Acadia Realty Trust (AKR) 2013 Q1 法說會逐字稿

Welcome to the first quarter 2013 Acadia Realty Trust earnings conference call. As a reminder, this conference is being recorded. At this time all audience lines have been placed on mute. We will conduct a question-and-answer session following the formal presentation.

(Operator Instructions)

I will now turn the call over to Amy Racanello, Vice President of Capital Markets and Investments. Please proceed.

Good afternoon and thank you for joining us for the first-quarter 2013 Acadia Realty Trust earning. Participating in today's call will be Kenneth Bernstein, President and Chief Executive Officer and Jon Grisham, Chief Financial Officer.

Before we begin, please be aware that statements made during the call that are not historical may be deemed forward looking statements within the meaning of the Securities and Exchange Act of 1934, and actual results may differ materially from though indicated by such forward looking statements. Due to a variety of risks and uncertainties, including those disclosed in the Company's most recent form 10-K, and other periodic filings with the SEC, forward looking statements speak only as of the date of this call, April 24, 2013, and the Company undertakes no duty to update them.

During this call, management may refer to certain non-GAAP financial measures including funds from operations and net operating income. Please see Acadia's earnings press release posted on its web site for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. With that, I will now turn the call over to Ken Bernstein.

Thank you, Amy. Good morning. Thanks for joining us. Today I'll start with a brief overview of some of the trends and key drivers that we're seeing in our business, then Jon will review our operating metrics, our earnings, as well as our forecast.

In terms of the market in general, in the first-quarter we saw a continuation of many of the trends that we've seen over the last year. In terms of the capital markets, cap rates and borrowing spreads continue to tighten. In the public markets, the majority of this activity appear to be in pursuit of the higher yielding investment opportunities, whereas in the private market it appears as though we saw greater cap rate compression for the higher quality core assets, especially those in the gateway markets.

And while it may be worth noting these divergent trends from Acadia's perspective, since we participate in a fairly broad range of investment themes through our dual platforms, we can remain fairly agnostic or opportunistic as to where and how we choose to allocate our resources, but irrespective of the enthusiasm, perhaps exuberance, that we're seeing in the capital markets, what we can't do is confuse this momentum with the realities of our industry's operating fundamentals, because in the long run, it's our tenants' performance, it's our tenant demand, that really drives our business. And just because cap rates are declining doesn't mean that rental demand is increasing.

What we're seeing is that while the overall market is nicely improving, it's primarily in our most dense suburban locations or even more so our high street and urban locations, where there seem to be sufficient tenant sales growth and leasing demand to really drive the prospects for healthy long-term growth. With that in mind, let's look at each of our dual platforms.

First, our core portfolio. Our first quarter same-store results were solid. They were at the higher end of our expectations, and even after stripping out the contributions from several of our previously discussed re-anchorings, our same store NOI growth for the quarter was a very solid 5.6%. It's probably worth noting that inclusive of our most recent core acquisitions, street and urban retail now represents over one third of our core NOI, that's nearly double where it was a few years ago.

Keep in mind that given the significant amount of acquisitions that closed over the last year or so, over 0.5 of our street retail portfolio is still not in our currently reported 2013 same-store NOI. It's our expectation that over any extended period of time and on a stabilized basis, street retail should provide us about 100 basis points higher contractual NOI growth, than our more traditional suburban assets. Thus, we're optimistic that over the next several years our same-store NOI growth should be stronger with the addition of these high street assets than if we had simply stuck with our strong, but suburban, portfolio.

In terms of core acquisition activity in the first quarter, we made an important $86 million addition to our Chicago Street retail portfolio with the acquisition of 664 North Michigan Avenue. Complementing our already exciting retail properties on Chicago's Gold Coast and in Lincoln Park, this property is at the base of the new Ritz Carlton residential condos. It's in the heart of the eight blocks that make up Chicago's Magnificent Mile. Our property is leased to tenants including Tommy Bahama and Ann Taylor Loft with neighboring tenants ranging from Apple and Niketown to Burberry and Cartier. North Michigan Avenue, with approximately 40,000 pedestrians daily, is one of the most heavily traffic retail shopping districts in the country. And we were fortunate that this acquisition was priced about a year ago, since the seller had to complete various conditions associated with the new residential condos above us, and that the leasing with the key tenants was also priced over a year ago. So the improvements in both the leasing market and the transaction market over the past year certainly inured to our favor.

In terms of core acquisition volume overall, last year we added about $225 million of high-quality properties to our core portfolio. These acquisitions have been focused in key supply constrained markets with strong tenant demand ranging from Washington, DC, up to Boston, as well as in Chicago. As we said on our last call, our expectation is that we'll maintain a similar acquisition pace to last year.

As we continue to add assets like North Michigan Avenue to our core portfolio, more important than scale, more important than earnings growth or diversification, is to make sure that we're continuing to position our portfolio for continued long-term growth, as well as to face the ongoing changes in the retailing landscape.

In terms of our fund platform, complementing our core growth initiatives is the second major component of our business which is the value creation generated from our fund platform. As we previously discussed, we're currently investing on behalf of our fund-four which has $540 million of equity and gives us about $1.5 billion of discretionary buying power. In the first quarter, while we didn't announce any new investments, we're seeing enough interesting opportunities to keep us positive. And keep in mind, we get well rewarded to be opportunistic and disciplined, and we get appropriately penalized when we're not. And while adding new investments is clearly an important and necessary goal for this platform, equally important, is maximizing the value of our existing investments and the opportunities embedded into this pipeline. From that perspective, we also think we're very well positioned.

Last year, we sold just under $500 million of fund properties that included Canarsie Plaza as well as our storage-post portfolio. And then with respect to our remaining fund assets, they break out into roughly four equal components as follows -- the current portfolio is about $1 billion on a cost basis. We have approximately 25% of that portfolio, which is now stabilized urban re-developments, primarily in our Fund Two, as we previously discussed, we'll continue to monetize those assets. Then another 25% are projects in several of our funds that are in what we call, lease-up mode. And by that we mean the current occupancy blends into the low 80s. This includes our two portfolios on Lincoln Road in Miami, as well as our Lincoln Park Center re-anchoring opportunity in Chicago, and several New York area lease-up projects. And in this quadrant, the NOI is projected to more than double over the next few years.

The third-quartile are our current high-yielding projects, where our going in unlevered yield has been strong, and where we're currently clipping a high-teens levered yield on properties ranging from Portland Town Center to Heritage Shops, in Chicago. And in the final quadrant, the balance are re-developments. City Point is certainly the highest profile, but collectively, we have over a million square feet of redevelopment opportunities, primarily in the New York area, but also in DC, as well as Miami. And while our exposure to new developments are appropriately mitigated, as demand in these key markets grow, we feel we're well positioned to benefit from this, as well.

So, whether it's capturing the benefits of compressing cap rates by selling our stabilized assets or enjoying strong tenant demand and the corresponding NOI growth from our lease-up projects, whether it's benefiting from the attractive current levered yields of our higher yielding properties or prudently executing on our development pipeline, we like how we are positioned with respect to these fund assets and the opportunities that we see going forward with them.

In conclusion, in the first quarter we continued to make steady progress with both our core portfolio and our fund platform, whether it was through re-anchoring, leasings, or core acquisitions. We continued to drive forward the quality and performance of our core portfolio. And then with respect to our fund platform, we like how we're positioned there, as well. Looking forward, both platforms are well capitalized, so we can take advantage of a wide array of opportunities as they may arise. And we're now of a size where, we're beginning to see the benefits of scale, but we're still all small enough that we can move the needle. With that, I'd like to thank our team for their hard work over the past quarter and turn the call over to Jon.

Good morning. We were pleased with first quarter results both in terms of our core portfolio performance and earnings. First, an overview of the portfolio. Same store NOI, as we reported, was up 10.9% for the quarter, and re-anchorings that we completed during 2012 drove about 0.5 of this positive result, specifically at our Bloomfield and Branch centers.

The comparative impact from Bloomfield will diminish starting second quarter, as the new anchors took occupancy second quarter last year. Branch will continue to contribute to same-store growth through the third quarter of this year. The remaining 5.6% NOI growth for the quarter was generated across the balance of the portfolio. The out-performance above and beyond was driven by a combination of factors including a better credit loss experience and higher CAM recovery in 2013, net of an increase in winter-related expenses relative to 2012.

Occupancy, as expected, was down first quarter versus year-end from 94.2% to 93.6%. It's worth noting that the 60 basis points of decrease represents only about 26,000 square feet, and the decrease is in large part from two former Fashion Bug stores in our portfolio that were closed following Athena's acquisition of Charming Shops. We're in final lease negotiations at one of these locations at a new rent, over double that of the former, and continue to work on releasing the second. A third former Fashion Bug store of retenanted prior to quarter-end at a 50% increase in rent and thus had no impact on quarter-to-quarter occupancy. While these are clearly very positive spreads, these locations are predominantly single digit rents so that the earnings impact isn't as quite as dramatic.

Our original 2013 portfolio occupancy guidance anticipated a short-term occupancy decline of 100 to 200 basis points, with us then finishing the year out at around 94%, which is similar to our 2012 year-end occupancy. Based on our releasing progress to date, we now expect this temporary decline will be closer to the 100 basis points as opposed to the 200, and all else being equal, we currently expect a total of perhaps another 25 to 50 basis points of additional short-term decline in the next quarter or two before getting back to 94% by year end.

Leasing spreads were 6% on a cash basis, 23% on a GAAP basis. This compares with 2012 spreads of minus 1% cash and positive 6% GAAP. Although there can be quite a bit of variability for us in this metric quarter-to-quarter and certainly one quarter does not itself a trend make, this is also clearly a positive result. For 2013, so far we like what we see in our core portfolio performance. That being said, it's obviously way too early to be declaring victory and revising guidance for 2013, but we're clearly trending to the high end of our original expectations.

Similarly, we are pleased with earning for first quarter. As we reported FFO was $0.31, and this includes $900,000 or $0.02 of acquisition expenses related to our purchase of 664 North Michigan. This should be stripped-out in comparing to our 2013 guidance of $1.17 to $1.25, which as we discussed, was before any acquisition-related expenses. During the quarter, there were also additional items of income aggregating $0.02 to $0.03 which aren't necessarily recurring every quarter. As it relates to our dividend, we increased this by 17% for the first quarter as a result of 2012 earnings growth and expected 2013 growth and the related increase in taxable earnings.

In terms of the balance sheet, we continue to maintain a low risk, low-cost capital structure. Our net debt to EBITDA for the core, is at four times, and including our share of our fund, it's five times. During the first quarter, we created the optionality of being an unsecured borrower, as we closed on a previously announced $150 million unsecured line of credit. In this facility, which can be accordioned up to $300 million, we placed our existing $65 million secured facility. That being said, we will remain opportunistic and continue to selectively borrow on a secured basis to take advantage of extending maturities at attractive rates that continue to tighten. Over the last quarter, spreads compressed another 25 to 50 basis points and are down 100 basis points over the last 12 months.

Looking at our equity, our [ATM] continues to be an efficient, low-cost vehicle for match funding our acquisition program. During the quarter, we raised $50 million to purchase 664 North Michigan, and we also renewed the program for up to another $150 million. In fund-four, we have a little under $500 million of remaining committed equity, which gives us about $1.5 billion of purchasing power on that platform. We continue to maintain a low-leverage capital structure. We've established unsecured-line availability, and have sufficient low-cost core and fund capital to execute on our strategic plans for the foreseeable future.

With that, we'll be happy to take any questions. Operator, please open up the line.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Todd Thomas, KeyBanc Capital Markets.

Hi. Thanks, good morning, I'm on with Jordan Sadler, as well. First, Ken, your comment about pricing in gateway markets, am I reading that right? That cap rate compression may cause acquisition activity in the core to decelerate a little bit? It sounds like you're still expecting to meet the $150 million to $300 million assumption that's embedded in guidance, and $86 million of that's already complete. But, can you help reconcile your comments a bit and maybe talk about the pipeline today for what you're seeing for the core?

Sure. First of all, yes, we do expect to meet our goals; so let's put that aside for a second. Cap rates are compressing, and as a buyer we'd rather cap rates not compress, but in terms of existing inventory, it makes us feel pretty good. But so are borrowing costs. And while we're not a heavy user of debt, it does make a difference, as well, and we are very careful about making sure for our core acquisitions that we're match funding and that we're achieving a positive spread, and even with the compressing cap rates, we're able to do that.

Now we're not alone. There's a lot of people out there who have either a very aggressive cost of capital or are willing to be more aggressive than us, so we need to recognize that there's always plenty of competition. Todd, that's been the case almost forever. Thankfully our acquisition goals in terms of absolute dollars, as you just pointed out, are relatively modest. We can pick our spots. The markets we know, we know well, and we know how to execute well in them.

So yes, things are expensive. But, if we can lock in long-term borrowing rates accordingly, we're not going to lever up to do these acquisitions. So we will match funds, and we can do that responsibly and profitably.

Okay. And then the Magnificent Mile deal that you just closed, do you plan to place permanent financing on that asset? I guess in the meantime, that was completely funded with equity on an unlevered basis?

Yes. We will probably put some form of debt on, and I'll defer it to Jon as to exactly how he executes on this. But I think he's been pretty clear that we're going to increase the number of unencumbered assets that we expect to have in our portfolio long term and either use our unsecured line, and then at the some point probably step up into the bond market.

But irrespective of secured versus unsecured and exactly what's attributable to that specific asset, overall we're going to make sure we're match funding and continuing to swap out to longer term interest rates because teaser rates are what got us into the global financial crisis, and we're not going to fall back into that. So, irrespective of what you see at the asset level, you can rest assured we will be maintaining our long-term fixed rate exposure at the appropriate levels for assets like that.

And you know, we talk about selectively financing certain assets on a secured basis. This is probably a good asset to do that with, given the quality of it, and we could probably get very attractive pricing on something like this. So, 60% leverage on an asset like this probably makes sense.

That being said on an overall basis, we're going to continue to maintain our current leverage levels. We might lever up a little bit on an asset like this potentially, but then you'll see us not use leverage elsewhere to maintain that overall low-leverage structure.

Okay. And then Jon, also for you, same store NOI growth. It was pretty strong, almost 11%, and even 5.6%, excluding the impact from the re-anchorings. Was that inline with your internal forecast for the quarter? It seems like the 2% to 3% would be pretty difficult to achieve for the year at this point, unless you're expecting growth to really flatten out or maybe be go negative in the back half of the year.

Yes. That did exceed our expectations. Again, it's the first quarter. Let's see how the next quarter or two play out. But we're clearly trending toward if not the higher end of our guidance, even beyond that. But like I said, let's let it play out for another quarter or two, and then we'll revisit that and talk about guidance.

Okay. Great. Thank you.

Craig Schmidt, Bank of America.

Thank you. I have a question. Is there any indication what the air rights might go for at City Point to a multifamily developer?

A lot more than we thought or feared a few years ago when we stepped up and bought out the residential partners during the financial crisis in Brooklyn. The residential demand, the overall demand in Brooklyn, is so strong that we're seeing a fairly robust demand for those kind of air rights. I'm not going to quote it on this call because whatever I say I am sure will be wrong one direction or another. But you probably are reading press accounts of different transactions, and from what we can tell, there's a very deep market and deep demand for it.

Great. And in regard to the sales productivity and the rent levels that are achieved on Fulton Mall, your interior, for lack of a better word, mall specialty space, will that go at a similar level, or could it go for a higher level?

Well, first of all, Craig, a bunch of our leasing team are groaning right now, because you called it interior mall space when, in fact, this is going to be a real exciting connection between Flat Bush Avenue and Fulton Street, what we call the Prince Street Extension. But, to the extent it is enclosed, you're correct. And we'll have to see.

We have a lot of interesting tenant interest for the street level. That will be the piece we will lease last, because we're leasing successfully from the top down, which is the right way to do a project like this. And then we will fill it in with the right tenants, because the shoppers are changing in downtown Brooklyn. Our decal market that we opened last summer as an experiment, really helped show that the Brownstone community will come to this market, will shop this market, and will add a whole other dynamic to what's already a very strong Fulton Street.

Okay. And just lastly, the upcoming ICSC Convention, are there any major objectives that you're hoping to accomplish through that convention?

We will certainly be spending a lot of time showcasing and talking to our retailers about the six or seven important projects that we have going on. City Point is certainly one of them. But on Lincoln Road, I think we're pretty darn close to being the largest retail landlord on Lincoln Road. We have about half of our space, with the opportunity to turn it over the next 24 months or so, and our retailers are very interested in that corridor in Miami. I bet we spend a lot of time talking to our fashion retailers about their entrance into Lincoln Road.

We have two or three other very exciting developments and re-developments ranging from the Bowery in Manhattan to a small redevelopment in DC. I would expect the leasing team to dominate the ICSC, and I would expect their time and effort to be spent on those projects. But it's also a very good venue for us to catch-up with all of the more traditional retailers, the TJ Maxes of the world, who are very important to us, our supermarket tenants, who are important to us, and hear from them different trends, different issues they have, different opportunities. So it's a worthwhile, but very busy few days.

Okay. Thank you. And my apologies to the leasing team.

(Laughter) They forgive you.

Bye.

Christy McElroy, UBS.

Hi, good morning, guys. Ross is on with me, as well. Jon, just with regard to your comments about better credit loss experience and higher CAM recoveries in the quarter, can you quantify how much of that was maybe one-timish and may have had an impact on the same-store NOI growth in Q1? Can you give us a sense, sort of, what the recovery rate should look like for the balance of the year?

Yes. For the first quarter, our recovery rate was 90% -- low 90%s -- 91%, 92%. Normally I would expect that to be somewhere around 80% plus, that is give or take 10% above what I would expect to see over the normal course of the year. In terms of the contribution to first quarter, the CAM recovery is probably 100, 150 basis points of that, 5.6%, with the rest of the out performance, being very broad based, but as you mentioned, credit loss is part of that. But specific to that CAM piece, about 100 to 150 basis points.

Okay. And then, Ken, I just wanted to follow up on some of the comments you made at the beginning of the call in regards to the divergence in public versus private market trends. It seem like there has been some private market compression in cap rates over the last six months in suburban or secondary markets, somewhat driven by the costs and availability of financing.

Would you say that hasn't really been the case in your view, or is your argument that the compression has been greater among higher quality assets? And if you look at the fundamental side, how would you quantify the difference in same-store NOI growth performance for your assets for suburban versus your infill?

Sure. Let me take it backwards. In general, and this is a broad base, because Jon talked about Fashion Bug as an example of our less infilled assets where there is big lease spread due to a tenant failing, et cetera, or the financial crisis where there's an uplift in some of the suburban. But on a stabilized basis, when your tenants are healthy, in a suburban center versus in a street center, contractually, when you add up your anchors plus your shop growth versus in street retail, there's about 100 basis points advantage that we're seeing in our street retail portfolio.

Now, that's in a theoretical, all things equal marketplace, which is never the case, but what we've seen on top of that, is put the contractual aside, where have market rents grown and where have they softened? And again, and similarly, we've seen greater market rent growth, sometimes substantially so, in the key urban and street markets. You could see rents reported in SOHO up 50%, 100%, whereas in our more traditional suburban locations, we're happy when rents held or were up 2% or 3% over a five-year period. It's that combination of contractual growth and the support for when you get the space back, market rent increases that continue to make us more positive about the long-term growth profile for those locations.

Now this is not a secret, and thus, we're seeing that in terms of cap rates. And this was my point -- what we're seeing amongst the buying community in terms of buying the real estate, and whether we're talking about our peers in the public markets, or private REITs, or sovereign wealth, or high net worth individuals, those who are buying assets, they recognize they're buying illiquid assets, and for the most part, people would rather, with a few exceptions, buy assets where they think that there is a decent shot for long-term embedded growth, rather than trying to catch a falling knife.

We have seen cap rates compress in the private markets, both for suburban primary and secondary assets, as well as for urban and high street assets. We've seen them compress more for the high street assets. And on a very simplistic basis, when a 5-cap compresses to a 4, that's obviously more than when a 10-cap compresses to a 9. The question is at what point, and who wins this so-called debate, because the public markets have said, we like the yield opportunity, and I'm very sensitive to that. I recognize that.

What we believe is that you can make a lot of money buying high-yielding assets, you just better be very nimble, quick, get out of those assets fast enough, and too often you can't. And so the private buyers probably recognize trying to outguess in a lower barrier to entry market, which tenants survive, which don't, which move, which don't, which shrank, which don't, is a tougher game. On the private side, we are seeing them recognize that these are locations over the next 5, 10, 15, 20 years beyond, that seem to have the wind at their backs. We recognize there's competition for that.

We like building this portfolio for the core assets that we can hold for a long period of time. We like that. But if cap rates continue to disproportionately compress on the trophy assets as opposed to the secondary, because of our dual platforms, we can play in high yielding assets, as well. That's why I said we're also relatively agnostic to it. One last point on this, our North Michigan Avenue property, we priced it, as I said, about a year ago. Cap rates compressed from the low 5s into below 4.5 from the time we priced it, and then another asset traded as we were closing this.

I don't see the cap rate compression slowing up right now, and I suspect that all of us are going to have to take out our pencils and look at NAVs, especially for higher quality assets, and say, wow, as low as these seem, NAVs may have to go up, cap rates may still be coming down.

Ken, it's Ross Nussbaum. Another quick question. On City Point, is there really any reasonable probability that the, I'll say uptick in volume from the unions of late will cause a delay to phase two?

No. No. Phase two is under construction as we speak. The financing is in place. It's funding. We're proceeding. And we made a host of important commitments to the city in terms of minority hiring, local hiring, women-owned business hiring. We're meeting those commitments, and, we're certainly engaged in a continuing dialogue with the unions that you mentioned, and we welcome their participation, but we're going full speed ahead.

Okay. Thank you.

Josh Pitinkin, BMO Capital Markets.

Hi, good morning. I'm curious on the $0.02 to $0.03 of nonrecurring income, what that was.

A combination of factors. Probably the most notable is we actually recovered an amount that we had reserved against, an old note. This is going back to 2009. And we actually were paid off in full on the note, and so that is accounted for on a pro rata basis, about $500,000 of income.

Okay. And in the mortgage notebook, you have about $100 million there, that's up from $50 million in 4Q '12. Can you describe what's going on there, and how you see that playing out over 2013?

Sure. In terms of total book amount, we've talked about previously how we're targeting anywhere from 5% to 10% of our equity cap as the right amount as it relates to that book. I think we are right in that sweet spot in terms of size. Most of what we are investing in are assets that we would love to own if the opportunity arises, or we'd be very happy just collecting our coupon on the note, and that will be a great return, as well. That is our expectation for 2013.

And you'll see us, for example we got paid back on a small note this quarter, $5 million. We'll recycle that and probably redeploy that into additional mezzanine investment. And it's worth noting that a significant portion of what we're calling mezzanine is really first mortgage investment. That's an important distinction obviously, but you'll see us maintain a similar book 2013, and beyond.

Very good. Going back to the street retail discussion, do the merchants that you have there report sales?

It runs across the board to the extent that we inherited leases that don't report. Then we count on our leasing team to make sure that we are having off-the-record conversations to understand which streets are working well for our retailers, what their rent-to-sale ratio should be, how they think about those kind of things.

Right. And does the rent-to-sale ratio, is that similar to what you'd see at some of the high quality mall portfolios?

You know, to some extent, but we are seeing retailers take advantage of, or desiring to control their brand on certain streets. And as best we can tell, it seems as though the rent-to-sales ratio that the tenants are willing to pay for street retail, is somewhat higher. High teens plus in some instances, whereas it seems as those lower in the A malls.

What I'd attribute that to is as omni channel retailing becomes more and more important for these retailers, as they have to figure out different ways to make sure that they are extending their brand awareness to the shopper, then it's a combination of order fulfillment needs, the ability to be identified as being, whether it's on M Street in George Town, or Lincoln Road, or down in SOHO, or on North Michigan Avenue, that there appears to be, and when we discussed it with our tenants, they can't always necessarily specifically quantify it.

But there are different additional benefits that cause them to remain enthusiastic at what seems to be increasing rents, and they're still profitable, for most of these tenants. There's one or two examples, you probably read, where tenants have opened up on 5th avenue or Madison Avenue, where they are saying they're not making a profit, thankfully it's not deals we own. But I think it's a positive sign for these locations that tenants want to be there as aggressively as they do.

That's interesting. Does rent on these streets, is it more a function of what other locations are commanding, or is it more a function of sales?

Well, I would say first and foremost it's sales. Tenants are in the business of making a profit, and they are not setting up these locations purely for advertising, marketing, branding, or order fulfillment purposes, although if you have a store in Times Square, you are meeting a whole bunch of different needs. That would be one extreme. Yet, those sales are really compelling, as are 5th Avenue, as are Lincoln Road.

But, when you get to the kind of properties we own, I would say almost without exception, our tenants are making very healthy profits and able to pay us rents and growing rents accordingly, where if the tenants are not profitable, it's very Darwinian. And so, for every brand that perhaps has lost its way for multiple quarters and needs to move on, you have the Lulu Lemons coming in, and if a street is generally doing $900 to $1,000 a foot, Lulu Lemon knows with confidence that they are going to do twice that.

So our tenants are profitable. Those that aren't tend to move on. And because that business is so much more fragmented than our consolidating suburban business, and we like our suburban business, but we're not expecting that there will be more office supply chains 10 years from now than there are today. We're not expecting more electronics or book stores.

But I would be really surprised to see the handbag business consolidate considerably. I'd be really surprised to see fashion or a bunch of these other areas go through any kind of consolidation wave like we're seeing in suburban. There will be a fair amount of competition, demand to pay these rents, but you're going to have to get your sales right. If you get your sales right, more often than not our tenants are, they are very happy in these locations.

Very good. One last question along this line, and then I will cede the floor. The leasing characteristics that provide the escalated growth, or the elevated growth, are those annual bumps, or would you just mind describing how the leasing works and if there's any pegs to CPI for these assets?

Yes. And it runs the gamut. We've been pleasantly surprised as we acquire more of these, the different, somewhat interesting provisions. We have leases that go beyond pegging to CPI, just mark-to-market every five years, option to renew at market. I assure you that none of our supermarket leases have that provision. They go on for the next 30, 50, 60 years with fixed non-CPI options. That's one way we can get there.

There are others that have rental, contractual bumps every year, 3% a year. That works, too. And then any combination in between, so it may be that it bumps every five years, that straight line out to 3%. But let's not fall in love with contractual growth, because I could show you a lot of shopping centers we owned that had great contractual growth and didn't live up to it.

What we need to make sure is that there's good contractual growth, and then back stopping it is a market demand, based on the tenant sales that we're talking about, the profitability. And then just a fragmented and favorable landlord, tenant supply demand ratio, that makes locations like North Michigan Avenue or like Lincoln Road in Miami, where in general, any time a tenant calls us and says, I'm thinking of leaving, that's a good news call for us.

We had Geox, who is a great brand, they were not achieving their goals on Lincoln Road. They said, we would like to leave, and we took the space back, put in Armani, and the rent increased, I think, 30%. You need the ability, not just to have contractual growth, though we like it, not just to have the CPI or mark-to-market, it's really good, but also the demand overall, so that if you get that phone call, it's a good news call, not a bad news call.

Great. Thank you.

Michael Muller, JPMorgan.

Yes, hi. I guess first of all, are there any updates to the disposition plans relating to the funds this year?

We talked about last year, year end, about looking to monetize some of these stabilized fund assets, and that is still ongoing. We identified some of the fund two assets that potentially would be sold, and that is still the plan. So stay tuned, and hopefully we'll see something this year.

Okay. And then looking at the development, redevelopment pipeline, City Point is obviously under construction. You have a whole host of other projects listed in the design category. What are the prospects for some of those moving into the construction camp at this point in 2013?

Jon, I'll let you answer specifically when you take it from, in design through, but what I'll tell you from a leasing and process perspective, Mike, is we're working with some real exciting tenants, and that ultimately is how we drive the decision to proceed on these. Which, if we can put those pieces together and a bunch of the other logistics associated with some of these, there's two or three that I'd be very hopeful that our team gets well underway this year.

For example, two of those, Courtlandt Crossing, up here in Westchester, we're very active in terms of pre-development activities, as well as Broad Hollow Commons, out on the island. Again, very active as it relates to pre-development. And either or both of those, you could see us start preliminarily additional activities before year end.

The key also, if we remember not too long ago, when developers found themselves in harms way, the key is not to start something before you have all your ducks in a row. Don't start something you're not ready to finish, and then when you start it, get it right. So we'd love to these start this year. We'll keep you posted as to who's coming in, et cetera, but our focus will be with, get those right. We can afford to be patient, and we'll do that.

Okay. Great. That was it, thanks.

Sure.

We have no further questions at this time, so I will turn the call back to Ken Bernstein for any closing remarks.

Great, I thank everyone for joining us, and we look forward to speaking to all of you again next quarter.

Thank you, ladies and gentlemen. This concludes the first quarter 2013 Acadia Realty Trust earnings conference call. Thank you for participating. You may now disconnect.