Bottom of the Barrel: Shopping for Yield at Acadia Realty

Searching for small-cap yield? You may find what you're looking for at Acadia Realty (AKR Quote).

Based in Port Washington, N.Y., this underfollowed real estate investment trust owns 35 community-center properties, totaling about 7 million square feet, primarily in the Northeast. These centers are often found in locations where new competition can't easily set up shop next door, and they're focused on anchors of necessity, or stores that customers regularly visit for essential household consumable items, typically grocery stores or discount retailers.

Repositioned

In April, Acadia announced it completed the sale of 17 properties -- representing about 25% of its leasable square feet, but only 4% of the company's net asset value. That marked the completion of a three-year turnaround program, allowing Acadia to refocus on its core Northeastern markets.

The portfolio realignment also reduced Acadia's exposure to troubled retailers, especially Kmart (KM Quote) and Ames. After the sales, the company holds four Ames leases and seven Kmart leases, all of which Acadia says are at or below current market rents in good locations. As a result of the repositioning and sales, Ames dropped from the second-largest tenant in Acadia's portfolio to seventh.

At a Glance Acadia Realty Trust (AKR:NYSE)
Current Price	$6.81
52-week Range	$7.59-$5.80
Price-to-Earnings Ratio*	7.92
Market Cap	$193.6 million
Avg. Daily Volume	15,454
Inst. Ownership	41%
Dividend Yield	7.64%
Beta	0.18
Company Web site	www.acadiarealty.com
*Based on 2002 estimated funds from operations Source: Market Guide, First Call, company reports, TSC research

None of the remaining Kmart stores in the Acadia portfolio is scheduled to close its doors. However, Kmart made up 11.6% of Acadia's total leasable space and 6.7% of total base rents at the end of 2001. Although those numbers have declined as a result of asset sales, Kmart remains a significant tenant. Continued economic sluggishness would make Kmart's space hard to re-lease, and also would pressure both occupancy and rents.

Other major tenants in the Acadia portfolio at the end of 2001 included TJX (TJX Quote), which has seven stores and contributes 3.5% of total base rents, and Wal-Mart (WMT Quote), which has three locations and contributes 3.4% of base rents.

Occupancy has declined slightly in the past year, down to 89.4% at the end of the first quarter vs. 91.6% a year ago. However, the repositioning program, scheduled rent increases and cost savings pushed same-property net operating income up 2.2% year over year in the first quarter. Acadia is also in the process of redeveloping two centers with large grocery anchors that should help boost operating income in the coming months.

However, grocery-anchored community centers could feel pressure from Wal-Mart's ever-expanding presence in the grocery business, and Acadia could feel the same pinch. Acadia's properties, to its benefit, are often in in-fill locations -- meaning no land in the immediate vicinity is available to build competing centers -- so they're largely insulated from direct Wal-Mart SuperCenter competition, unless WalMart chooses to occupy space in an existing Acadia center.

An Ivy League Partnership

Acadia should easily post funds from operations, a REIT's measure of earnings, of 87 cents share this year and 89 cents next year. Those numbers are likely conservative. In fact, a recent joint venture with Yale University, its largest institutional shareholder, may help Acadia push up to $1 a share in funds from operations in 2003.

Yale owns 34% of Acadia's outstanding shares, after buying an additional 2.3 million shares in February. It's teamed up with three other institutional investors to form a joint venture with Acadia to acquire and develop $300 million in retail real estate. Under the plan, Acadia would collect fees for its role in developing and managing the property, which one fund manager said could add 5 to 10 cents to per-share profit over the next several years.

"Since all of these investors are currently significant shareholders in Acadia, this venture represents a highly beneficial alignment of interests and economic incentives for all our shareholders," wrote Acadia President and CEO Kenneth Bernstein in the latest annual report.

Acadia's financial ratios look solid for a retail REIT. Even after boosting its dividend by 8%, the company is paying only out about 55% of FFO and only about 65% of funds available for distribution, or FAD, which measures cash flow after interest payments and preferred dividends.

That suggests not only that the dividend is safe, but also that the current 52-cent dividend is likely to be raised in the coming year. In addition, Acadia is about 55% leveraged, in line with its shopping-center peers, and it has plenty of credit available on its revolving credit line, about $61 million.

Shopping for Value Acadia posts solid results
Year	Revenue (in millions)	Fund from Operations Per Share
2000	$96.8	$0.84
2001	85.5	0.86
2002*	86.1	0.87
2003*	90.4	0.89
* Estimates Source: First Call, SunTrust Robinson Humphrey, Company Reports, TSC Research

Nevertheless, the company's small-cap nature means that trading is choppy and volatile. The stock price is subject to significant swings based on news.

Acadia seems well positioned, however, to deal with its challenges, and has smartly positioned its portfolio for stable growth as the economy recovers. The upside potential from the Yale development joint venture is a smart extension of Acadia's core competencies, and by engaging smart partners that are also large shareholders, the deal aligns shareholder interests with management's.

In addition, Acadia's disclosure to shareholders is exceptional for a small-cap REIT. In fact, the National Association of Real Estate Investment Trusts awarded Acadia its top award for its Management Discussion and Analysis in its 2001 annual report.

Overall, I like this small-cap shopping center company. Solid management, smart portfolio positioning and a solid balance sheet combined with a 7.6% yield make this a nice addition to the Bottom of the Barrel income portfolio. I give Acadia three barrels. (For an explanation of our barrel rating system, see our description.)

Barrelology

I've been on the road this week, so there's not a lot of flavor to the performance chart below, except to say that the small-caps have followed the broader market in the past week, and that means lower prices. I do think the reaction in both Endocare (ENDO Quote) and NetBank (NTBK Quote) create good trading opportunities when the market regains its footing.

Leaky Barrel? Small-caps stumble like broader market
Current Rating	Company/Ticker	Date of Mention	June 3 Price	Mention Price*	% Change From Mention	% Change Last Week
Above Average Outlook
	Fidelity National (LION:Nasdaq)	May 8, 2002	$10.63	$10.58	0.47%	0.57%
	Endocare (ENDO:Nasdq)	Jan. 23, 2002	13.48	18.21	-25.97	-14.47
	SurModics (SRDX:Nasdaq)	Dec. 19, 2001	32.51	34.60	-6.04	-5.02
	FPIC Insurance (FPIC:Nasdaq)	Nov. 14, 2001	14.89	12.83	16.06	0.95
Average Outlook
	Champps Entertainment (CMPP: Nasdaq)	May 29, 2002	$12.92	$13.01	-0.69%	0.78%
	Wilsons Leather (WLSN:Nasdaq)	May 22, 2002	14.50	14.96	-3.07	-4.61
	Trico Marine (TMAR:Nasdaq)	May 1, 2002	7.66	8.25	-7.15	-6.70
	Arch Chemicals (ARJ:NYSE)	April 24, 2002	22.80	22.52	1.24	0.44
	Hines Horticulture (HORT:Nasdaq)	April 17, 2001	4.40	4.75	-7.37	-3.30
	UCBH Holdings (UCBH:Nasdaq)	March 27,2002	38.41	35.65	7.74	-3.71
	Cost Plus World Markets (CPWM:Nasdaq)	March 6, 2002	31.65	25.83	22.53	-2.74
	Rare Hospitality (RARE:Nasdaq)	Feb. 20, 2002	27.14	25.72	5.52	-3.00
	VitalWorks (VWKS:Nasdaq)	Nov. 21, 2001	8.70	4.30	102.33	0.58
	NetBank (NTBK:Nasdaq)	Feb. 6, 2002	12.42	13.45	-7.66	-17.20
	Coastal Bancorp (CBSA:Nasdaq)	Dec. 12, 2001	30.96	27.84	11.21	0.00
	Coinstar (CSTR:Nasdaq)	Nov. 7, 2001	28.18	19.96	41.18	0.64
	Witness Systems (WITS:Nasdaq)	Oct. 31, 2001	5.90	8.06	-26.80	-6.35
	Hibbett Sports (HIBB:Nasdaq)**	Oct. 24, 2001	26.60	20.04	32.73	-4.11
	Quixote (QUIX:Nasdaq)	Oct. 3, 2001	17.35	21.44	-19.08	-7.57
Below Average Outlook
	Actrade (ACRT:NYSE)	Jan. 30, 2002	$15.47	$20.65	-25.08%	-15.46%
	Goody's Family Clothing (GDYS:Nasdaq)	Nov. 28, 2001	10.22	4.50	127.11	2.20
	Bridgford Foods (BRID:Nasdaq)	Oct. 10, 2001	15.00	13.18	13.81	3.45
	Quanta Systems (PWR:NYSE)	Jan. 9, 2002	11.66	16.05	-27.35	-13.63
Bottom of the Barrel Income Portfolio
	Capital Automotive REIT (CARS:Nasdaq)	April 3, 2002	$24.00	$22.95	4.58%	2.13%
	Laclede Group (LG:NYSE)	March 20, 2002	24.00	23.64	1.52	2.35
	Alexandria Real Estate (ARE:NYSE)	Feb. 13, 2002	46.51	40.25	15.55	3.01
	Empire District Electric (EDE:NYSE)	Jan. 16, 2002	19.90	21.23	-6.26	-3.49
	Met-Pro (MPR:NYSE)	Oct. 17, 2001	14.98	11.16	34.23	0.54
	Integra Bancorp (IBNK:Nasdaq)	Jan. 2, 2002	22.43	20.75	8.10	0.99
Bottom of the Barrel Special Situation Portfolio
	Luby's (LUB:NYSE)	Feb. 27, 2002	$6.70	$6.22	7.72%	0.00%
*Average price on date of mention. **Prices adjusted for 3:2 split on Feb. 20, 2002 Source: Thomson Financial/First Call, TSC Research