By Lorna Pappas

Kenneth Bernstein became president and CEO of Acadia Realty Trust (NYSE: AKR) in 2000, a time viewed by many investors as unfavorable for REITs. Bernstein, who has been with the firm since its inception in 1990 and believed fiercely in its future, moved forward with an aggressive strategy. The plan included a series of alternative acquisition funds that helped transform Acadia's stock from below $6 per share in 2000 to a $26.70 high in the third quarter of 2006.

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AGE: 45 EDUCATION: B.A. from University of Vermont; J.D. from Boston University School of Law CAREER BACKGROUND: Served as COO of RD Capital, Inc. from 1990 until the creation of Acadia Realty Trust through the merger of RD Capital with Mark Centers Trust in 1998. Prior to joining RD Capital, Bernstein was an associate with the New York law firm of Battle Fowler, LLP. FAMILY: Wife and two children HOBBIES: Sailing, windsurfing and skiing. FAVORITE VACATION SPOT: "Anywhere I can sail with my family." COMMUNITY/PROFESSIONAL ACTIVITIES: Bernstein is an active member of the International Council of Shopping Centers (ICSC), National Association of Real Estate Investment Trusts (NAREIT), Urban Land Institute (ULI), and The Real Estate Roundtable. He is also a member of the Young President's Organization (YPO), where he is chairman of the Real Estate Network. In addition, Bernstein is a member of the Board of Trustees of BRT Realty Trust (NYSE: BRT).

In his seven years as CEO, Bernstein, an avid sailor in his spare time, has successfully navigated Acadia Realty Trust through changing conditions. Today, the company is firmly anchored in its core management strength: the acquisition, ownership and redevelopment of high barrier-to-entry neighborhood and community shopping centers located primarily in the Northeast corridor between Delaware and Boston. The company owns and operates 85 properties, totaling more than 10 million square feet, and continues to pursue projects in dense, urban areas where tenant demand has greatly surpassed the supply of available sites.

Portfolio stepped aboard to ask Bernstein about his tenure with Acadia Realty Trust.

Portfolio: Acadia is distinct among publicly traded shopping center REITs because of its concentration in the Northeast corridor, with more than 80 percent of base rents coming from this area. Tell us about this strategy.

Bernstein: Shareholders are better served by investments in and developments of retail properties in urban, high barrier-to-entry markets. Our roots and most of our assets are in the Northeast, and we will continue to focus our efforts in this area.

We firmly believe that one of the most important determinants of the success of a retail property is barrier to entry, because it tends to prevent over-retailing and helps drive rental growth. For example, while there are 20 square feet of gross leasable area (GLA) per person in the United States, that ratio is more like 5-to-1 in the boroughs of New York City. That's a significant difference. This ratio enables us to continue to drive rental growth in this area, which we could not do as successfully in less populated, lower barrier-to-entry markets.

While much of our current activity takes place in New York City, we also are acquiring assets in downtown Chicago and in Chestnut Hill, an upscale neighborhood on the outskirts of Philadelphia. We are also looking at several other cities around the country that have similar supply-constrained dynamics.

Portfolio: What attracts you to the shopping center segment?

Bernstein: I've always enjoyed the different dynamics of retailing and the elements that drive one retailer to succeed where others have failed. Coupling this interest with the significant redevelopment opportunities in the retail arena, the shopping center niche has been a truly exciting branch of the real estate landscape.

Portfolio: What was one of the more serious challenges for your segment over the last decade?

Bernstein: Six years ago, the retail shopping center space faced a combination of challenges, including a lack of interest in REITs in favor of technology and dot-com companies. Separately, with the broad series of anchor tenant bankruptcies, there was concern about the "disintermediation" of traditional retail shopping in favor of online shopping. This combination of events led many people to conclude that the worst place to put their money would be in a small cap shopping center REIT. As a result, when I took over as CEO of Acadia in 2000, our stock was trading below $6 per share.

Portfolio: How did you overcome those circumstances and turn things around?

Bernstein: First, by disposing of non-core and under-performing properties, then redeveloping, repositioning and re-anchoring others to create a stronger portfolio of core assets.

We set up an investment fund structure in which we were not beholden to the public capital markets as our sole source of growth capital. In 2001, we launched AKR Fund I to fuel our external growth, acquiring interests in more than $300 million of real estate. In 2004, we launched AKR Fund II and are in the process of purchasing $1 billion of real estate. In addition to New York urban infill activities, Fund II includes our Retailer Controlled Property (RCP) Venture, which is more national in scale. Along with our RCP partners Lubert-Adler and the Klaff Organization, we are part of a consortium buying high quality real estate direct from retailers. For example, the RCP Venture acquired Mervyns from Target Corporation in 2004, purchased Albertsons earlier this year, and made other, smaller investments.

Acadia is focusing on AKR Fund III in 2007. As we continue to acquire, redevelop and prune our assets, we have overcome the concerns that existed back in 2000.

Portfolio: Could you talk about Acadia's development projects?

Bernstein: Currently, we have seven projects in our New York redevelopment pipeline, with a total cost of approximately $350 million. One of the most intriguing New York infill developments is Fordham Road, the number one retail corridor in the Bronx. We purchased a Sears building, and when the lease expires in 2007 we will redevelop it with multiple, well-known and successful tenants.

Elsewhere, the projects most exciting to us are taking place within the RCP Venture, such as the Mervyns purchase in 2004. With this acquisition, we have successfully retenanted the regions from which Mervyns originally pulled out. We have retained and are participating in the very successful rejuvenation of Mervyns in its core markets on the West Coast, giving us some interesting exposure in a new region with a profitable retailer and some very valuable real estate.

Portfolio: You continue to build your external growth platform, primarily through urban redevelopment and the RCP Venture. Why do you consider this a solid approach, and where do you hope it will take you over the next few years?

Bernstein: Over the next several years we will be prepared for two eventualities: first, the potential reduction in consumer spending, and second, the continued separation of high quality retail from the lesser B or C quality assets.

Right now it is very hard for people to distinguish between a B-plus and C-plus asset because the occupancies appear to be the same, as do the tenant rosters. Only if you drill into demographic trends, sales per square foot and barriers-to-entry can you begin to see the potential differentiation. I want to assure that, as these differentiations become more evident, the properties that we own or are redeveloping are higher quality, high barriers-to-entry urban assets and not the ones more likely to succumb to revenue and value shortfalls in a softening market. Our urban infill program clearly capitalizes on this thesis.

In the RCP Venture, the assets vary more significantly in terms of quality because we are buying on a national basis into some markets that we love and others that we don't. Thus, for the weaker markets, we need to ensure that we are disciplined with respect to our capital structure and exit strategies so that the assets we end up owning for a longer term are in the high barrier-to-entry markets.

Portfolio: Acadia has some of the most conservative dividend payout and debt-service ratios in the sector. How has this served you?

Bernstein: We think that maintaining financial flexibility and having dry powder benefits our shareholders in the long run. The best opportunities for a company of our size arise when the capital markets are in disarray. We need to make sure that in the event of a dislocation in the capital markets, we are on the winning side for our stakeholders.

At this point in the cycle, there is no such thing as a distressed seller, so we need to be disciplined about what growth opportunities we pursue. I suspect that over the next several years, opportunities in addition to our current value-add programs will present themselves, and hopefully, we will be in a position to capitalize on them. These prospects could include other public companies, but more likely will be outside of the usual cast of merger and acquisition suspects.