There's nothing inherently wrong with Acadia Realty Trust (AKR 1.42%) or its general business model. In fact, some investors might actually like the opportunistic way it runs its portfolio. However, if you're like me and prefer simple investments, you might want to avoid it, just like I plan to. Here's what you need to know to decide if Acadia Realty is right for you -- or not.
Retail with a twist
At its core, Acadia Realty is a real estate investment trust (REIT) that owns retail properties. It's really not all that complicated a business to understand: Try to own well-located properties in areas with high consumer demand and enough wealth that retailers want to be there.
To that end, Acadia Realty owns some pretty great properties, with outdoor shopping centers located across the country in and around some of the most important regions, like New York City, Chicago, Los Angeles, San Francisco, and Boston, among others.
Image source: Getty Images.
So far, so good. But when you actually dig into the property list for Acadia, you'll note that it owns retail properties within all of the cities noted above as well, which the company calls "street-level" properties.
Using New York City as an example, the REIT owns five properties on Green Street in Soho, a retail asset on the Upper East Side, and a property in Union Square. This is very different from owning a strip mall with a grocery anchor in the city's suburbs, such as the properties it owns in Westchester, Long Island, and Staten Island. They are simply not driven by the same dynamics.
A grocery-anchored strip mall draws traffic when people go to buy food. The smaller shops in the center, which often include things like restaurants, salons, and dry cleaners, benefit from that traffic. A good location with a good anchor can make a center a cash flow machine. So what drives demand at 5-7 East 17th Street? Or the series of properties that Acadia owns in Soho?
While I might be able to get a handle on that because I happen to live in the New York City area, I can't tell you what drives street-level locations in Boston, Los Angeles, or San Francisco. For example, the photo of 146 Geary Street in San Francisco on the company's website looks nice, and there are certainly plenty of high-end stores nearby, but I have no clue what Geary Street is really like.
In defense of Acadia and its management team, investors are effectively hiring the REIT to run a property portfolio. The team has been around the block, so it probably knows what it's doing. I'd just rather have a more straightforward model that's easily repeatable than one that requires specialized knowledge about niche shopping districts in cities across the country in which I have never set foot.
And then there's the buy-fix-sell platform
On top of that core portfolio, Acadia Realty also does some other things that complicate the story even more. Most notably, it uses an asset management platform that works with institutional-level investors to buy properties. This isn't a bad business, as it provides outside capital that is long-term in nature and allows the REIT to generate fee income as it operates the assets that are acquired. There are plenty of REITs that have similar partnerships set up.
However, Acadia Realty has launched five funds, while most other REITs stick with one or two. (Of the five funds originally launched, four are still active.) Some of these funds invest in other funds that directly invest in retailers.
Part of the current approach in the funds group is to buy assets that need upgrading, so there's a construction component to this segment of the company as well, which goes under the buy-fix-sell category of properties. The REIT highlights these in its presentations. There's nothing inherently wrong with this business, but when you add it to the other pieces here, it materially increases the complexity of Acadia Realty's already complex retail real estate model.
I don't have the time
In the end, to own Acadia Realty, you need to watch the fairly pedestrian strip mall business, which isn't complicated. But then you also have to understand street-level retail in major metropolitan cities, which is way more complex. And on top of that, you also need to watch the REIT's institutional funds business, which has been buying fixer-uppers -- so construction is in the mix there as well.
That's a lot to get a handle on in one REIT, and it's just too much work for me to take on with all the other investments I own. You might like all the different ways that this REIT has to make money, but I'd rather stick to a retail REIT that keeps things simple so I too can keep things simple in my portfolio.
