Acadia Realty Trust (AKR) 2014 Q1 法說會逐字稿

Welcome to the First Quarter 2014 Acadia Realty Trust Earnings Conference Call. My name is Vivian and I will be your Operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Ms. Amy Racanello. Ms. Racanello, you may begin.

Good afternoon and thank you for joining us for the First Quarter 2014 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, May 1, 2014 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. Thanks for joining us. Today I will start with an overview of our performance then Jon will review our earnings. and our first quarter operating metrics.

We're four months into 2014 and off to a strong start. We're meeting and exceeding several of our key metrics and goals. With respect to our core portfolio, not only did our existing assets produce sold same-store NOI growth, but also by continuing to accretively add higher growth to street retail assets we believe that we're further differentiating our Company and positioning it for continued strong performance.

Then with respect to our funds platform, we continue to make important leasing and development progress on our existing investments and in the first quarter we also expanded our street retail program with an investment in Savannah, Georgia. This investment is consistent with our emerging market or what we call next generation retail strategy.

Then finally as Jon will discuss, during the first quarter we maintained our historically strong balance sheet metrics and thus looking ahead both platforms are well-positioned and well capitalized for growth.

With that in mind, let's begin with a review of our core portfolio. I'm going to leave a detailed discussion of our operating results to Jon but I'd like to point out a few observations. First, our strong same store NOI growth follows a very solid 2013 performance and it's consistent with our full year guidance of 4% to 5%. Looking ahead as our portfolio approaches stabilized occupancy, more and more of our internal growth will be driven by a combination of contractual rent increases and then periodic mark to market opportunities.

Approximately half of our core portfolio value is now comprised of street and-or urban retail where strong tenant demand and rising market rents are creating outsized opportunities for growth. This was certainly evidenced in our first quarter leasing spreads which were positively impacted by the recapture and releasing of one of our New York City street retail locations. We're in the process of completing the necessary steps to deliver the space to the new tenant and at that time we'll provide further color on that transaction.

Now in terms of core acquisition activity, as you recall, last year we added $220 million of properties to our portfolio and then guided to $200 million to $300 million of acquisitions for this year. As of our last earnings call, our acquisition pipeline was $92 million. Since then our teams made additional investment progress and we've increased our pipeline from $92 million to $148 million of which we have closed $84 million. As a result, although we're only a third of the way through 2014, we're already within striking distance of the lower end of our core acquisition guidance and in fact we believe that we're on track to meet or perhaps exceed the upper end of our goals.

As was the case last year, the transactions in our pipeline are primarily high quality, street retail or dense suburban assets. Given the changing retail landscape and the reality that our retailers are continuing to do more with less, we believe that our continued emphasis on high quality street retail and then dense suburban assets is going to translate into superior long-term growth. That will provide us with both upside opportunities as well as downside protection. This year we're focused on strengthening our existing street retail foothold in those top tier markets where we're already active.

For example, subsequent to quarter end we acquired another asset in Manhattan's SoHo submarket. This property is located on Spring Street which is one of SoHo's main retail arteries. Our tenants include Kate Spade Saturday, who has contractual rent growth of 3% annually. It's worth noting that we acquired this asset by exercising a purchase option that we included in a loan we made in the end of 2012. In this instance the option was at a specified cap rate which then afforded us attractive pricing in light of the continued cap rate compression we're seeing in the marketplace.

As we previously discussed we focused our mezzanine financing program on investments that not only provide an attractive current return but also create opportunities to acquire the underlying assets. This was the case in Georgetown in DC where in 2011 we converted a preferred equity investment into a permanent ownership position and now looking ahead this April we planted another seed in Chicago by making a $13 million loan on an asset located in the Rush Street Corridor.

Additionally during the first quarter we continued to aggregate street retail assets in the affluent towns of Greenwich and Westport, Connecticut where household incomes average more than $175,000. On Greenwich Avenue we acquired a property that's located immediately across the street from our existing Restoration Hardware location as well as right across from Ralph Lauren's flagship store. This property is currently tenanted by Madewell, Calypso, and Jack Wills and generates contractual rent growth also of 3% per year.

In Westport we acquired a property located on Main Street at the 50 yard line which is down the street from our existing TD Bank, Westport remains an important market for our retailers. For example, Ann Taylor chose Main Street in Westport for its first freestanding Lou & Grey store. Our property is currently occupied by Chico's. Although their rent is flat for the next couple of years we also believe that it's below market. And so when we're afforded the opportunity to retenant that space we should be awarded with attractive rental growth.

During the first quarter we also strengthened our presence in Chicago. As you may recall, at the beginning of the year we acquired a property located at the base of the Waldorf Astoria in the Gold Coast. Currently that property is tenanted by Marc Jacobs and YSL. This property complements our other Rush and Walton Street assets including those leased to lululemon, Barber, Brioni. Then in March we acquired a well located property that's leased to Forever 21 in Lincoln Park's high traffic North Avenue corridor. This submarket is home to tenants ranging from an Apple flagship store to Whole Foods. Forever 21's lease provides for growth of 15% every five years which is also consistent with our expectations for larger format retailers in street locations.

Turning now to our fund platform, as we've previously discussed, our acquisition activities are centered on four key strategies. First is street retail reanchoring and lease opportunities. Second is investing in emerging or next generation street retail investments. Third is investing where there are distressed retail opportunities. And then the fourth bucket is the broader opportunistic investments we make periodically.

With respect to new investments, during the first quarter Fund IV entered into a joint venture with Ben Carter Enterprises for the acquisition and redevelopment of 18 street retail buildings located on Broughton Street in downtown Savannah. With 12 million tourists visiting Savannah annually, our retailers have made it clear to us that Broughton Street presents a compelling opportunity for them to expand and promote their brand in a unique and productive manner. To date Gap and Urban Outfitters have each opened several of our their formats including Gap, Banana Republic, Urban Outfitters, Anthropologie, Free People. These retailers have also been joined by Marc Jacobs and Kate Spade and are situated alongside several thriving local retailers who we expect will remain an integral part of the Broughton Street corridor.

Our partnership has already signed leases with J.Crew and Lilly Pulitzer and the restoration of the city's beautiful and historic architecture is well underway. This redevelopment is being led by Ben Carter and his talented team who identified the potential of and then articulated a vision for Savannah as a top shopping, top dining, cultural, and entertainment destination.

Fund IV's investment is structured as a senior preferred equity investment and also includes a debt component. The cost for the initial 18 property portfolio is projected to total $50 million with the expectation that this amount will grow as our partnership makes add-on investments. New investments during the first quarter, our team made continued leasing and redevelopment progress, for example at our Cortlandt Town Center in Westchester, New York. We leased a final junior anchor box which increased the property's leased occupancy from 94% to 97%. To date on that project we have financed out all but $5 million of our $89 million cost basis and as a result our current unlevered return is not in the mid-nines and our leveraged deal is obviously multiples of that.

Then with respect to our largest development project, City Point, as we've stated on previous calls, we've successfully completed the pre-anchoring of levels two, three, four, and five with retailers ranging from City Target to Century 21. Construction on phase two is now about 60% complete and the anchor retailers are anticipated to open in late 2015 or early 2016. It's worth noting that the available street and concourse level retail spaces which comprise only about a third of the commercial square footage are projected to represent about 60% of the total rental revenue which means that we still have plenty of value creation opportunities in front of us that will enable our project to continue to benefit from the ongoing strengthening of downtown Brooklyn and especially Fulton Street.

On the residential front for City Point you recall we have three towers. The first which is currently under construction is an affordable housing tower that's being developed by BFC Partners under the 50-30-20 program. The second tower will be developed by the Brodsky Organization. We contracted to sell that tower in mid-2011. And we anticipate delivering the podium and completing the sale of those development rights during the second quarter of this year. Then finally we still own the third and largest potential tower development which is approximately 570,000 square feet of development rights. We anticipate a sale of this by year end.

So, in conclusion, during the first quarter we made steady progress across both our operating platforms and both in terms of our existing assets as well as new investments that we made. Then looking ahead we remain well positioned, well capitalized, highly motivated to continue to execute on this plan. I'd like to thank our team for their hard work during the quarter and I'll turn the call over to Jon now.

Good afternoon. We are pleased with our first quarter results in both the core and fund platforms. A few areas I'd like to expand on for the purpose of this call are the core portfolio, our structured finance portfolio, and earnings.

First, an overview of the core portfolio which generated strong results for the quarter. Occupancy was 95.6% at quarter end which was up 40 basis points over year end 2013. And on a same store basis, first quarter 2014 overall occupancy was 95.2%, up 140 basis points over first quarter 2013 and the shop space occupancy of 90.2% represented 170 basis point increase.

Same store net operating income was up 4.3% for the quarter. Some noteworthy points related to this, full year 2013 same store growth of 7.2% included some contribution from reanchoring activities. For first quarter 2014 and for that matter our full year 2014 forecast of 4% to 5% do not include a similar contribution from these activities. In the first quarter growth was broad based across the portfolio. With that being said we did experience higher growth in our street retail portfolio which currently makes up about a third of our same store pool. Also keep in mind there is another 10% plus all street retail of our current NOI that is from our 2013 acquisitions and accordingly isn't currently included in the same store NOI pool.

The other interesting phenomenon is that to a large degree, and different from the experience of some other retail portfolios and even for that matter different from our own experience in previous years, the net impact of winter related expenses was not a significant drag on our NOI. The three underlying factors that mitigate this for us are, one, our recovery of these expenses is very high as occupancy now stands at over 95% and furthermore, although some of our leases cap the year over year increase in the [can] expense pool, virtually all of those leases also exclude snow removal expense from that limitation.

Second, 75% of our larger shopping centers have either fixed or substantially fixed snow removal contracts. Then finally, but not least in importance, our street assets typically have no or very little parking lot that requires salting and plowing. As these assets are a growing percentage of our core winter-related expenses have correspondingly become less of a factor.

Leasing spreads were 74% on a cash basis and 100% on a GAAP basis. Although a significant positive, this result was based on a small amount of square footage, as Ken mentioned, driven primarily by one location located in New York City. Although it's a stretch to extrapolate this across the entire portfolio, it is continued anecdotal evidence as to the embedded rent growth or upside we've seen in some of our other street locations.

Looking at our structured finance portfolio, subsequent to quarter end we, as Ken mentioned, made a new first mortgage investment of $13 million in Chicago and converted a $38 million first mortgage note into an equity position in SoHo. We also collected an aggregate $10 million on loans originated in 2007 and 2011.

So, adjusting our $120 million quarter end principle balance for the subsequent activity, our portfolio now totals just under $90 million with about a third of this being first mortgage loans and two-thirds being mezzanine debt.

Turning to earnings which were consistent with our expectations, FFO for the first quarter was $0.32. This includes acquisition costs of $700,000 or $0.01 on the deals we closed during the quarter. Keep in mind, our earnings guidance is before such costs. One item to note for GAAP earnings is the $12.4 million gain from the cancelation of the $23 million nonrecourse loan on the Walnut Hill Plaza in Rhode Island.

Given the pace of our 2014 core acquisitions and solid performance of the existing core funds, we now have a bias to the midpoint as opposed to the lower half of our annual FFO guidance range which is $1.30 to $1.40. Commensurate with our significant additions of high quality properties to our core portfolio, over the last three to four years, the amount and stability of our overall cash flows and earnings have followed suit.

And our fund platform also continues to fuel earnings growth although some of these earnings can and have varied quarter to quarter and even year to year. For example the earnings generated from our promote interest in the funds has been significant over the years but the timing has been correlated to when we monetized certain fund assets as opposed to a more regular pattern. I typically use the technical term lumpy to best describe this. We now expect additional lumpy fund income in 2014 from the expected sale of residential air rights at City Point.

Although it's premature to forecast a specific amount of profit, it's clear that the market is somewhere north of $150 a square foot which could potentially generate income of $0.10 to $0.15 per share. And furthermore, as this sale of air rights is not a sale of depreciated property, it would be included in FFO. Our current guidance of $1.30 to $1.40 does not include this but we will certainly keep everyone posted and update guidance as this progresses.

In terms of the balance sheet we continue to maintain a low risk, low cost, capital structure. Our fixed charge coverage ratio including our pro rata fund activity increased from 3.1 times as of fourth quarter 2013 to 3.4 times for the first quarter 2014. Our net debt to EBITDA was 4.9 times at year end. It's now a tick better at 4.8 times as of the first quarter.

In terms of equity issuance, we have been and plan to continue to exercise discipline using new equity. For 2013, we raised a total of $114 million of equity consisting of $81 million under our ATM and $33 million in OP units. During the first quarter of 2014 we raised another $27 million under the ATM to continue to match fund our investments.

Looking at our 2014 capital needs, in terms of the current $64 million core acquisition pipeline and our remaining 2014 target acquisition activity, we have sufficient dry powder both in terms of liquidity and leverage to fund these without being overly beholden to the capital markets. Fund IV has $400 million of remaining committed equity to drive growth in that area for the next couple of years. So, our healthy balance sheet and fund capital provide us available capital and flexibility in sourcing that to enable us to continue to execute our strategies in both the core and the fund platforms.

With that we'll be happy to take any questions. Operator, please open up the lines for Q&A.

(Operator Instructions) Christy McElroy, Citi.

Just in terms of Broughton Street, what's your (inaudible) street retail in Savannah, if you could provide a little more color about what the street looks like today, what's sort of the long-term vision there? Can you talk a little bit about going in yields and projected returns?

Sure. First, I've got to give Ben Carter a lot of credit for recognizing that given what is going on in other streets, ranging from Charleston to what we see in Georgetown, that he saw there was clear demand based on the number of tourists they get, the style of the street, the architecture, and the potential. He spent a fair amount of time educating retailers, so by the time we got involved our retailers were pretty clear to us that this is an exciting area for them.

So, the same retailers that we work on whether it's in Chicago, Westport, certainly SoHo, you're going to see many of them showing up and as I mentioned in my remarks, we've already signed with J.Crew which I think is a pretty good leading indicator. As I mentioned, our investment because we've spent less time on this than Ben has, our investment is a senior preferred. What that means is we're 50-50 partners and assuming this does well and we're all very confident about it, we will share 50-50. But in terms of downside protection, we get our capital back plus a return on our capital which affords us a fairly nice cushion. So, we're expecting mid-teens levered returns and that's how our deal is structured but in terms of the potential of this lease up, there's no reason that on an unlevered yield basis if these retailers are showing up the way we expect that we won't see our traditional unlevered goals ranging from 6%, 7%, 8%, 9% and then in all of those instances because of our senior preferred it translates through very nicely. If you come visit this property or the street in the next few years, my guess is it's a year away.

What you're going to see is the perfect combination of local merchants who are doing a fabulous job down there with the right fashion and lifestyle retailers that we're used to dealing with and I think it's going to be a good extension as retailers start thinking about where can they open exciting new brand consistent locations given that there's not going to be more A malls developed and there's a limitation in how that executes. Coming to SoHo is fabulous. We want to see the mall there. But they're also thinking about where is that next generation. This opportunity gives us a chance to be responsive to our retailers and also come in on an attractive preferred basis.

Ken, you mentioned continued cap rate compression in some of the more major markets that you've been buying in, Chicago, Manhattan, Fairfield County. You have $150 million under your belt so far for this year. Can you talk about the cap rates that you're paying in each of those markets where you're buying street retail for the core?

Sure. Let me break it out into a few components, because I think it's worth nothing. If what we said was we need to spend $1 billion on street retail in the major markets, we would certainly be forced to bid and do most of our transactions at kind of best pricing in well marketed deals. That in fact is a fairly small piece of what we're doing. But what we're seeing for the right assets in SoHo, cap rates are 4 and lower. For the right assets in Chicago they may be 50 basis points behind but not much more than that. Westport, Connecticut, Greenwich, et cetera. But keep in mind if you look at last year, for instance and our yield expectation this year as well, we're going to be in the 5s. The way we get there is, one, we're not doing $1 billion of it.

Two, as Jon had mentioned, a certain component of our transactions last year in Tribeca, for instance, it was an OP unit transaction. And as most people are familiar with OP unit deals, they're tax deferred and the contributor of the asset is often looking to take their high quality asset and diversify it but not dilute the quality. So, if you have a high quality street retail location and you own it at a low tax basis, we're an ideal candidate for that contribution. And while you'll care about pricing as the contributor, you're thinking 5, 10, 15 years out. So, that has also helped us on pricing.

Finally, what I mentioned in terms of our latest Spring Street acquisition, there we made a opportunistic loan helping out a developer entrepreneur 1.5, 2 years ago with the understanding that we were locking in a option to buy at a fixed cap rate that is 50, 100 basis points plus better than where it might have executed in the open market today.

So, I'm not a huge believer that off market deals automatically translate through into a benefit to us as buyers, you as shareholders, but by not having to do a huge amount of volume and being selective, by utilizing our ability to issue OP units, we're utilizing our ability to make these opportunistic mezzanine loans, we're able to what we think is buy accretively and ahead of kind of where the markets are today.

None of your street retail tenants I think report sales SKU. Is that something that you would consider disclosing in the future if you continue doing that street retail portfolio?

Christy, I want to let other people chime in with questions. We'll get into I suspect the discussion of tenant productivity. I'll make sure to answer that at some point.

Thank you.

Craig Schmidt, Bank of America.

I'm curious about how many potential next generation street retail markets there may be. Obviously you may not be able to specify given you go and alert people but how many more markets could you be rolling out in like a Savannah?

I am disinclined to say a specific number. The stars have to align correctly, Craig. There are certainly even primary markets that we're not in today and we've been pretty clear that whether it's primary or secondary, we're going to be very thoughtful about which next steps we take. So, you could go up and down the West Coast and point to two or three markets you'd like to see us in someday and we very well may be. But we're going to be very deliberate about that.

As it relates to the Eastern seaboard, there are only a handful where our retailers are interested, where the barriers to entry and the right entry point exists. When it does, we'll show up. We thought for instance that Lincoln Road was and the time we bought it I think that was the general perception, that it was up and coming, emerging. What happened and the phenomenon in Miami overall where Miami is on the cusp if not already considered a core market has been fascinating and very rewarding for us to see. But there are certain ones in Florida, certain others as we move up the Eastern seaboard into Boston. But very few. We don't need many. When we see them we'll execute on it.

The tenants we're talking about in Savannah are for the most part domestic. Do you think this is ultimately a market where we could see the international retailers come as well?

I think so. The international retailers are clear to us that almost without exception when they're thinking of an entry into the US is that there are a handful of key first markets and thankfully we're in many of them. But then they'll talk about additional roll outs. The other thing you need to keep in mind with international retailers and frankly all of our retailers is they're thinking about all of their different channels and different ways to utilize these channels so resort and vacation destinations could be part of a multi channel rollout but that may take a few years for several of these retailers to execute through. That's fine with us, because the domestic interest, if you want to refer to it that way, is real strong.

Okay. Do you want to comment on sales productivity of your tenants?

It would strike me as next to impossible for us to be able to disclose store by store productivity and sales. Our retailers would really push back on that. But we will endeavor to provide better and better information as to what kind of sales productivity we're seeing on the different retail corridors that we're most involved with, whether it be a Greenwich Avenue or a Spring Street in SoHo, et cetera. But I think it's important to not over focus on any one metric and sales would be one of those metrics that we all like to really focus on but I would caution everybody. We think about our retailer sales in a broader form of tenant health. And just like any of our own health, we wouldn't think of looking just at our blood pressure, retail sales are one of the metrics and as we talk to our retailers, sure it's important but it's one of the metrics.

So, keep in mind, first of all, that not all sales are created equal. And by that I mean if you're in a generic retail location doing $275 a foot your rent to sales ratio is going to be really important because your fixed charges are a big part of your total sales. As you start moving up and in most of our locations we're in much higher sales productivity than that. What our retailers tell us is that in many instances because fixed charges remain the same otherwise but for rent that the rent to sale is a component but not nearly as critical when you're doing $1000 a foot or $1250 a foot, et cetera.

Additionally, we ought not underestimate the importance of omnichannel, of branding, of watching our retailers tear down the barrier between the online execution and in store and so those locations that afford that execution are also much more valuable to our retailers even if it doesn't show up in the reported sales. Finally, what I'd remind all of us and we see it every day, the retail business is a very Darwinian business.

So, while I like looking at tenant sales, it's very often you'll see a retailer sales continue to decline even when other retailers are continuing to thrive. We need to recognize that in the supply constrained corridors that we're active in, there's some retailers that I'm very fond of that this might not be the right location for them and that's fine with us because given the strong rental growth, almost without exception, we're happy to take that space back and make a nice releasing spread on it.

We're going to work to provide more information where we're allowed to, where we can, I think it'll be interesting but let's not over focus on it because I think that would be a mistake.

Thank you.

Todd Thomas, KeyBanc.

First question, regarding the big rent spread in the quarter, I was wondering if you can share how many square feet that was within the overall new leasing square footage that was completed in the quarter? And also it looks like a big number for the tenant improvements. I was curious how much time it might take for rent to commence at that space.

It will take a few months plus, Todd. Because we're doing a pretty extensive gut rehab of it. Jon? I think it's 11,000 square feet?

It's 10,000 square feet.

Right. I don't mean to be particularly -- we like to provide a lot of transparency. There's a few relatively minor steps we need to go through to make sure we get this tenant opened on time in the right way. So, we're not providing the usual amount of details on this but on our next call I think it will all be crystal clear.

Just to get a sense for sort of the economics on a street retail property like this, I was wondering if you could talk about the unlevered IRR at this property. So, you're investing some capital. Maybe what your yield on total costs will look like once rents commence?

It will be very good, Todd, but that's exactly what I don't want to do. I don't need to read in Crane's that we're making a gazillion dollars on the following thing until we've dealt with all of the minor but you never want somebody putting their hand out unnecessarily. It's all good. I'll shift away from this specific one and just say in general what we like about the street retail component of our portfolio is just that. When we can get back these spaces, there are often opportunities because the market continued to build and the tenant demand and it's a fragmented business as opposed to our suburban where our retailers are consolidating. There's more new retailers than a year ago I'd even heard of that are interested.

So, in general, when we're afforded the opportunity to get space back, it's going to be additional upside. But let's also point out the obvious in street retail. There are tenants above us. There are coops above us, there are a host of other players involved. I just want to make sure we get all those pieces buttoned up before I read about this in the press. It's not that big that I would encourage the press to write about it but it's a nice pop for us and I apologize about being even slightly coy.

Understood. Just lastly then, Jon, the promote income that you quantify, I think you said $0.10 to $0.15 a share. So, I guess $7 million, $8 million to Acadia. That's just related to the potential sale of air rights at City Point. Is it correct to assume at that point Acadia will be in the promote for Fund II and then all cash flow and return of capital from the commercial space at City Point and the few other assets in Fund II will get distributed according to the promote splits going forward?

No. We called all of the investments in the fund are pooled. All the capital, all the fund capital and all the prep has to be paid out before we're in the promote position. And frankly that won't happen until down the road when we most likely monetize the rest of City Point. So, it's a little bit early to start talking promotes at this point.

Okay, got it. Thank you.

Jay Carlington, Green Street Advisors.

Ken, can you maybe talk about what your street retail occupancy cost ratios are? And maybe the comparable market occupancy cost ratios are for your portfolio?

Kind of. I was touching on this before, Jay. The sales run the gamut. And so as you can imagine, if you have a thriving lululemon, for instance, who can do $2000 a foot in sales in a $1000 a foot market in general, rent to sales are going to look very low. But lulu to their credit said, that's fine. Those are our sales, not your sales. It really does run the gamut. I would caution any of us from being overly focused on just that metric because as I said before, not all sales are created equal. As you get into the higher and higher productive locations, rent to sales is less of a factor when we talk to our retailers than a broad base of factors. That being said, what we are seeing is in our suburban portfolio the flexibility that I was just articulating does not seem to come up in our retailer conversations with the many retailers I love very much but ranging from Bed, Bath, and Beyond to T.J. Maxx, they're very disciplined about their rent to sales ratio. Those two will range but they'll often be single digit, high single digit to 12%, 13% in some instances. They need to be if it's a more common productivity location. They're going to be very vigilant about that. They have their model, they have their tight margins and they need to watch that carefully.

The suburban side, it matters, and we'd need to drill down retailer category by category because as you can imagine, Kmart sales and a good Kmart looks very different than a good Target. On the street retail side, we're watching it because we need to know in general that not only are our retailers passionate about coming to Rush Street, passionate about being on M Street in Georgetown, but that they're also profitable and in those discussions, they have assured us they're not doing these leases with us for kicks. These are profitable locations. They're renewing because they're profitable locations. But I am hesitant to point to one rent to sales and say this is good and anything higher rent to sales than that, we're in trouble and anything lower we're safe because it just doesn't play out that way.

Maybe on the potential acquisitions in some of your core street retail, kind of unrelated to pricing. Is there a certain radius you maybe look to consolidate? A lot of your deals you're doing are across the street, on the same block or in the same neighborhood. Can you maybe talk about what type of synergies you're seeing there or maybe how you think about your next purchase down the road?

Yes. I've always been very cynical about the concept of synergies. It's something we all kick around but often they're promised and not delivered. Here -- there's a few different phases. First of all there's what I would call retailer intelligence and that means if we have four or five stores on the Rush Street corridor, for instance, we then know which retailers are doing well, where's there's demand as our leasing team is talking to new retailers looking to enter the market we get a sense of how aggressive they might be willing to do. It increases our knowledge. It increases our confidence in a given submarket. That's step one. That is very helpful. I never want to underestimate that.

But then the question will be -- and we're starting to execute on this in a few places in Chicago and Lincoln Park, for instance, on Clark and Diversey, through now it's been I think it's been five acquisitions we have amassed a high level of concentration and control on that submarket. The rents have grown significantly -- nothing to do with us. It's a great market. But now we're in a position where we can get back a bunch of space, move some tenants around potentially, and bring that somewhat more dated physical plant to the next level. As you see us concentrate in certain submarkets, that will help as well.

And in the final piece, because I do think you will see us continue to add to the markets we're in as opposed to dabble in the markets we're not in, is the deal flow is just better when you're there. So, we get to know our neighbors. If they want to contribute assets for OP units, we know them that much better. We know and we're the first call for many of the brokers who are involved in many of the transactions. So, it just helps in terms of getting first looks, early looks, et cetera. All of that I think starts to inure to our shareholders benefit, starting kind of where we are right now. 50% of our portfolio is street retail. We have doubled the size of our portfolio over the past few years. I've been pretty clear that we were too small a few years ago. I think we're now getting to a point where we're starting to feel the benefit of all of those leverage points and then my expectation is that starts to translate through in terms of growth along the lines I just talked about.

Great, Thank you.

Paul Adornato, BMO Capital Markets.

With respect to City Point, if you're looking at a late 2015 or early 2016 opening, does that mean we'll have some visibility on the shop space rents by the end of this year?

We'll see, Paul. So, we have been extremely disciplined about mitigating our risks over the past several years and in each of these mitigations that we sold a year or signed a lease three years ago or sold a residential, because of how much this market has appreciated, we definitely left money on the table and I'm okay with that because our job is to be responsible shepherds of capital. So, we have preleased five, four, three, and two. We have sold off or are about to sell off this year all of the residential.

I don't want to appear or sound greedy as it relates to street retail but this is going to be great street retail space and in case any of our retailers are listening, they're not going to get a discount for signing this week versus four months from now. There's a few key retailers that we're working with now. If they step up, fabulous. If not, this space -- because Fulton Street is taking off. This space is going to lease up really well and we have earned the right to get the right rent for all of this. Nordstrom Rack just opened this week. H&M is open there. There's a host of other retailers that are coming in. We're going to do the right thing by this but I don't want to measure it in terms of a fourth quarter earnings call or something like that. When we find the right retailers, when they're ready to pay the right rent, we're signing them.

Fair enough. Jon, with respect to the big lumps that you're expecting, with the sale, $0.10 to $0.15 as you mentioned, any thought to letting shareholders take their lumps so to speak in the form of either a regular dividend increase or a special dividend?

Would that be one lump or two? Obviously we're looking at our overall tax position and our redistribution requirements. Let us get further down the road in terms of 2014 and we'll see how this fits in with our overall position. So, it's a little bit early to start talking special distributions at this point.

Maybe just one more. Ken, I was wondering if you could provide a comment on competitive capital flows out there? A lot of talk of a lot of private equity money looking to invest and so how does that effect your fund pipeline?

Yes. It's funny, speaking of private equity, I read in the Journal this morning, one of the private equity CEOs saying the world continues to be awash in liquidity and investors are chasing yields seemingly regardless of quality and risk. That resonated for me because we are certainly seeing and to the credit of the REIT community, less in the publically traded REITs and more in some of these other vehicles that are raising a lot of capital and are focused and probably over focused on yield seemingly regardless of quality and risk. Yes, there's a healthy amount of capital out there. That being said, I don't see anything in the near-term that is nearly as troubling as it was in 2006 or 2007. And so I don't know where the disruption -- or I wouldn't wait for that disruption.

From our deployment of capital, what we're starting to see is entrepreneurs reemerge into the marketplace. They're willing to take risks but they're looking for institutional partners who can also provide execution ability. Our Savannah deal would fall into that category. We're seeing some debt maturities that require recapitalization. Thus I'll continue to be fairly cautious, disciplined about how we put that money to work. If the deals aren't there, we won't. But there should be a fair amount of opportunity as this market continues to evolve.

Okay, great, thank you.

I think we have time for one more question.

Operator? Is there another questions?

I'm not showing any further questions at this time. I would now like to turn the call back over to Ken Bernstein for closing remarks.

Thank you, all, for taking the time with me today. We look forward to speaking with you in the near future.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.