Acadia Realty Trust (AKR) 2013 Q2 法說會逐字稿

Welcome to the second-quarter 2013 Acadia Realty Trust earnings conference call. As a reminder, this conference is being recorded. (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 second-quarter 2013 Acadia Realty Trust earnings conference call. 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 those 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, July 30, 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 website 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 afternoon. Today I will start with a brief overview of some of the trends and key drivers in our business, and then Jon will review our operating metrics, our earnings, and our forecast.

In the second quarter, notwithstanding a great deal of noise in the capital markets, our business remained on track, with our earnings coming in at the higher end of our forecast and our operating fundamentals showing solid growth. And as distracting as the volatility in the bond and the REIT markets can be, thankfully, given how our Company is structured -- with high-quality, high barrier to entry properties, strong indebted growth opportunities in our portfolio, conservative leverage, as well as plenty of dry powder in both of our dual platforms -- we feel we are well positioned for a wide range of future opportunities and investments.

So with that in mind, let's look at the different components of our business. First, our core portfolio and operating fundamentals.

Our second-quarter same-store results were solid, and as Jon will discuss in more detail later, they were at the high end of our expectation. Even after stripping out the contributions from our previously discussed reanchorings, our same-store NOI growth for the quarter was still a very solid 5%. And while the drivers this quarter were fairly broad across both our suburban and our Street Retail components of our business, we continue to see better long-term growth opportunities in our Street Retail portion of our portfolio.

In terms of our core acquisition activity, recently we made two core investments of Street Retail properties totaling $34 million. One was in Georgetown, Washington DC, and the other in the Gold Coast in Chicago in Georgetown. The property is on the corner of M Street and Wisconsin, where we've added it to our existing collection of properties. This acquisition is arguably the best corner in Georgetown and is occupied by Banana Republic.

In Chicago we added 2 buildings that are contiguous to our Lululemon on Rush Street. We now own 6 of the 9 buildings on the intersection of Walton and Rush Streets, with tenants ranging from Brioni to Barbour.

Both of these acquisitions are consistent with our theme of adding to our existing Street Retail portfolio in those markets that we are active in. And these acquisitions, along with being attractive on their own right, are also strategic. We believe that as we continue to add these properties, whether they be contiguous or approximate to other Street Retail properties that we own, we are going to create a powerful collection of retail assets that will have strong, long-term growth potential. So far this year we have added $120 million of these acquisitions, and we seem to be on track to meet our goals for the year.

Turning now to 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. We are currently making investments on behalf of Fund IV.

In the second quarter we closed on two deals for $47 million. One was a high-yielding opportunity in Manassas, Virginia, where we will restructure the anchor lease. And then the other falls into our retailer category, where we acquired from Toys "R" Us a retail building that they are currently occupying in densely populated North Bergen, New Jersey. They will leave that property at the end of the year, and we intend to reanchor it. And we already have strong tenant interest.

Now, along with adding new investments to our funds, equally important is maximizing the value of our existing investments there. And from that perspective we also made strong progress last quarter. With respect to our Fund assets, they break out into 4 currently fairly equal components, as follows.

About 25% of the roughly $1 billion of assets is now what we consider stabilized. These are primarily our urban redevelopments, and they were primarily falling into our Fund II. Last year, you may recall, we sold $500 million of Fund assets. And we will continue to monetize these remaining properties. So far, investor interest in these assets that we are bringing to market appears to be strong, and it's not so far been impacted by the bond market volatility.

Another 25% are projects in several of our funds that are in what we consider lease-up mode. There, the current occupancy is in the low 80s. The NOI is projected to double over the next few years. It includes two portfolios that we own -- Lincoln Road in Miami as well as our Lincoln Park Centre in Chicago, and several New York area properties, as well.

Since the majority of these properties are Street Retail properties, where there is a more diverse and growing tenant base as compared to on the suburban side, the list of tenants looking to get into these markets is very strong, and we're very confident about the lease-up of these assets.

Then 25% is our current high-yielding projects, where our going in unlevered yield has been strong. And we are currently clipping high teens levered yields on properties ranging from Cortlandt Towne Center to our Heritage Shops in Chicago.

And then finally, the final quartile are our developments in redevelopments. CityPoint is certainly the highest profile, but collectively we have over 1 million square feet of redevelopment opportunities in our funds -- primarily in New York, but also in Washington DC and Miami. And while our exposure to new development is appropriately mitigated, as demand in these key markets grow, we feel we are well positioned to benefit from this.

In terms of CityPoint, it's worth a brief overview. As you probably recall, it is a 1.9 million square foot development that will be done in three phases. Phase 1 and 2 will be 675,000 square feet of retail and approximately 625,000 square feet of residential. And then Phase 3 will be a 600,000 square foot residential tower.

Phase 1 is complete, and construction on Phase 2 is well underway. In terms of the retail in Phase 1 and 2, we're finalizing over the next several weeks an anchor for the second floor of Phase 2. And assuming that we are successful, that will then leave us 100% preleased on floors 5, 4, 3, and 2; bring our overall preleased occupancy to 65%; and leaving us with a Street Retail and concourse of approximately 240,000 square feet left to lease.

In Phase 1 the retail is fully leased, and we are completing a lease for 10,000 square feet of office space on the fourth floor. Interestingly, what would have a few years ago been secondary office space is going to a global marketing firm that is relocating this division from SoHo in Manhattan to our downtown Brooklyn building.

In Phase 2, the steel is going up; construction is in full swing. And in terms of retail on Fulton Street, H&M just recently opened. American Eagle, Nordstrom Rack, Sephora are on the way. And there's a long list of retailers looking to get into downtown Brooklyn in general and Fulton Street, specifically.

Rents for the retail on Fulton Street have almost doubled over the past 24 months. This certainly bodes well for our remaining lease-up.

And then finally, in Phase 3, as I mentioned, that will be a 600,000 square foot residential tower. The residential market in downtown Brooklyn continues to strengthen, both in terms of market rents as well as the value of FAR. Now that Phase 2 is well underway, we've been receiving strong interest from residential developers for the purchase of Phase 3. And we will keep you posted on that.

So in conclusion, in the second quarter we continued to make steady progress with both our core portfolio and our Fund platform. And looking forward, both platforms are well positioned.

Before I turn the call over to Jon, I would be remiss if I did not note that 15 years ago this summer we entered the public markets through the reverse merger of a troubled shopping center REIT called Mark Centers Trust. We did that just in time for the REIT market to enter into a significant meltdown in the face of the Russian debt crisis, the collapse of the hedge fund long-term capital, and a host of other reasons.

Since then we have lived through plenty of ups and downs, but throughout it our team has tried to learn from these trends and has tried to capitalize on them. This experience is what informs us as to the decisions we make today, and it is what guides us as to how we are going to operate our business in the future.

It is why we focus on real estate locations that are not driven by short-term tenant demand, but driven by long-term intrinsic value. It is why we operate with conservative leverage; why we have focused on growth only where it makes sense for our stakeholders, not growth for growth's stake. But when we find growth that makes sense, we've made sure that we have both the capital and the ability to execute.

Over the past 15 years our senior management team has developed a strong and a deep bench -- not because we no longer have the passion to do the work ourselves, but precisely because we have that passion, and we want to see that it is passed on.

So I'd like to thank all of our stakeholders for their support over the past decade and a half. I'd like to thank all of our team members -- those who have joined us over the past several years, but especially those who were with us 15 years ago. I'd like to thank them for their hard work and their commitment to our success.

Over the past 15 years we've delivered a 1,000% total return to our shareholders as compared to a 300% for our peer group. And while that track record is certainly something we are proud of, I truly believe that our best years are still in front of us.

So now, with that, I will turn the call over to Jon.

Good afternoon. Second-quarter results were solid, both in terms of our core portfolio performance and earnings. First, an overview of the portfolio.

Same-store NOI was up 7.4% for the quarter, and the majority of this growth, about 5% was generated across the portfolio. And consistent with the first quarter, this was driven by positive rent spreads and better tenant performance in terms of credit loss. The remaining 240 basis points was from last year's reanchoring at the Branch Plaza.

Year-to-date same-store NOI was up 9.3%. Again, about 5% was experienced throughout the portfolio. And along with those factors I just mentioned for the quarter, year-to-date results were also boosted by a higher CAM recovery in 2013, net of an increase in winter-related expenses relative to 2012.

4.3% of the year-to-date result was from both the Branch Plaza and the Bloomfield reanchorings. As Bloomfield came online first quarter 2012, it was not a factor for second-quarter 2013 same-store NOI comparison.

For the remainder of 2013, the incremental NOI contribution from these reanchorings burns off, and growth from the remaining portfolio may potentially moderate some to be more consistent with long-term expectations for a high quality but stable portfolio. Accordingly, we expect full-year same-store NOI growth will range from 6% to 6.5% for the full year.

Our core portfolio occupancy was 93.7% at June 30, which is up 10 basis points from the first quarter. Given that our current leased occupancy is 95%, we expect, all else being equal, that we will end up at 94% or better by year end.

Across the core portfolio, small store occupancy was 86.7%. Breaking this out between the Street and Suburban components of our portfolio -- and as an aside, we now do this in our quarterly earnings supplement -- Street shop occupancy was 92.3% versus Suburban shop opportunity of 85%.

The additional leased but not yet occupied space that gets us the 95% that I mentioned in discussing occupancy represents about 57,000 square feet. Of this, almost half is Suburban shop space, which equates to roughly 200 basis points of Suburban shop occupancy.

Again, presuming all else equal, these additional leases put us at a Suburban shop occupancy level of around 87%. This compares favorably with 82% at the end of 2011 and 86% at the end of 2012.

Leasing spreads for the quarter were 13% on a cash basis and 23% on a GAAP basis, and year to date were 9% cash and 23% GAAP. This 2013 year-to-date result compares favorably with full-year 2012 spreads of minus 1% cash and plus 6% GAAP.

Boosting the second-quarter result was the releasing of part of the former A&P space at our Crossroads Shopping Center at a rent over double that of the former A&P.

Along with the core portfolio, we are pleased with second-quarter earnings. As reported, FFO was $0.31 for the quarter, and this included $600,000 or about $0.01 of acquisition expense that should be added back in comparing actual to guidance -- which, as we discussed at the beginning of the year, guidance was before any acquisition expense.

Adjusting for the $1.5 million or $0.03 of acquisition expense year to date, FFO is $0.65, which clearly puts us on track to achieve the high end of our guidance and potentially $0.01 or $0.02 above this. We will revisit our guidance in the second half of the year and keep you posted.

Last but of no less importance is our balance sheet and capital management. We continue to maintain a low-risk, low-cost capital structure. Our ATM has been an effective vehicle for match-funding acquisitions on a leverage-neutral basis while maintaining our conservative overall capital structure of two-thirds equity and one-third debt. Since we launched our initial ATM in 2012, we have expanded our core portfolio by almost 30%, and we've raised the majority of the $304 million of equity through the ATM, which has in turn funded the equity component of the $467 million of core and Fund investments on a pro rata basis. And although leverage has varied quite a bit deal by deal on an overall basis, the capital mix for funding these acquisitions was right at our two-thirds equity target.

In late May we stopped issuance under the ATM as REIT share prices dipped. So for the second quarter we raised a total of about $23 million, which is about half of what we have been averaging since starting the program in early 2012.

In terms of sourcing capital going forward, we will continue to adjust the current mix of equity versus debt based on pricing, but while this may vary over any given quarter or two, over any extended period we will maintain our target leverage of between 5 and 6 times net debt to EBITDA.

Our current net debt to EBITDA, including our funds, is slightly under 5 times. With $150 million of availability under our unsecured line, we have the ability to draw on this facility while still maintaining very low leverage.

We are currently 100% fixed rate in the core and 90% fixed including our pro rata share of Fund debt. And we continue to selectively lock in attractive long-term debt on certain assets. Case in point -- during the quarter we closed on $52 million of long-term, secured mortgage financing on our recent acquisition of 664 North Michigan. And although we have optionality as to when we actually fund this loan, we have locked rate for 10 years on a substantial component of this at a sub-4% all-in rate.

Since May, base rates are up 90 to 100 basis points, but anecdotally, spreads have compressed 25 to 50 basis points, buffering about half this rise in rates. The results are costs hovering around 4%, which is still relatively low on a historic basis. As we've previously discussed, we'll also continue to develop our ability to borrow on an unsecured basis. And we will keep you posted as to our progress in this area.

In our Fund platform, we have $466 million of remaining committed equity in our Fund IV, which gives us up to $1.5 billion of buying power in the platform.

So in conclusion, our core portfolio is performing well. Earnings are trending to the high end of our original expectations. We continue to maintain a low-risk, low-cost capital structure and have core and Fund capital available to continue to execute on our strategic plans.

With that, we'll be happy to take any questions.

(Operator Instructions). Todd Thomas, KeyBanc Capital Markets.

I am on with Jordan Sadler, as well. First question -- just seems like investment activity was steady in the quarter. But Ken, you mentioned that the volatility in the capital markets and interest rates were volatile a couple of times in your prepared remarks. And I was just curious if you could elaborate a little bit on the deal environment, as we think about both the core investments and the four different types of Fund deals that you are targeting. Is there any evidence that the rising rates or the volatility is being disruptive on either the buy or sell side?

A few different things, I think, that's worth noting. If it's not disruptive, it's certainly distracting. And so what we have seen from sellers of high-quality real estate is for the most part they've held to their pricing. And unless they needed to capitulate and sell, they have been patient.

And what has been surprising to me is watching secured lending spreads, which -- when the volatility first hit, those spreads widened. And then the lenders, who clearly have to put a fair amount of debt to work, they've come in, and as Jon pointed out, absorbed about half of that spread, so that for high-quality assets, our sense is that pricing is holding up.

Now, fortunately, as it relates to our core portfolio acquisition goals, we're talking about a relatively modest amount of acquisitions. And I like the pipeline that we have, and we are tapped into enough of these markets that I don't think it has any real impact to us and our goals. It's just interesting to watch a 100-basis point move in the 10-year treasury and not see much shift in terms of pricing for high-quality assets.

Now, to shift over to the more opportunistic side, people seem to be waiting out the summer to see where everything settles. There's a fair amount of leverage available in the system, but it's our expectation in of the conversations we're having that there are enough different sellers of real estate who are going to have to do something over the next 12 months that if there is a re-mark-to-market, we may see some opportunities there.

Still a little early, and the summer is probably the worst time to gauge this, but I think we will all be watching closely as we see where the 10-year treasury settles; where spreads settle in; as sellers of real estate, as people who are looking to recapitalize opportunistic or more trouble portfolios need to figure out what to do.

How about for Acadia, for the stabilized properties that you are looking to monetize? You mentioned 25% of the $1 billion worth of property under management. Do you reassess the timing of selling those assets?

Not really. I think it would fall into that category of we're watching it more closely.

So far, for those assets that we have been bringing to market, we have not seen a shift in pricing. I think it's partially because of the density of the location that they are somewhat unique assets. I was concerned as we would go to market and test expectations, but we've been very pleased with what we're seeing. So far there has not been any falloff there.

Okay. And then I was wondering -- A&P, there were some news reports that they were exploring strategic options. And Acadia and your partners in the funds, you didn't participate in the Supervalu transaction, but A&P is a different geographic footprint that is a little more concentrated in the Northeast, where you have a little bit more familiar sense of things. Any thoughts on A&P?

Lots of thoughts. But in terms of what we want to discuss here -- first of all, I think it's worth pointing out, for the most part A&P has sold off most of their real estate owned. So I think that's worth taking into account.

The other trend that you are seeing -- of the consolidation in the supermarket industry -- I think will continue. And we have a very nice supermarket anchored portfolio. We like that segment of the business, but we also need to recognize that there are challenges to the supermarkets and to supermarket-anchored centers, and we're adjusting to those challenges.

Those challenges range from the wholesale clubs, like Costco; to the higher end, like Whole Foods; to the more boutiques, like Trader Joe's. It impacts both the supermarket chains, and they are responding, I think correctly, by some of the consolidation you have seen throughout the US. And then it impacts our supermarket-anchored center in terms of the number of shops per week we should expect from our visitors and how it impacts our satellite space.

So interesting trend to watch overall. No comment on our involvement in any future acquisitions, because that wouldn't be appropriate.

Okay, great. Thank you.

Craig Schmidt, Bank of America.

Given the flux in the market, is there an expectation that you may be more involved with opportunistic in the second half of the year than you were in the first half?

That would be our hope, Craig. Those type of deals, the nice thing about having fully discretionary capital on call is we can move very fast irrespective of where the REIT market multiples might be. And in fact, more often than not, it is when there is volatility in the REIT market that we seem to find the best opportunities.

But they happen quickly. Our team is working hard on a wide variety of opportunities. If they hit, they will be real exciting; and then volume goes up. And we've proven in the past, where it doesn't make sense, then we sit on the sidelines.

Okay. And then maybe a little discussion on the scalability of the Street Retail portfolio. Is there advantage, let's say, in your five different markets in Chicago benefiting each other? Or is the benefit within just in Rush and Walton by itself?

I think they are definitely scalable for a lot of different reasons. First, before scalability, we are finding that just on a standalone basis, these retail investments are more compelling to us from a risk-adjusted return than a host of other -- of the more traditional, more generic retail opportunities.

But as we can add to the key markets that we are involved with -- and you pointed out Chicago, and that's certainly a very important market to us. New York we continue to penetrate and add assets to. Washington DC, M Street; Lincoln Road in Miami; and then there's a host of others that we are involved with.

As we have an increased presence in any of these given submarkets, we afford to the fairly fragmented retailer group who's looking to penetrate these markets an opportunity to sit down and deal with multiple markets at once. And that's a big benefit when a retailer is recognizing that one of their many channels needs to be Street Retail.

And we're working very hard to make sure that our profile in those markets is high enough that we're certainly in front of the right retailer. So there's a scalability from the retailer side.

There also is just the fact that, whether we like it or not, when we make the papers for our acquisitions, we are on people's radar screen for the next acquisitions. And several of our deals have been offered to us off-market, because we have proven ourselves to be aggressive bidders and excited owners of real estate in Chicago, for instance; in Washington DC, for instance. So a host of those transactions have been off-market, and I would expect them to continue to be. So there's a scalability from that perspective.

Operationally, there is some scale. But fortunately, with Street Retail we don't have parking lots to sweep; we don't have roofs to speak of and some of the more traditional suburban operational components. But that's never really what has driven that business. So from a scalability perspective, I think the keys are going to be our leasing presence in those markets and then also just deal flow.

Okay. And it struck me that -- the fact that the high-quality stuff does not seem to do your pricing. And while the other stuff is waiting out the summer, could be repriced later in the year. I just wonder if this might be the period of the cycle where you see more spread between the high-quality assets and, let's say, the remainder of the real estate universe. Does that make sense, or --?

It could be. The way I like to think about it is our investment team should come to work every day absolutely agnostic. Because we have capital that can play in just about everything that we are good at, and we ought to remind ourselves, we have no capital to play in things that we are not good at.

And so you have seen in the Fund side us take down some pretty opportunistic assets recently that wouldn't fall into the highest-quality Street Retail, wouldn't be consistent with the upper quartile of our portfolio. But we're getting attractive yields. If we see more of that, great; we will take it.

If we don't see core acquisition activity, we don't have to do that. We can play any of the different triggers between the two platforms. And we were touching on this before -- we can also be sellers, and we can accelerate the selling of assets, depending on what we want to do.

So I'm hoping that when we show up every day, we stay agnostic as to where our book is. And we put the dollars to work or repatriate those dollars as we think it makes sense, as we look at those different spreads.

That being said, when you strip aside the 20 or 30 basis points that we all focus on day in and day out in terms of our borrowing costs, in terms of our acquisition yields, and you sit down and you talk to our retailers, there is just no doubt that their long-term growth strategies are much more focused in the higher barrier to entry assets; in these key streets where they can not only do strong sales, but also provides them branding, provides order fulfillment.

So we ought not get too caught up in last week's bond pricing and make sure we continue to add these kind of assets, and that we think over the long term we have a much better chance for outsized rental growth that will make a lot of this summer's noise seem somewhat irrelevant.

Thank you.

Christy McElroy, UBS.

Just while you're talking about acquisitions, did you guys bid on or did you look at 830 North Michigan? And then, also, on your guidance, I think you talked about $150 million to $300 million of core acquisitions this year. You are at $121 million today. How is that looking from the balance of the year standpoint?

We are very confident that we will achieve that guidance within that range. And I don't mean to be -- well, I did mean to be a little cute on that.

Our expectation and our goal -- last year we did about $225 million of volume, and our goal and my expectation is that we will finish the year up somewhere in that similar range, with the huge caveat that it is all very dependent on the specifics in the marketplace.

As to 830 North Michigan Avenue, we have looked at almost every deal that trades. We love North Michigan Avenue. We are always pissed when we are not the winning bidder, but that is life.

Got you. Jon, I appreciate the new breakout of your core portfolio between Street Retail and Suburban. It definitely highlights the prominence of your Street Retail portfolio in terms of rent contribution.

It also highlights that there are several one-off properties where it is the only Suburban center your own in the state. To what extent would you look to -- and I guess the question for both of you -- to what extent would you look to monetize some of that over time?

We've talked about this before. We do have a bottom-fifth quartile, we call it; it is a handful of assets, and certainly over an extended period of time you shouldn't be surprised as we probably get rid of those. The short answer is yes, and it will be over some period of time, though.

Okay. On the development pipeline, can you update us on your recent thoughts around 723 North Lincoln Lane and the potential opportunity there?

And then, also, can you just remind me why there's such a wide range for development spend at CityPoint?

In terms of Lincoln Lane, and for those of you less familiar with Lincoln Road in Miami in general, over the past few years Lincoln Road has transitioned from being a pretty mixed bag in terms of retailer interest to now the location where most of the aspirational retailers want to locate. We saw earlier this year flagships open for H&M, Forever 21; Zara is a slated to open their flagship later this year.

And with that, Lincoln Lane, which is one block north but truly contiguous on Meridian to Lincoln Road, provides a real compelling flagship opportunity. However, we will probably not try to pre-develop it and guess exactly how and which retailer wants it. So we're talking to a wide variety of retailers that belong on Lincoln Road and that need and want the kind of footprint that we could afford when we can do multiple levels. So we're certainly exploring that, as well.

As soon as we have something concrete to announce, we'll talk about that. Thankfully, you may recall we purchased that portfolio a few years ago. Rents on the street level have probably increased 50%, maybe more since that acquisition. So our patience is being very well rewarded as we make sure we get best execution on that.

The second question was then on CityPoint. Jon, why don't you --.

So factors that go into the range in terms of ultimate cost for CityPoint include, for example, TIs for the first-floor and concourse leasing. Obviously until we do those leases, there is an unknown there.

Also, the value that we monetize the air rights for for Phase 3 -- there is variability there is well. So as we start to nail down these pieces, we will narrow down this range. But for right now there is still some variability there.

Got you. Thank you.

Paul Adornato, BMO Capital Markets.

Just looking at Street Retail and the very large rent increases that you are seeing there, was wondering if you could talk about how the retailers look at their occupancy costs, or do they? Do they follow the same metrics as operating in other locations? Or are these flagships -- do they have different economics for a flagship?

So what our retailers tell us is that while there are different economics, we ought never fool ourselves. They expect and need these stores to be profitable.

And as you push up into the high teens occupancy costs in terms of rent to sales, many of the retailers, depending, again, where their price points are, where their margins are, that starts pushing the needle. However, Street Retail does afford them a host of opportunities they believe -- and so far they are seeing -- that they don't get in some of their other channels, or it complements those other channels.

So it does act in a very positive way from a branding perspective. They can't put a sales amount on that, because they don't know where the sales get executed. They just know that it is helping their brand identification.

Secondly, it also helps them from an order fulfillment perspective. It's a great way to present your goods to the shopper, even if they then choose to subsequently shop online. Our retailers are getting better at identifying the source of the inspiration. But technology isn't there yet, and they also remain somewhat indifferent as to where you initially saw that product that then caused you to shop it.

And so it's still a moving needle. But most of the retailers we're talking with are well represented in the other channels. So they are well represented in the malls they want to be in, and they are not building a lot more of those. They are well represented in the outlets -- great business for several of our retailers -- but as we have read and as you see, the retailers need to be really careful that they are not becoming simply a retailer into the outlets. They need to maintain that brand and maintain a certain elite level of that brand. And Street Retail affords that.

So those are some of the less quantifiable components, Paul. Then, ultimately, they look at market rent and they say, can we make a profit within our four-wall EBITDA to justify that occupancy? If they can't, they tend not to show up. And when they think they can, they have. And I think based on the renewal rates, based on the traction that you see on M Street, the success you see in SoHo, the success we see on Lincoln road, it seems to be working.

Okay. Thanks for the color on that. And switching to the shop space discussion, where should we expect occupancy to settle out over the long term, both on the Street shop space and the Suburban shop space?

So the Street shop space, which is currently at about 92%-plus, we have signed leases that is going to take that up closer to 95%-plus. And we think that is an appropriate level for the Street Retail.

In terms of the Suburban shop space, we're currently at give or take 85%. We think that ultimately probably high 80s, almost 90% is probably the stabilized level as it relates to that portion of the portfolio.

Keep in mind, though, we're not talking -- in the case of the Suburban portfolio, we're not talking that much square footage. So every 10,000 square feet represents a percent. So you're only talking about doing another, give or take, 50,000 square feet to go from 85% to 90% in the Suburban portfolio.

Okay, great. Thank you.

Jason White, Green Street.

A question on your Merrillville reanchoring -- you talked about it in the past being kind of a mid-2013 event. Can you just give us a little more detail around that? We didn't see occupancy drop in it, so we assume it's still to come?

It turns out that -- and kudos to our leasing team -- that we were are able to re-tenant that with virtually really no down time. It was all done in the quarter. And we didn't have that dip that I was originally talking about at the beginning of the year.

Okay, great. Who was the tenant?

It is a local furniture -- a regional operation. Regional.

Okay, great. And then in terms of the resi air rights, is there any timing on that? You guys have any visibility on it? Is it a one quarter, three quarter type event?

It depends who on our team you ask. My guess is that is the general ballpark. I have been hesitant to entertain serious offers until we have nailed down Phase 2.

So they are physically adjacent. Phase 2 will include Century 21, will include the second-floor anchor that I was referring to that hopefully we'll finish up in the next couple of weeks. Once that is all nailed down, so we are certain as to exactly the footprint, then our need to continue to own the Phase 3 residential is greatly diminished.

Given the high, high level of interest in residential development, both rental and otherwise in Brooklyn, we're prepared now to start entertaining those kind of offers. So whether it takes a quarter or three quarters, I don't care that much, other than I want to make sure our team gets it done right.

Okay. And then final question around your Street Retail, how competitive are the individual markets getting? Are you seeing a ton more competition entering the space? Or is it just with GGP entering up in Chicago, it was just kind of a one-off that it seemed like it was getting a lot more competitive?

Thankfully, the businesses is fragmented enough that the entry of any one buyer, no matter how strong or otherwise, doesn't seem to really move that needle. It's always been a competitive business. It's always been very focused by a host of local entrepreneurs in each of the segments.

Where we have found that we fit in nicely is we have a lot of discretionary capital, but we also small enough that we can afford to do these $10 million, $20 million, $30 million, $40 million deals, where the multi-billion dollar guys can't or probably don't. So there seems to be a nice niche that takes us above the very local entrepreneur who is running around to try to raise capital; keeps us below some of the larger guys.

And then we will just have to see where the spreads play out. I have said several times today and other times, our retailers remain so enthusiastic about these opportunities that we need to make sure we are not being too conservative in our long-term rental assumptions. But we also need to make sure we buy it right. And there's plenty of competition out there, so we pick and choose our spots.

Okay, thank you.

Michael Mueller, JPMorgan.

Ken, when you were talking about at the beginning seeing better growth out of Street Retail, were you specifically talking about core growth? Or is that spilling over to the investment pipeline, too, so it's making up a pretty big chunk of what you're looking at?

A little of both, although I was mainly referring to as we look at our Street rents today, the increase in market rents -- so where were the rents a year ago? Where were they two years ago? Where do we expect them to be over the next 12 months? We are continuing to see stronger market rent growth in those markets.

Now, that doesn't mean that we immediately get to capture it. We just acquired, as I mentioned, on M Street a building that is occupied by Banana Republic. They are probably going to be there for a long time. They certainly have the right to.

But what is good is that as these leases roll, we, I think, are afforded a better mark-to-market opportunity. And then contractually what we said on past calls and appears to be the case is we seem to be able to get about 100 basis points better contractual rental growth from our retailers on Street retail rather than on a blended basis in our Suburban side, whether it is on the discounter-anchored centers or on the supermarket-anchored centers.

So it is that growth that I was referring to overall. In terms of deal flow, it really runs the gamut.

Got it, okay. And then thinking of the opposite of acquisitions, on the asset sales side, self-storage portfolio is largely gone. You have had some other stuff. Can you talk about what we could see monetized in the funds over the next few quarters, next year or so?

Yes. Within the 25% that we refer to as stabilized, embedded into that is Pelham Manor, which we have stabilized as substantially fully leased; Fordham Road in The Bronx. There are two or three smaller assets in New York City that also could trade as well. But those that the two largest. You're talking about a couple of hundred million right there.

Got it. And do you think some of that or all of it gets done in 2013?

Don't want to make any predictions, but what I will say is we've been very encouraged by investor interest.

Okay. That was it. Thanks.

Quentin Velleley, Citigroup.

Ken, you spoke about your preference to buy Street Retail close to some of the existing street retail assets your own. Can you talk a little bit more about the opportunities that you're seeing in that SoHo Nolita/Bowery area of Manhattan?

Yes, the Bowery is a -- and I should always be careful, because my team always comes in and screams at me after these calls, saying I may enjoy talking about it, but I make their life more difficult.

That being said, the Bowery is no secret as to what is going on in terms of hotel interest, in terms of residential interest. And there's no doubt, and our retailers are telling us, that at the right time that area is going to transition and is going to be a very hot area for retail.

So if we can get our hands on more assets, and maybe I should keep my mouth shut, then we see that area continuing to be strong. New York City overall has just been incredible. The sales performance, the rental growth has been very strong. Every deal we did not do 3 years ago we probably regret.

We need to be careful of that. Just because it was compelling over the past few years doesn't mean it's going to continue to grow at that level. And our guess is that for those markets that are already established, it would be overly optimistic for us to assume that same growth trajectory.

So when you go into some of these what we call more emerging markets, like the Bowery, there is really an outsized opportunity to see real rental growth. So we will try to capture some of that as we can.

Was that -- I believe there is 10 or so buildings on the corner of Houston and Bowery, where there is Pulino's and a bunch of other tenants there. I believe that those assets sold. Was that something that you look closely at? And if so, would it have been something more suitable for the core or the Funds?

Very specific -- those were definitely assets that we looked at. Where you need to be careful in New York City is as you go above the first or second level, you are in alternative uses.

And then when it's residential -- we're not afraid of residential. We have shown our willingness to take those down, but you do need to be careful. What kind of residential is that's. Is it right for condominium? Is it at-market or is it rent regulated? What kind of rent regulation? And all of those different decisions, then, would determine whether or not these are stable assets with long-term growth consistent with our core portfolio; or assets that really require a lot of heavy lifting, vacating, and redevelopment, in which case, it would belong more in our Funds.

And I'm not going to comment specifically on those, but there is a host of different moving pieces that drive that decision making.

That is interesting. Thank you.

Rich Moore, RBC Capital Markets.

It sounded this morning, Ken, like when we listened to the GGP call, as one of the previous questioners was asking, their intent is to push more into Street Retail acquisition. Did you run into them on East Walton? Or are you thinking -- kind of indicating that that sort of size is too small for them, so you didn't see them on a transaction like that?

Yes. So our recent acquisitions, I think, happen to be off-market. I don't like to make too much of on-market versus off-market. I'm assuming the seller is extracting the top price.

I didn't listen to GGP's call. I am very fond of Sandeep. He is brilliant. I can't imagine that his business plan is to do one or two buildings at a time at that level. I welcome his enthusiasm for the space, and I think it is a very good positive reinforcement. As to the thesis, there's plenty of room for both of us.

Okay. So even in Chicago, where he's obviously got a big presence, you are not really running into him. You did, it sounds like, at 830. But outside of that, not really.

Yes. We all cross paths a little bit. I have found more often than not, and this is true over the past 15 years, as much as we all like to believe in REIT world that we are at the center of the real estate universe, we are not. And so almost always there is a very viable private competitor -- whether it is pension fund backed, sovereign wealth backed, debt-backed -- that focusing simply on the other REITs that are active in any given market that we are competing on, you are missing a wide swath of very legitimate, very credible buyers and competitors.

If there were no other REIT competitors, we'd still have to work our tails off to get our deals done. And if one or two decide they want to reemphasize into a given space, we've not found that that has changed our business plan at all. So we welcome all of it. And in fact, anything that brings the high-quality, institutional, high-integrity type of buyer into the marketplace with transparency in a way that a GGP does, that is good for our industry. It's good for our retailers. And I think, ultimately, it's good for asset values.

Okay, good. Got it, thanks.

And then on tenants using some of their space for distribution, we talked about that before. Are you seeing any furthering of that trend for retailers to take some space and do that?

Yes. And it is absolutely not cause for celebration whatsoever, because distribution space does not warrant the productivity or the rent that we like to receive. But retailers have pointed out, where they have stores that are larger in size and they have not been able to rationalize that size, they are considering utilization of the back portion of that space or some portion of it.

It still -- these are going to be long-term trends, Rich, in terms of how order fulfillment is best executed. What we know is that when a retailer is calling us for utilization of our space as storage, assuming it's not in our self- storage portfolio that we've already sold, that's probably not a good day for us. So we will try not to own too much of that.

Right. And so these are the big-box guys, mostly, that are thinking along these lines?

Well, not just the big-box. There are a lot of retailers out there who have been very candid; they need to downsize. And that has not occurred yet. And it probably won't occur until there is the appropriate catalyst. That catalyst could be their lease expiration. It could be, and I hope not, but their bankruptcy.

But so far we have not seen a wide variety of downsizings. And so some of those retailers are thinking about how they use space as distribution. But while that is a trend that I think is early and may be a positive compared to returning some of that space to permanent vacancy or farmland, that is not where we should be spending our time and resources.

Okay, good. Got it. And then a couple of quickies.

On G&A, and that was up in the quarter, what do you guys see as far as the rest of the year goes?

A little bit of seasonality there. Our expectation full year is $24.5 million, $25 million. So that is, again, what you should assume is in guidance, and that's what we expect to see.

Okay, all right. Sounds good. And then the transactional income from RCP -- any thoughts there?

There is --

We don't have any baked in.

Yes, nothing baked in right now. We do have some in our guidance. Let's see what happens in the second half of the year.

Okay, terrific. Thank you, guys.

Todd Thomas.

Just wanted to follow up on some of the leasing in the quarter. The 10 new leases that resulted in the 16% cash rent spread, the 40% GAAP rent spread -- was Crossroads lease -- was that lease with A&P in that bucket? And then can you give us a breakout of what those 10 new leases were in terms of Suburban versus Street Retail?

So the answer to the first question is, yes, the re-tenanting of a portion of the A&P space is in that new lease metric. In terms of the breakout between Suburban and Street, most of it is Suburban. I don't know -- I don't have an exact number for you, but the majority is Suburban in terms of what is driving that new lease metric.

Same thing with the renewal leases. The majority at this point is Suburban leasing.

Okay. If we look ahead, then, to 2014, the expirations in the core represent a little more than 12% of base rents. What kind of opportunity is there to mark up those expiring rents just based on the direction of the market rents and what is rolling? Are there any near-term Street expirations? Or would you say that they are mostly longer dated?

I think the Street expirations in general are longer dated. And in terms of opportunities, there are opportunities throughout that. And my expectation is when we look at the 2013 leasing result, you take out Crossroads, that probably puts us for new leases in the single high digit cash -- or mid to single high digit cash, mid-teens GAAP. That is probably a reasonable expectation for 2014.

Jon, I think Todd was trying to get you to give guidance for 2014 this summer, which would be very unusual for you to do. Good try though, Todd.

And then, yes, the breakout of the portfolio is definitely helpful. As the Street Retail segment gets larger, any thoughts about breaking out the lease expirations in terms of Suburban versus Street?

We certainly are looking at that. The thing we need to be careful about is there's still relatively small portfolios. And small events can have, from a percentage perspective, a big impact.

So we just want to make sure that it is relevant and that is useful, but certainly are looking at how best to present that going forward. So stay tuned. And it's an evolving process. But certainly do want to be able to capture and reflect the performance of the Street component of the portfolio. As we've talked about before, we think it will, over the long run, outperform the rest of the portfolio. So stay tuned.

Okay, great. Thank you.

Quentin Velleley.

Yes, Kenneth. Michael Bilerman. Just a quick question -- on the assets that you are marketing out of Fund II, I guess you are marketing 100% of the asset. Are you talking to potential investors to step in to maybe just the 80% stake that you don't own? And then how would you evaluate potentially consolidating those assets if you were the buyer?

We have in the past once gone ahead with a recap like you are discussing, where the Fund -- this was Fund I -- was bought out, and we stayed in place. Because that was at the time what we determined and our Fund investors determined to be best execution.

There is enough interest right now that I wouldn't count on that being best execution. These are strong assets, so I'm sure there will be a wide variety of interest.

If that turned out to be the case, then we have shown in the past, we are willing to step up. These are good assets that we like, and we certainly could do it. And then those would be consolidated.

Look, everything is consolidated onto our balance sheet. We would then deal with it in the Sup accordingly.

That's right. That is right.

I'm saying more from a capital perspective. Do want to hold a -- you could sell 100% of the assets and go home; you could sell your Fund's 80% stake in the assets and you keep 20%; or you can buy 100%.

Those seem to be the three options. I didn't know which way you were leaning, and how important these assets were to your platform and your strategy. They each have different (multiple speakers) outcomes.

Well, door 1, door 2, and door 3 are always stuff that we need to be open mind to considering. None of these assets are so inexorably linked to our growth strategy that it should move the needle materially one way or the other. And on this call, given where we are in the marketplace, it would be inappropriate to comment on which I think is the best way to do this.

We are fiduciaries. We have a responsibility to make sure we get best execution for our Fund investors. So that comes first and foremost. And if we do that right, as we have in the past, we make money for our shareholders.

Great. Thanks for the time.

Sure.

Thank you. I will now turn it back to Mr. Ken Bernstein for closing remarks.

Great. I thank everyone for taking time to listen today. I am grateful that no one made any comments about the 15 years that we've been doing this, but it has been a pleasure. And look forward to speaking to everyone again in the Fall.

And this concludes today's conference. Thank you for joining. You may now disconnect.