By Lynn Novelli

Quickness and agility, good qualities to have in a football player, are just as important in a REIT, according to Kenneth Bernstein, the president and chief executive officer of Acadia Realty Trust (NYSE: AKR). Established in 1998 as an UPREIT, the White Plains, N.Y.-based company specializes in the acquisition, redevelopment and operation of shopping centers anchored by grocery and value-oriented retail.

With a total market capitalization of $850 million, Bernstein feels Acadia is the right size to respond rapidly to changing market conditions. "We have chosen to remain relatively small, which means that we can quickly push the needle that much more and maintain a very healthy balance sheet while supercharging shareholder returns," he explains.

Acadia's portfolio includes 62 properties comprising 9 million square feet, sprawled out in a footprint that extends from New England down to South Carolina and west to Indiana, Michigan and Ohio.

A Position of Strength

In recent years, Acadia has fine tuned its portfolio by selling off assets that were underperforming or not aligned with its long-term growth plans. As a result, the company has "a solid portfolio with good cash flow," Bernstein says. Third quarter 2005 results bear him out: Funds from operations were up 7 cents per share, same store net operating income was up 5.1 percent, and earnings per share doubled compared with third quarter 2004.

Bernstein, 43, quarterbacks a senior management team of executives ranging in age from 40 to 60, a collection of experts that he considers one of the company's greatest assets.

"The management team is focused on creating long-term value, is energized by what we are doing and has significant experience in the sector," he says. Although he is on the younger end of the age spread, Bernstein himself has some 20 years of industry experience under his belt.

With the company's emphasis on long-term shareholder value, Acadia's management team is focused on maintaining a healthy balance sheet at all times. This includes a low debt to total market capitalization ratio, supported by a high percentage of fixed-rent tenants and low, fixed-rate, long-term debt. As a result, Acadia's total blended cost of debt is just 5.7 percent.

Game Plan for Growth

"Our strategy for building shareholder value is to use our value-added skills in focused areas," Bernstein says. "We have the right capital structure to do this, including a high quality core portfolio with solid cash flow and a safe and solid balance sheet." Add to these the cash derived from sales of non-core assets and Acadia's large base of institutional investors willing to provide highly accretive, discretionary capital for acquisitions, and the company is positioned to grow, Bernstein adds.

For most of its history, Acadia has been in the hunt for ex-urban shopping center properties for acquisition, development or redevelopment. However, in 2004 the company became disillusioned by what Bernstein terms "price inflation" in this arena, and as a result the management team rolled out two new growth initiatives.

Acadia does not plan to stray from its core shopping center business, but it is approaching the sector in a whole new way, Bernstein explains. "Our strategy is to focus on our urban infill program and retail controlled property ventures," he says. "We believe these areas will continue to bear fruit and provide attractive returns to shareholders."

Urban infill involves bringing national retailers into targeted urban markets for investment and redevelopment, frequently in areas they have been reluctant to penetrate such as the Bronx, Queens and Brooklyn, New York. These areas are characterized by high population density and a dearth of retail but also have significant barriers to entry.

Acadia is looking for properties that meet these criteria with the potential for at least a 10 percent yield. Once acquired, these properties will be renovated, repurposed, or demolished and reconstructed.

Ultimately, the retail mix in these urban infill projects will resemble what is found in typical suburban shopping centers, reflecting consumer demand. In fact, Bernstein says, "There is a huge demand in urban markets for big-box retailers and others that typically are found in ex-urban centers."

Acadia launched its urban infill strategy in 2004, purchasing four assets in New York City. With two additions to the NYC portfolio in the third quarter of 2005, Acadia now has six projects under way in the city's boroughs. Bernstein anticipates total redevelopment costs for the six projects to be $200 million to $275 million over the next 12 to 36 months with an expected return of greater than 10 percent over cost.

Encouraged by the positive reception in New York City, Acadia is expanding the urban infill strategy to other selected markets. In September 2005, the company entered into an agreement to acquire a 20,000-square-foot retail building in Chicago's Lincoln Park district. The $9.75 million deal is expected to close in the first quarter of 2006.

The second growth strategy in Acadia's playbook is its retailer controlled property (RCP) ventures. Acadia plans to purchase undervalued properties that are owned by retailers with the goal of repositioning them with new tenants or new development or selling them to other users.

"In many instances, a retailer has a division that has not received the attention it deserves," Bernstein says. "We can go in with other investors and acquire such a division and turn it around. It is a different way to unlock value in the retail arena."

For example, Acadia recently was part of an investment consortium that acquired 265 Mervyn's stores from Target, a deal that involved 22 million square feet of retail space for a price tag of $1.2 billion. The sale was completed in August 2004, and less than a year later the consortium sold 25 percent of the property for $600 million, recouping half of the purchase price.

In 2004, Acadia launched the Acadia Strategic Opportunity Fund II with $300 million of discretionary equity to fund the urban infill and RCP ventures. About one-third of the fund's capital is earmarked for redevelopment projects.

Staying in Shape

In addition to its growth strategies, Acadia's management team never overlooks the necessity of staying tuned to the whims of consumers.

"There is good reason to be cautious of the shopping center sector," Bernstein says. "We must stay on our toes for changes in consumer spending habits over the next few years that could affect us."

Although Acadia has experienced gains in occupancy and tenant performance over the past two years, nothing is forever, he cautions. "Because of the size of our company, we are always more impacted by events. Just as it's easier for us to move the needle in a positive direction, it's also easier for it to go the other way."

Whatever direction the economy turns in the near-term future, Acadia is in good shape to be nimble and flexible, Bernstein says. "We do think there may be further volatility in the REIT market," he says. "We anticipate superior results during good times and, as volatility increases, we have the capital to look for more opportunities."