and another $60 million under the lines available. So I don’t think we need the ATM for those.

Okay. But would you expect to use the bulk of the ATM this year, assuming that you find those core acquisition opportunities?

It’s all a function of what we find and what we close on. But presuming that we’re very successful, we could use a substantial portion of it.

And then in terms of cap rates, I’m sorry if I missed this. But can you just give us a sense for cap rates on the stuff that you closed last year and the stuff that you have in your contract right now, and sort of what you are assuming in terms of -- and that’s just sticking for the core, what you assume for acquisitions that you expect to close this year?

Yes. We’ve announced that the cap rates are in the 6.5 to 7 range in general. Cap rates for high-quality core continue to march down as borrowing spread tighten as there seems to be more confidence that, when the 10-year treasury hovers around 2% for a while. So the 6.5 to 7, if we were to try to replicate all those deals today, my guess is the market is probably closer to 6. We’re seeing deals that were not acquiring that are the high-quality assets where people are confident that their strong rental growth or stability, we’re seeing them trade in the low 5s, and we are selling assets into some of that. Now when you look at it on an absolute basis, 5 sounds very low, we’re probably not a player at that level. When we announced our Cambridge Whole Foods at 6, just to give an indication of where we might be interested and where we might not, but at a 6% cap over a -- looking at it just as relative to the 10-year treasury, 400 basis points spread seems to be well within the historic average. And until rates move, I would be surprised to see, unless there is some massive, another round of financial distress, I would be surprised to see spreads widening, and in fact I think you'll see them continue to compress. Our point of view in terms of core acquisition is we’re not smart enough to guess or game the debt markets, thus we keep the vast majority of our debt match-funded long-term fixed rate and we can borrow at 200 over -- almost anywhere on the yield curve. So you can kind of pencil into what the spreads would look like from that perspective. And as Jon has articulated, we probably match fund the equity as well. So cap rates, on an absolute basis, are feeling compressed and low. So we’ll continue to be careful.

Okay. And then just one quick following question. What’s the average interest rate on the $51.7 million of debt that you’re assuming?

It’s between 5% and 6%.

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

Ken, is the list of investors for Fund IV similar to Fund III, or have you got some new investors?

Both. I would expect, and I’m hopeful, that we’ll have a very high level of re-up, and then I think we’ll have a nice list of complementary investors. As you probably know, we primarily work with university endowments, foundations, private pension funds. I joke that it's all the universities that didn’t let me into college or law school, but it’s a great group of investors, very savvy, and we’ve been very pleased with their support over the years.

Okay. So you’re still in that process, I take it, of selecting or marketing to the investment community?

Yes. We intend to have a close towards the end of the second quarter.

Right, okay, good. And then looking at the guidance for a second, it sounds like you get to around $0.29, somewhere in that neighborhood, $0.30 a quarter by the end of the year, which is $1.15 to $1.20 run rate for annually. Is that kind of where we would be with the fund in there, and with the re-anchored, the re-tenanted anchors in there?

That’s exactly right.

Jon, I think Rich is trying to get you to give 2013 guidance.

I was doing exactly that. I was doing exactly that, Ken, I am looking for 2014, if I could…

Third and fourth quarters, those are good solid earnings numbers.

Okay, good, perfect. And then, when you guys think about RCP and think about some of the retailers out there that are struggling and others that could be struggling, is there any more opportunity in that kind of investment, you think, going forward?

Sure. So far what we’ve been doing, when A&P got into trouble we doubled down and bought a bunch more A&Ps, but so far we’ve doing them on one-off basis often where we specifically have a retailer saying, I’ll take this space. And it may continue to trend more towards selective assets than whole companies, though that may be a function just of the lack of LBO debt and other things. But it’s part of what we do, and it is a great way to create value when you can buy real estate from retailers because they are not generally in the real estate business.

Okay, okay, good. Yeah, got you. And then you guys have some maturing debt in the funds in 2012, including the line of credit, and then going into early ’13 as well. I mean, how does that look for refinancing, or how do you plan, I guess, to deal with some of these, they're not real near-term but there are some of them coming up here in the first half?

In terms of most of the debt, Richard, it will be refinanced. And we’re well along the road in doing that. In terms of the acquisition line, to the extent that we don’t renew that, then obviously that will be replaced with investor capital.

Right, that’s a good point. I got you. So is that mortgages from banks, insurance companies, that kind of thing, Jon, is that what’s available for these?

Yes. Yes.

There are no further questions in queue at this time. I would now like to hand the conference back over to Ken Bernstein for any closing remarks.

I’d like to thank everyone for taking the time to join us today. We look forward to speaking to all of you again soon.

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