Acadia Realty Trust (AKR) Q1 2013 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2013 Acadia Realty Trust Earnings Conference Call. As a reminder, this conference is being recorded. At this time, all audience lines have been placed on mute. We will conduct a question-and-answer session following the formal presentation. (Operator Instructions). I will now turn the call over to Amy Rancanello, Vice President of Capital Markets and Investments. Please proceed.

Good afternoon and thank you for joining us for the first quarter of 2013 Acadia Realty Trust earnings conference call. Participating in today’s call will be Kenneth Bernstein, President and Chief Executive Officer; and Jon Grisham, Chief Financial Officer. Before we begin, please be aware that statements made during the call that are not historical maybe deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934. And actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risk and uncertainties including those disclosed in the company’s most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call April 24, 2013 and the company undertakes no duty to update them. During this call management may refer to certain non-GAAP financial measures including funds from operations and net operating income. Please see Acadia’s earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. With that, I will now turn the call over to Ken Bernstein.

Thank you, Amy. Good morning. Thanks for joining us. Today I’ll start with a brief overview of some of the trends and key drivers that we’re seeing in our business, then Jon will review our operating metrics, our earnings as well as our forecast. In terms of the market in general, in the first quarter we saw a continuation of many of the trends that we’ve seen over the last year, in terms of the capital markets, cap rates and bond spreads continue to tighten. In the public markets, the majority of this activity appear to be in pursuit of the higher yielding investment opportunities whereas in the private market it appears as though we saw greater cap rate compression for the higher quality core assets especially those in the gateway markets. And while it maybe worse, noting these divergent trends from Acadia’s perspective, since we participate in a fairly broad range of investment themes through our dual platforms. We can remain fairly agnostic or opportunistic as to where and how we choose to allocate our resources. But irrespective of the enthusiasm perhaps, exuberance that we’re seeing in the capital markets what we can’t do is confused this momentum with the realties of our industries operating fundamentals, because in the long run its our tenants performance, its our tenant demand that really drives our business. And just because cap rates are declining doesn’t mean that rental demand is increasing. What we’re seeing is that, well the overall market is nicely improving, it’s primarily in our most dense suburban locations or even more so or a high-street and urban locations where there seems to be sufficient tenant sales growth and leasing demand to really drive the prospects for healthy long-term growth. So with that in mind, let’s look at each of…

Good morning. We’re pleased with first quarter results both in terms of our core portfolio performance and earnings. First an overview of the portfolio. Same store NOI; as we reported was up 10.9% for the quarter. And re-anchorings that we completed during 2012 drove about half of this positive result specifically at our Bloomfield and Branch Centers. The comparative impact from Bloomfield will diminish starting second quarter as the new anchors took occupancy in second quarter last year. Branch will continue to contribute to same store growth through the third quarter of this year. The remaining 5.6% NOI growth for the quarter was generated across the balance of the portfolio. The out performance above and beyond was driven by a combination of factors including a better credit loss experience and higher CAM recovery in 2013 and that of an increase in winter-related expenses relative to 2012. Occupancy as expected was down first quarter versus year-end from 94.2% to 93.6%. It’s worth nothing that the 60 basis points of decrease represents only about 26,000 square feet and the decrease is in large part from two former Fashion Bug stores in our portfolio that were closed following and seen acquisition of Charming Shoppes. We are in the final lease negotiations at one of these locations at a new rent over double that of the former and continue to REIT, work on releasing the second. Our third former Fashion Bug store was REIT and it did prior to quarter end at a 50% increase in rent and thus had no impact on quarter-to-quarter occupancy. So while these are clearly very positive spreads these locations are predominantly single-digit rents so that the earnings impact doesn’t quite as dramatic. Our renewed 2013 portfolio occupancy guidance anticipated a short-term occupancy decline of a 100 basis points…

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

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

Sure. First of all yes we do expect to meet our goals so lets put that aside for a second. Cap rates are compressing and as a buyer we’d rather cap rates not compress but in terms of existing inventory it makes us feel pretty good but so our borrowing cost and while we’re not a heavy user of debt it does make a difference as well and we are very careful about making sure for our core acquisitions that we are match funding and that we are achieving a positive spread and even with the compressing cap rates, we are able to do that. Now, we are not alone. There is a lot of people out there, who have either very aggressive cost of capital or are willing to be more aggressive than us. So, we need to recognize that there is always plenty of competition that’s been the case almost forever thankfully our acquisition goals in terms of absolute dollars as you just pointed out are relatively modest. We can pick our spots. The markets we know, we know well and we know how to execute well in them. So, yes things are expensive but if we can lock in long-term borrowing rates accordingly we’re not going to lever up to do these acquisitions so we’ll match fund and we can do that responsibly and profitably.

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

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

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

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

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

Okay, great. Thank you.

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

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

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

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

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

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

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

Okay thank you and my apologies to the leasing team.

They forgive you.

Bye.

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

Hi, good morning guys.

Good morning.

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

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

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

Sure. And let me take it backwards. In general and this is a broad base because Jon talked about Fashion Bug as a example of our less infill assets where there is a lease spread due to a tenant failing and etcetera or the financial crisis where there is an uplift in some of the suburban but on a stabilized basis when your tenants are healthy in a suburban center versus in a street sector contractually when you add up your anchors plus our shop growth versus in street-retail is about a 100 basis points advantage. That we are seeing in our street-retail portfolio. Now that’s in a theoretical all things equal marketplace which is never the case but what we’ve seen on top of that is put the contractual aside we’ll have market rents grown and we’ll have softened and again in similarly we’ve seen greater market rent growth sometimes substantially some in the key urban and street markets. So you could see rents reported in so how up 50% or 100% whereas in our more traditional suburban locations and we are happy when rents held or we’re up to a 3% over a five year period. So it’s that combination of contractual growth and the support for when you get the space back market rent increases and that continue to make us more positive about the long-term growth portfolio for those locations. Now this is not a secret and thus we are seeing that in terms of cap rates and this was my point. What we are seeing amongst the buying community in terms of buying the real estate and whether we are talking about our peers in the public markets or private REITs or sovereign wealth or high network individuals those who are buying assets is they…

Hey Ken it’s Ross Nussbaum.

Hi, Ross.

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

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

I appreciate it. Thanks.

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

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

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

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

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

Okay.

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

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

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

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

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

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

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

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

Yeah, and it runs the gamut and we’ve been pleasantly surprised as we acquire more of these, they are different somewhat interesting provision. So we have leases that go beyond pegging to CPI just mark-to-market every five years option to renew F market. I assure you that none of our supermarket leases have that provision as they go on for the next 30, 50, 60 years with fixed non-CPI options. So that’s one way we can get there. There are others that have rental contractual bumps every year, 3% a year that works too. And then any combination in between so it maybe that it bumps every five years that straight-line out to the 3%. But let’s not fall in love with contractual growth because I could show you a lot of shopping centers we own that had great contractual growth and didn’t live up to it. What we need to make sure is that there is good contractual growth and then backstopping it is a market demand based on the tenant sales that we are talking about, the profitability and then just a fragmented and favorable landlord tenant supply demand ratio that makes locations like North Michigan Avenue or like Lincoln Road in Miami wherein general anytime a tenant calls us and says I’m thinking of leaving. That’s a good news call for us and we had Geox who is a great brand. They were not achieving their goals on Lincoln Road and they said we’d like to leave and we took this space back putting our money and rents increased I think 30%. So you need the ability not just have the contractual growth though we like it, not just to have the CPI or mark-to-market really good but also the demand overall so that if you get that phone call it’s a good news call not a bad news call.

Right. Thank you.

Sure.

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

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

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

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

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

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

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

Okay. Great that was it. Thanks.

Sure.

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

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