Bottom of the Barrel: Acadia Builds on Stable Growth

This community-center REIT may make a good play for income-oriented investors.
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If you're a small-cap real estate investor, you may want to take a second look at Acadia Realty (AKR) - Get Report.

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


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Home Depot

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J.C. Penney

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. Although Acadia does have some exposure to



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.

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.

That "upgrading" has resulted in a significant increase in property values for Acadia. Analysts estimate Acadia's net asset value -- the value of the company's real estate assets -- at between $10 and $12 per share. "

Internal growth from additional lease-up and redevelopment activity should continue to create shareholder value for the foreseeable future," Adornato told clients this week.

Real Balance Sheet

Acadia also boasts good financials: a debt level of just above 40%, based on total market capitalization; $34 million in cash on hand; and a bank line of $45 million. Those data points suggest this REIT isn't only a good steward of capital but also quite flexible if acquisition opportunities arise. In addition, the company continues to reduce exposure to floating-rate debt with relatively low-rate fixed-rate paper. That should add to Acadia's bottom line over time.

Acadia's performance has enabled the company to increase its dividend each of the past two years, most recently boosting the payout over 11% in April. With its price near $10, the stock still yields a safe 5.8%, with a payout ratio of just over 60%.

Even with solid financials and a good management team, Acadia shares continue to trade at a discount to its community-center peers. On a funds-from-operations basis, Acadia trades at about 10.2 times 2003 estimates, roughly a 12% discount to the average community-center REIT. With a net asset value somewhere above $10 per share, Acadia trades slightly below its property value, compared to an average 15% to 20% premium among its peers. Part of the discount is the result of Acadia's small size and lack of public stock float. However, that spread should continue to narrow as Acadia grows and proves its ability to perform with a focused portfolio.

With a bit of an economic recovery and an accretive acquisition here or there, I think Acadia could earn 95 cents a share this year and $1 in 2004. That should help push the stock price higher over the coming year. In the meantime, you get nearly 6% while you wait.

That's not a bad dividend for owning a well-managed, low-risk REIT. Acadia remains relatively small and unnoticed, but I think it continues to be a good fit in a diversified real estate portfolio.

Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.