Acadia Realty Trust (AKR)

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Acadia Realty Trust (AKR)

Q1 2008 Earnings Call

April 30, 2008 12:00 pm ET


Debra Miley – Director of Marketing and Communications

Kenneth F. Bernstein – President and Chief Executive Officer

Jon Grisham – Chief Accounting Officer

Michael Nelsen Sr. – Chief Financial Officer


Amika Goel – Citigroup

Michael Bilerman - Citigroup

Christy McElroy – Bank of America

Paul Adornato – BMO Capital Markets

Michael Mueller – JPMorgan

Rich Moore – RBC Capital Markets



Welcome to today’s call. (Operator instructions) I would like to turn the conference over to your initial host for today’s event, Debra Miley, Director of Marketing and Communications.

Debra Miley

Welcome to Acadia’s First Quarter 2008 Earnings Conference Call. Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties which are disclosed in our 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 we undertake 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 hosted on its website for a reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Please note that the FFO numbers for calendar year 2007 have been adjusted as set forth in the reconciliation.

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.

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

Kenneth F. Bernstein

Before we discuss our quarterly results, I’d like to comment briefly on where we see the current market environment and how we have been positioning Acadia accordingly. The most significant factors that are currently impacting our industry are, first, the credit crisis in the capital markets both in its direct impact on real estate debt financing as well as the indirect impact of the credit prices on real estate both in terms of transactional volume and in values.

Second component is the slowing down of the economy and its impact on retail tenants and profits. First, with respect to the capital markets, the credit crisis has made it much more difficult to finance all kinds of real estate especially accessing the type of debt that was until recently provided through the securitization markets and Wall Street. That included large loans over say $100 million in size as well as high leverage transactions.

But notwithstanding this debt crisis, there is debt available outside of the securitization markets from balance sheet lenders, and Mike will discuss this further on our call, but in short, sponsorship matters, the leverage is at lower levels, spreads are somewhat wider, supply is somewhat fragile, and in all instances, lenders can now be very selective as to who they lend to and the quality of assets that they lend on.

So what we’re seeing so far and we expect to see continuing going forward is first, a de-leveraging of the economy including real estate capital structures as borrowers are beginning to recognize and lenders are demanding that more equity is needed for all projects, especially those that are harder to finance. And second, we expect to see a further differentiation between higher-quality assets that are currently generally financeable and so far generally holding onto their 2007 values as opposed to secondary or more commodity type properties that seem to be having more difficulty obtaining financing and pricing seems to have declined more significantly.

While transactional volume is down significantly, cap rates for quality retail projects in higher barrier to entry markets have moved perhaps 25 basis points, may be 50 basis points off of their highs. Based on two sale transactions that we’re currently involved with, we still see quality stabilized properties in the Metro New York suburban area trading at low 6-cap range and in the mid Atlantic region in the 6.5 cap range. In short, patient sellers are still able to achieve strong pricing for high quality financeable assets.

In terms of the economy, while we have not yet seen the impact of the weakening economy either with respect to our core portfolio or redevelopment, if the economy continues to weaken, our experience is that it must have some impact on our tenants, which then leads to impact on the real estate.

However, the impact is generally not evenly spread out and depends on the quality as well as the location of the properties. While we are seeing some tenants putting on hold new stores, they seem to be more often in projects that were dependent on new housing growth or were in secondary markets, and in general, tenants still want the infill locations like those that we either currently own or in the process of developing.

So, as now is the case in the debt markets from a tendency perspective, we will also expect even more differentiation than in the past few years between high quality, high barrier to entry location, versus secondary properties. So in light of the capital markets issues and the slowing down in the economy, here’s what we’ve been doing and we’ll continue to do with respect to these events.

First of all, if debt crisis was not created overnight, the signs began over a year ago with clear breakdown in the securitization markets by last summer, and in response first of all with respect to our core portfolio, we sold off higher risk assets where we thought that an economic slow-down or further capital market correction might more significantly impact those assets and we rotated into higher quality assets. In the first quarter of this year for example, we continued this process by entering into an agreement to sell one of our few remaining non-core assets as well as then rotating into another Manhattan retail property.

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