Bottom of the Barrel: Acadia Builds on Stable Growth

If you're a small-cap real estate investor, you may want to take a second look at Acadia Realty (AKR Quote).

When I first featured Acadia in June 2002, the stock was trading around $7 per share. Today it's near $10, as the company executes on its stable, slow-growth strategy. Although it's closer to fair value now than it was then, it still holds potential for patient, income-oriented investors.

Building on a Good Base

Acadia is a small-cap real estate investment trust that owns slightly more than 60 properties, primarily in the Northeast, and that focuses on community centers. Typically, a community center is anchored by a grocery store or discount department store, which serves as a conduit for traffic to other stores in the center. Acadia's centers are well-positioned in areas where there's little adjacent land to build competing centers.

The company has a solid base of grocery-store tenants as well as major retailers such as Wal-Mart (WMT Quote), Home Depot (HD Quote) and J.C. Penney (JCP Quote). Although Acadia does have some exposure to Kmart (KMRT Quote) stores, they appear relatively safe from closure because locations, rents and productivity are all well within Kmart's current strategy.

In recent quarters, Acadia has suffered from the vacancy of four former Ames stores. However, on a conference call earlier this week, Acadia indicated that two of those locations have been leased, with the balance likely to be re-leased in the next 12 to 18 months. In fact, the company has done an exceptional job in the past several years at upgrading the tenants in its portfolio.

Acadia The stock rises steadily

"Acadia continues to create value for shareholders through active redevelopment and re-leasing of grocery- and value-retail-anchored centers," said Paul Adornato, REIT analyst at Mercury Partners, after the company's second-quarter conference call. "The company has disposed or redeveloped over half of its predecessor portfolio." He also added, "Acadia has a long history of creating value by 'recycling' troubled anchors at its properties." Adornato rates the stock a buy, and his firm has not provided investment advisory services to Acadia in the past three years.