Acadia Realty Trust (AKR) 2014 Q2 法說會逐字稿

Welcome to the Acadia Realty Trust earnings conference call. My name is Vanessa and I will be operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

And I will now turn the call over to Amy Racanello, Vice President of Capital Markets and Investments. You may begin.

Good afternoon and thank you for joining us for the second-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 July 30, 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.

Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue and we will answer as time permits.

With that, I will now turn the call over to Ken.

Thank you, Amy. Good afternoon; thanks for joining us. Today, I will start with an overview of our second-quarter results and then Jon will review our earnings and operating metrics.

As a general overview, during the second quarter, we made significant progress across both our core portfolio as well as our fund platform. It was another quarter of continued improvement in operating fundamentals for both our street retail as well as our suburban assets. That being said, the street retail portion of our portfolio continues to outperform both our expectations in terms of operating performance as well as capital market interest.

First, a few key highlights from our core portfolio. During the second quarter, our properties delivered strong same-store NOI growth of 4.9%, which this quarter was driven most notably by our Chicago street retail portfolio.

As we've discussed on previous calls, we expect that our street retail property should provide superior growth over any extended period of time compared to our suburban portfolio. And that's going to be driven by approximately 100 basis points per year of contractual rent outperformance, and then more frequent and hopefully more profitable mark to market opportunities. So far, our second-quarter and year-to-date results are consistent with that thesis.

Now in terms of our core portfolio acquisition activity, during and subsequent to the second quarter, we completed acquisitions of $102 million of properties and put another $68 million under contract. As we've previously discussed, we anticipate that the majority of our acquisition activities will be street retail-focused. And consistent with these goals, during the second quarter, we expanded our presence in Manhattan's Soho submarket.

As we previously discussed in April, we acquired a property located on Spring Street. Then at quarter end, we entered into a contract to acquire another equally well located Soho asset. We will provide further color after that transaction closes, but this will be another off-market OP Unit transaction similar to our Tribeca acquisition at year end.

We are finding that having the ability to issue tax-deferred OP Units is a good way for us to differentiate ourselves from the broader market, which is primarily comprised of cash buyers. And we like the fact that when owners of high quality street retail assets consider an OP Unit transaction, they recognize the compatibility with our high quality portfolio and as a result, we are on a relatively short list.

Along with our street retail acquisitions, at the same time, we're going to continue to complement these high street assets by selectively adding properties located in densely populated urban as well as supply constrained suburban markets. For example, during the second quarter, we acquired a well-located asset situated directly across the street from Kings Plaza in Brooklyn.

This property was acquired from Capital One. We locked in the pricing approximately a year ago prior to the property stabilization, which then enabled us to acquire the asset at a cap rate in the 6%s. It would clearly trade for better pricing today.

Subsequent to the second quarter, we also added a supermarket anchor property with extremely high barriers to entry located in Westchester County. This property benefits from the affluence of the immediate trade area, which is reflected in the average household income of nearly $200,000.

The property was acquired for $47 million at a yield similar to our Brooklyn acquisition. The center has older, primarily below-market leases and in the long term, there could be an opportunity to expand the very high-performing supermarket.

So with $260 million of acquisitions year to date either closed or placed under contract, we've already exceeded the low end of our full-year acquisition goals and based on the deal flow that we're seeing now, we are on track to meet or exceed the upper end.

Turning now to our fund platform. As we've previously discussed, our fund investment activities are centered around four key strategies: street retail turnarounds, next-generation or emerging market street retail, distressed retailer opportunities, and then opportunistic where our current focus has been on high-yielding properties.

With respect to new investments on the opportunistic front, subsequent to quarter end, Fund IV acquired a high-yielding shopping center located just outside of Wilmington, Delaware, in partnership with MCB Real Estate. The 236,000 square foot property was acquired for $25 million and that equated to an initial cap rate of about 9%.

In the near term, one of the center's two anchors, Lowe's Home Improvement, is planning to relocate and expand at a nearby site, providing us with the opportunity to re-anchor that center. With respect to our street retail investment in Savannah, Georgia, during the second quarter, Fund IV, as part of our partnership with Ben Carter Enterprises, added seven more properties to our Broughton Street venture, increasing the transaction size to $65 million from $50 million.

Year to date, our team has also made significant progress on the disposition front with respect to our funds. First, with respect to Fund II's CityPoint development in downtown Brooklyn, as you will recall, the project includes about 0.5 million square feet of retail and then three residential towers.

The first residential tower, which includes affordable housing, is being developed by BFC Partners and that is currently under construction. During the second quarter, as we previously discussed and contemplated, we completed the sale of air rights for the second residential tower to the Brodsky Organization. We delivered the podiums at this tower and construction is now underway.

Then most significantly, during the second quarter, we executed a sale contract with another high quality developer, who will build the residential tower on phase 3. Since this sale is still subject to the satisfaction of certain conditions, we will save further disclosures for our next call. But suffice it to say, the pricing was consistent with our expectations for this very strong and thriving market.

Turning now to Lincoln Road, subsequent to the second quarter, we entered into a contract to sell Fund III and Fund IV's Lincoln Road properties in Miami Beach for $342 million. These properties are being acquired by a high quality institutional investor from whom we received a compelling and preemptive proposal.

The properties owned by Fund III were acquired in February 2011 for $52 million and they will be sold for $142 million, generating an IRR of 46% on our investment and an equity multiple of three times.

The properties owned by Fund IV were acquired in December 2012 for $139 million and they will be sold for $200 million, generating an IRR of 48% and an equity multiple of close to two times. And that's after only 20 months.

Over the past several months, our talented partners at Terranova Corporation teed up several important leases for both the existing as well as the development assets in both portfolios, enabling this strong execution for sale. Terranova will remain active in these properties, ensuring a smooth transition.

So with respect to Fund III, following this sale and the corresponding return of nearly $100 million to the Fund III investors, this fund's remaining assets can be characterized as either stabilized, lease up, or development.

The stabilized assets comprise about 60% of the remaining portfolio. These properties consist of first our Lincoln Park Center in Chicago, where during the second quarter, we completed the re-anchoring of that property with a new design within reach flagship store.

Second is our Heritage Shops, which is another high quality Chicago street retail asset, and then Cortland Town Center, White City, and Parkway Crossing, which are three well-located suburban centers in Westchester, Shrewsbury, Mass., and Baltimore.

Then another 25% of the Fund III assets are in what we call lease-up mode. More than half of this amount is comprised of our two properties in Manhattan's Noho submarket and the balance consists of solid properties in Brooklyn, Long Island, and Baltimore.

And then finally, 15% of Fund III's portfolio is comprised of three well-located developments, one on M Street in Georgetown, DC as well as one in Westchester, one in Long Island. So barring any significant shift in the capital markets and consistent with our fund mandate, we anticipate a rational disposition of Fund III's stabilized and lease-up assets as well as the completion of our development projects over the next two to four years.

So in conclusion, during the second quarter, we made steady progress across both of our operating platforms. Looking ahead, we like how we're positioned. We are well on our way to creating a unique and best-in-class core portfolio with a strong retail presence that we are confident will to contribute to superior growth over the long term.

Then complementing this portfolio is our fund platform. Not only are our funds positioned to start adding meaningful profits from the monetization of existing investments, but we also have plenty of dry powder to invest in future profit-making opportunities for all of our stakeholders.

So with that, I would like to thank the team for their hard work this quarter and I will turn the call over to Jon, who will review our second quarter earnings.

Good afternoon. Operating and financial results were solid for the second quarter. We detailed these results in our press release yesterday and for this call, I would like to focus on a couple of key areas, including our earnings expectations and core portfolio.

So starting with the core portfolio, same-store net operating income was up 4.9% for the quarter and 4.6% year to date, which is consistent with our 2014 guidance of 4% to 5%. And similar to our first-quarter results, this was experienced fairly broadly across the portfolio, although somewhat stronger in our street and urban retail, which currently makes up about one-third of our same-store pool.

Keep in mind that our 2013 and year-to-date 2014 acquisitions, which total about $370 million, are not currently included in the same-store pool. And the NOI from these investments are significant, representing about 20% of our total current core NOI. And once these are included in that pool, it will take the street and urban component of our core NOI up to almost half of our total NOI.

Occupancy was 96.6% at quarter end, which was up 100 basis points over the first quarter. About half of this occupancy gain was at our Crossroads Center here in Westchester, with DSW and PetSmart opening their stores in the former A&P space during the quarter.

Current shop space occupancy now stands at about 92.2%. And on a same-store basis, second-quarter 2014 occupancy was 96.5%, which is up about 300 basis points over second quarter 2013. A significant driver for this was our shop space occupancy, which was up from 86.4% to 91.6% on a same-store basis between 2013 and 2014.

Shifting to our structured finance portfolio, during the quarter, we harvested existing investments and planted some new seeds as well. On the harvesting side -- and we previously announced this -- we converted a $38 million first mortgage note into an equity position in Soho.

And our new investments during the quarter included -- and again, we've mentioned this before -- a first mortgage investment of $13 million in the Rush Street corridor in Chicago and a new $4 million preferred equity investment here in the Bronx.

And during the quarter, we also collected an aggregate $10.3 million on loans that were originated in 2007 and 2011 and we had previously reserved $2 million against one of these loans. This was reversed and taken into income as a result of our full collection of all principal and interest.

So following these transactions, the portfolio balance, which was $126 million at the end of the first quarter, is now $96 million. And you should expect to see us add to this, consistent with our previously stated goal of maintaining this book between 5% to 10% of our total assets.

Turning to earnings, which were consistent with our expectations, FFO for the first quarter was $0.35. This includes acquisition costs of $1.1 million, or $0.02, on the deals we closed during the quarter, and keeping in mind that our earnings guidance is before such costs.

One other item to note for the quarter is we picked up $2 million or $0.03 of cash FFO from the collection of the note receivable that I just discussed.

And although this is not a recurring item, on a quarterly basis, we invariably generate other income in areas such as this over the course of a year, and this specific item was contemplated in our original annual earnings guidance.

Given that both our existing core portfolio and acquisitions are both coming in at the high end as of midyear and looking at our expectations for the second half of this year, we are now increasing our guidance to the upper half of our previously provided range and now expect FFO will total between $1.35 and $1.40 for the full year.

Keep in mind that this is before the potential income of $0.10 to $0.15 from the sale of the CityPoint residential air rights in tower three, as we discussed last quarter, and I'll touch again on this in a minute.

Recall in our last quarterly conference call, we spoke about our fund platform and its contribution to earnings growth. In light of the sale of the Lincoln Road portfolio, we now have additional visibility as to the potential income for the next several years from our fund platform and more specifically as it relates to Fund III.

The anticipated sale of the Fund III Lincoln Road assets will return nearly $100 million to Fund III's investors and combined with previous distributions of $260 million, essentially all of the capital that has been contributed to date will have been returned to the investors.

Keep in mind that Acadia has a 20% pro rata equity share plus a 20% profit participation once all capital and a 6% preferred return have been paid. So once we are in a promote position, this equates to a blended 36% share of the profits for Acadia.

Following the Lincoln Road sale and distribution of proceeds, Acadia will be about $70 million to $80 million away from being in a promote position in Fund III. Keep in mind that depending on the timing of any additional Fund III capital calls, asset sales, distributions, this amount will vary to some degree over the remaining life of the fund.

The current cost basis of the remaining Fund III assets is approximately $400 million and as Ken walk through earlier, approximately 85% of these are either stabilized or currently being leased up. And for purposes of gauging the potential valuation of these assets, approximately one-third are street retail in Chicago and New York, another third are dense suburban assets located in the metro New York area, and the balance are located in the New England and mid-Atlantic markets.

Taking into account Fund III spaces, the implied cap rate needed to return all capital and the accumulated preferred return would be about 9%. And there can obviously be no guarantee as to what price these assets ultimately trade at, but we are confident that they would trade at cap rates significantly below this level if they were to trade today.

At a 7.5% cap rate, for example, Fund III would realize an equity profit of approximately $85 million above the accumulated preferred return, of which Acadia would receive 20% or $17 million in connection with its co-invested equity and another $11 million to $15 million of promote, depending on the timing of the sales.

And at a 6% cap, the fund would earn a profit of $200 million above the pref, of which Acadia would receive $40 million on our co-invested equity and another $29 million to $33 million of promote. Obviously, if the ASIC cap rates were to be lower than this, our coinvestment share of the profit and promote income would increase.

And keep in mind as we monetize assets in the funds, there is some positive event dilution in terms of reduction in NOI and fee income, which will in part be offset by the deployment of new capital in Fund IV. So for the purpose of this discussion, if the recognition of promote income from Fund III were to occur ratably over a three- to five-year period, the annual FFO contribution would be roughly $3 million to $6 million per year or $0.05 to $0.10 per share per year. This could represent a material contribution to earnings and could start as early as next year.

But even before we get to next year, it's likely the profit from the anticipated sale of Fund II's CityPoint air rights in tower three will have a significant impact this year, with an estimated gain of $0.10 to $0.15. And looking beyond CityPoint and Fund III and while it's still early to start quantifying promote income from our other funds, the sale of the Lincoln Road assets in Fund IV, for example, will return nearly 80% of the invested capital to date in that fund, which also leaves us well-positioned in terms of future profit sharing.

Looking at our gains from Lincoln Road and CityPoint for 2014, as well as potential gains from our funds in future years, these will obviously increase our taxable income and thus impact our dividend policy. We will carefully evaluate this and address it through our quarterly dividend and/or special dividends.

While this transactional activity is of interesting and important, let's not lose sight of our balance sheet, which we continue to maintain a low risk and low-cost capital platform. Our fixed charge coverage ratio, including our pro rata share of fund activity, is well over three times and our net debt to EBITDA below five times.

On the equity side year to date, we've raised $96 million under our ATM and we expect to continue to use this and OP Units to efficiently match fund our investments going forward.

In looking at sourcing the required capital for our $67 million core acquisition pipeline and our remaining 2014 targeted acquisition activity, we have sufficient capacity, both in terms of liquidity and leverage, to fund these without being overly beholden on the capital markets. And as to our fund acquisition, Fund IV has sufficient remaining committed equity to drive growth in this area for the next couple of years.

So given our current financial platform position, we have the capital, capacity, and flexibility in sourcing this to enable us to continue to execute our strategies in both the core and fund platforms.

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

(Operator Instructions) Christy McElroy, Citi.

Regarding your annual guidance range for acquisitions with what's under contract today, you are at about the midpoint currently. Ken, you mentioned you could potentially exceed the upper end of that range?

What volume of assets are you underwriting today and what could be a more likely range that we should be thinking about for the year? $300 million to $350 million? Or $400 million?

I would rather you stick with the same numbers and then we get to beat it. But I think it's somewhat semantics. There is decent deal flow, we're being fairly selective, but it would not surprise me, as I said, for us to be in excess of the $300 million and maybe another $50 million.

Okay. And then in regards to Lincoln Road, given the price that the buyer is willing to pay there of $3000 a foot, is that indicative of where pricing is now in that market and is that market that you would continue to look at for future investment? Or by selling, are you effectively saying that you think it's too overheated for your taste currently?

So a few things. One, the deal hasn't enclosed, so I'm going to be a little bit cautious about a lot of different statements. But I would be very careful about looking too much at price per square foot. Keep in mind, we have second-floor space, there's some space right on Lincoln Road, etc., and I think one could get confused either direction just by picking that price per square foot.

I think that Miami in general and Lincoln Road specifically could do extremely well for the next 5, 10, 15 years. The historic cyclicality or hyper cyclicality of Florida may truly shift and we may find that the next correction Florida does -- the same as and no worse and maybe even better than other core markets, so there's nothing about Miami that causes me specific concern.

And then as it relates to Lincoln Road, Lincoln Road has positioned itself very nicely. At the upper end, there's some real competition as to where the high-end retailers are going to land between the Design District and some of the other competing areas, but for this more aspirational and middle market, I think Lincoln Road is great.

All of that being said, we are in the business of and pretty good at evaluating when it's a good time to buy assets, when it's a good time to sell assets, and this was an opportunity to make some pretty significant profits for us and our fund investors, so it made sense to do that.

I wouldn't read too much into us saying Lincoln Road is overheated or Miami's overheated. I would look at the 10-year treasury and say wow, rates are low and thus cap rates are low. But beyond that, I wouldn't read much more into it.

Thank you, guys.

Todd Thomas, KeyBanc Capital Markets.

Just a question for Jon regarding leverage. You mentioned as -- continued to tick down. I know you like to be conservative from a balance sheet perspective, but net debt to EBITDA at 3.6 times at the end of the quarter, that's significantly below your peers and most other REITs.

What's the strategy with regard to the balance sheet? Are there any opportunities to lever up a bit from here and take advantage of today's interest rate environment?

So couple of thoughts as it relates to that. Number one is given our size and given some of the things we do in the funds, it makes sense to counterbalance that to some degree with conservative -- conservatism on the balance sheet. So I think it makes sense for us to be a little more conservative than our peers to some degree.

Secondly, we do have some capacity to increase leverage. I think it makes sense for us to have some flexibility as it relates to that, given that capital markets come and go. And we have a very active acquisition pipeline and program and we want to ensure that we are able to capitalize that throughout the cycle.

So based on all of that, it makes sense for us to be in a lower leverage position. It helps me sleep at night as well, but you may see that go up, depending on where we are at in the cycle and what's going on, but we will always maintain a conservative level and we will not take that up to a level that in any way puts us in harm's way.

Okay. And then just looking at the leasing spreads in the core, a couple of big numbers again this quarter. I'm assuming both of the new lease deals were in the street retail portfolio. I guess two questions -- first the renewal bucket, the GoA was fairly sizable.

I was just wondering if you could breakout the renewal spreads between street and suburban. And then are there any other any near-term expirations in the street retail portfolio that we should expect to see in 2014?

Yes. So when you look at the breakout between renewal and new releases, 97% of the leasing volume this quarter was renewal. And within that renewal bucket, 98% was suburban. So there was literally one or two street retail locations in that renewal bucket.

So that 17% GAAP and 7% cash positive lease spread was essentially on our suburban portfolio and many of those renewals were option exercises, so we feel very positive about that result for the quarter.

In terms of the new leases, not a large amount of leases obviously, not a large amount of GLA, 5000 square feet, but it was street retail locations. And obviously the spreads on those were significant in terms of 50% cash, 70% GAAP.

And we talked about this last quarter as well, it's obviously based on that level of volume -- anecdotal data -- but still, that anecdotal data does speak to the embedded growth in the upside as it relates to street retail.

Looking forward, I think that second quarter was more volume than usual in terms of renewal leases and I would expect to see that moderate some for the balance of the year. And in specifically, looking at the street retail portfolio, many of assets that we have acquired over the last couple two or three years, there's not a lot of lease role in the next year or two, so I wouldn't expect to see as much activity there short term, but long term, I think there is -- as we've seen anecdotally, the potential for significant upside going forward.

And Todd, I'll just chime in on that last point. What we are seeing with street retail -- and I think you will see continued through our re-leasing efforts -- is it's going to be less about just simple lease maturities and more the fact that our retailers, for a wide variety of reasons, and mainly because it's a competitive world out there, they seem more willing to shed assets before end of lease term.

Even when those leases are below market and as compared to the suburban side, where we quote unquote have learned to partner with our box retailers in the re-leasing of this, there's a better understanding that we are in the real estate business.

Our retailers in the business of selling their merchandise. And so we are seeing and have seen more recapture opportunities that then hopefully will show up in spreads as well.

Okay, that makes sense, that's helpful. But the two new lease deals, then -- just following up on that. Were they expected or were they recaptured prior to expiration?

They both for the most part were expected. One of them was at our 120 West Broadway location, and so -- but these are not recaptures in this case.

Okay, great, thank you.

Jay Carlington, Green Street Advisors.

So just go back to Lincoln Road, was this something that was initially contemplated at the beginning of the year and maybe you can describe when you started kind of the negotiations of the process on this?

Yes, it was not contemplated at the beginning of the year. It has felt to us over the past three, four months in acceleration and interest that overall, we're thrilled to see as it relates to specifically street retail. So somewhere around the May ICSC, we started a dialogue and at first it was intriguing, but not actionable and then as it improved, several iterations became what I would define as preemptive and compelling.

So it was really May when this heated up. And while it's true in Lincoln Road, in general, what we are seeing -- and it's very exciting, because keep in mind, we've got plenty of equally good product, both in our funds and certainly in our core.

The recognition by our -- first and foremost, our retailers, because at the end of the day, these are sooner or later going to be cash flowing assets. The enthusiasm by retailers on a global basis to be on these various different high streets continues to be reinforced.

And a few years ago, the question was geez, Ken, is it scalable? Geez, Ken will institutional capital ever really show up in this very fragmented business? There's no doubt about that now.

And it is achieving cap rates and valuations that I think it deserves, based on the growth profile and is going to reward our stakeholders, whether it's assets in our core that we're going to own long term or assets that we are redeveloping and selling in our funds. So long answer to -- happened quickly. Let's hope it continues.

Okay. And I recognize you are kind of understandably hesitant about making a market call on Miami, so I'm just -- maybe are there -- given the movement the last couple of months, are there other markets or neighborhoods that you are seeing kind of an acceleration or interest that you are maybe considering harvesting some of the value there?

Well, so we walked through in our -- and it's easiest to think about it in our fund business, because there, we are absolutely sooner or later going to monetize. And to the extent that someone is willing to pay you today for what you expected to take another three, four years of hard work, well great.

But whether you want to look in Brooklyn or in Noho or M Street in Georgetown, these are all great markets. The capital markets now are hot. We recognize that as a negative. We've got to work that much harder and be that much more careful on our new investments, but we have in our Fund III pipeline, then Fund IV -- don't forget about CityPoint and Fund II.

We've got a lot of great assets that we think over the next one, three, five years are going to be able to create a fair amount of significant incremental value for our shareholders while we continue to execute on this dual platform that we've created.

Okay, great, thank you.

Craig Schmidt, Bank of America.

Ken, cap rate is I think closer to historic lows at this point than the historic highs, and it has been keeping some REITs from being active in acquisitions. It is AKR's position or expectation that street retail will prove stickier with regards to cap rates and is that more of an issue of structural change than a cyclical change?

Well -- so the -- the biggest question with all of this is where do interest rates go, where does the growth in street retail versus probably the lower growth suburban and box retail, how does that play out?

Because when we look at the spreads from the 10-year treasury or BBBs relative to higher growth street retail, it's not as though they are way out of whack. We think that all things equal -- and you're seeing, Craig, us put more dollars into street retail than into suburban. So we think all things equal, street retail the still more compelling.

When we talk about stickiness, what we're forecasting is two different things -- what kind of interest rate growth occurs and then our ability to grow our rents as inflation or interest rates seep back into -- increases seep back into our system. From what we see now, we think we will have more bites at the apple to grow those rents than in our suburban side.

We think if interest rate increases are commensurate with GDP growth, commensurate with healthy inflation, that street retail will be a better place to be and thus what I think you referred to as stickier. But we need to be careful about it, and so you're seeing us be fairly cautious about how we're growing, where we're growing, picking our spots carefully to make sure that we're not predicting the future in ways that are above our pay grade.

Great. And then the cap rate on [Bayer] I think I heard 9%.

Yes.

Is that people's concern about the Lowe's [vaccing] where you see an opportunity?

Let's take it -- it's a little of both, but just our high-yield program seems to work best where there is something that renders a property less financeable. There's a ton of capital today, but it's harder when one of the two anchors is relocating across the street, which was the case here. So we've done best in the past half-dozen deals or so where the anchors either had shorter term leases and we were then at post-acquisition able to extend them.

That was the case, for instance, with a Home Depot that we recently acquired. So there's an arbitrage due to the lack of financability and uncertainty that keeps the high leverage buyers away and it also keeps the -- probably the biggest competitors in that space, which are the nontraded REITs -- it also keeps them at bay a little bit.

So the opportunity there is the lease is below market, but it ends in 2017. So we are like, we are happy to get back, but it's a significant piece of the cash flow and thus that was our angle into that deal. And the way we then think about it is if we go from a 9% for a couple of years -- the levered return is obviously significantly higher than that -- and then there's one or two years of downtime, especially in the fund structure. That's easy for us to absorb, as long as we can retenant it to a acceptable yield afterwards. And our team is very comfortable we can do that.

Great, thank you.

Paul Adornato, BMO Capital Markets.

Thanks, good afternoon. From Lincoln Road to Flatbush Avenue, I'm very happy to see you guys kind of book end Flatbush Avenue. So was wondering if you could talk a little bit about the Bob's Discount Capital One property?

You said that the deal was struck before the lease was signed. Did you guys have any part in the leasing of the property?

Some. Capital One owned the asset. They were self-building it -- call it a self leaseback is probably giving too much to a relatively small transaction. But they recognized that they didn't really want to self develop and then be overly exposed, so we gave them a forward commitment, worked through the two leases, and in exchange for that, the pricing was favorable.

So we're happy to own that side of Flatbush Avenue. And then, as you know Paul, we've been more excited by what's going on at CityPoint on that side of Flatbush Avenue.

Sure. So maybe -- any insights that you could give us outside of Kings Plaza Mall? Obviously, there is re-merchandising going on inside? What's happening outside? Any more opportunities for you guys there?

Yes, I think so. Brooklyn is going through such a fascinating transformation that there are several markets we're looking at. And compared to the other boroughs that are still doing well, but the transformation in Brooklyn is certainly much more than we expected.

So where we can see -- and a lot of this is driven by a lot of very positive new housing stock coming to the market, providing a diverse opportunity and change. And so with that, there are going to be continued changes in terms of which retailers want to be in the different spots in Brooklyn and I think you'll see us continue to be active there.

Thank you.

Jim Sullivan, Cowen Group.

Ken, just following up on Lincoln Road and the transaction and what it implies or suggests about how you want to build the Company going forward. It is kind of -- obviously very, very impressive IRR, congratulations on that.

In your presentations, you've talked about being able to put together what you'd call, I think, a meaningful concentration of street retail assets. And there will be opportunities, I guess, in the future to sell more of the value creation that you've been able to achieve in these different funds.

And I'm curious how you assess the prospects of either doing more Lincoln Road-type roundtrips, if you will, selling assets at very impressive IRRs, which provides a great track record for your fund business as opposed to sustaining the concentration of assets that you have. In other words, is there an ongoing platform value that would accrue to the Company and maybe the share price multiple, if you were to continue to assemble and grow the street retail across the country as a very large platform?

You made reference to some of the commentary from people about whether you could put together a meaningful concentration. You've obviously begun to do that. Is there some greater value to be achieved by being one of the largest players or the largest player in that business in your mind? Is that currently and does that potentially trump, if you will, what you've characterized as preemptive bid?

So let me try this at a few different angles. First, just to reiterate our fund platform, where our mandate, our fiduciary obligation, is to buy assets that we think we can create meaningful value, both from an IRR -- and I would point out, I'm thrilled with the IRR, but, Jim, a 3X is even more impressive.

This is real estate, not a private equity. So the mandate in the fund is to buy it opportunistically or value-add and fix it up within our core competencies, which this definitely is, and then monetize it for the benefit of all stakeholders. And as Jon walked through the math, that 36% to us ain't chump change.

So we like that business -- and by the way, I've been watching the multiples in that fund business. Those are pretty attractive multiples, too. So I would expect us to continue to be able to create value in the fund business while still doing exactly what you've articulated, which is -- our goal is at the core level to create a best-in-class portfolio.

I think the sooner we can do it profitably, the better off we are, but I'm not going to rush and try to bulk up at the expense of shareholder value. We've seen that not end so well. So is there the opportunity while still maintaining our fund business to grow our core -- absolutely.

And if you look this year at the street retail assets that we are adding, we are doing, we doing it in markets that we are currently active in, and I think there will be additional benefits to the fact as you see us continue to add assets on Rush Street and Walton, as you see us continue to add assets in Soho or in Westport.

There's some scalability to that, both in terms of expense management, but also just in terms of market knowledge being really good at some of those. Can we grow that platform? Absolutely. Are we going to? Absolutely. Will the fund business detract from that? I don't see that. I see the opposite.

I see the fund business provides us with significant overhead funding, significant market knowledge, the ability to write huge checks quickly and makes us better and does not deter that growth. The fact that we'll trade out of assets or the fact -- when we bought Lincoln Road, no one was saying geez, we wish it were in the core. A couple of years later, they were saying that.

The fact that periodically, we will see assets that we buy and the market recognizes and we say wow, we wish they had been in the core, sure. We can live with that and going 3X certainly helps make up for any loss from those assets or are missing them at all. Expect to see our core grow and then on the fund side, if we can collect the promote income that Jon has been articulating, that's going to be pretty meaningful.

Let's see if it hits in 2015. We're not making any promises right now, but we're pretty darn close to that and we think that the fund business and its contribution will begin to start getting the respect that we think it deserves in our portfolio.

I guess the second part of that question -- and don't know if you have an answer -- but in terms of the value creation that was achieved on Lincoln Road, there was obviously very significant movement in the market in terms of the rent per foot, as you outlined in your presentations.

There was also, as you mentioned in your prepared comments, significant value added by your -- by Terranova, I guess, I think you cited, in terms of the leasing activity. And I wonder if you can kind of breakdown in terms of the value creation how much of it was attributable to those two factors as opposed to what would've been attributable to cap rate compression?

I can't describe math to it and partially because some of it is subjective. But let's point out a few obvious -- or a few things. Rents have close to doubled since our initial acquisition. Lincoln Road and the leases, by nature, this is true. And street retail, in general, have much better mark to market capabilities, so that even if a lease has not been signed, as long as you're comfortable that the market -- which was [150], is now [300] -- you can look through and say in one, three, five, at most seven years, you're getting to those numbers.

Now if you then believe that rents are [300] today in going to [400], you can get comfortable that your yields will grow correspondingly. So part of this is there is pretty good transparency and the ability to get to those mark to market rents.

Not overnight, and it's not like every retenanting is going to get done at the same rent, because not all space is created equal, but a owner on Lincoln Road can both lease or finance or sell with the comfort that within a finite period of time, it will mark to market.

As a result of the rental increase -- which was pretty darn significant, whether you got it today or you are going to get in 3, 5, 10 years, combined with the fact that cap rates absolutely have compressed and the fact that we have now, I believe, gotten close enough to showing where the second floor space could lease, where a bunch of the other spaces may retenant, I think that a buyer of high quality institutional capability could look through and say if we are long-term owner, if we believe in these positive trends, here's that -- to get the cap rate that we are buying today, it's just not relevant.

Here is where we can be in 3 years, here is where we can be in 7 years, here's where we can be in 10 or 15 years. And I think that is how the thought process plays out.

Great, okay. Thanks, Ken.

Rich Moore, RBC Capital Markets.

Are you guys actively marketing the stabilized portion of Fund III so that we might think of those promotes may be coming sooner rather than later?

We weren't, but on Jon's presentation, it's certainly sounded like you are gearing up for it, Jon. No. Rich, the definition of actively marketed plays out a bunch of different ways. Once an asset is stabilized and we think that market is receptive, we will sell those assets.

So within Fund III, I walked through a handful of the stabilized assets ranging from Cortland Town Center to the two deals in Chicago, and my expectation will be that we monetize these assets over the next one year, three years. And then as it relates to the development deal, it's probably one, three, five years.

So our hope and expectation would be that we can transact in the next 6 to 12 months on some of these and thus, that's how the 2015 promote would kick in. If for whatever reason, we are not happy with the valuations we're seeing -- and that happens periodically -- then we wouldn't transact.

So you did not see us sell anything in 2009, 2010, I don't think 2011. And then as the markets came back, you saw us monetize the majority of our Fund III pre-global financial crisis assets. So we sold off profitably self storage, profitably a bunch of other assets, and now we are in a really good position today as it relates to Fund III.

Okay, good, I got you. And Jon, I hope I didn't get you in trouble with that. (laughter)

Not too bad.

Let me ask you guys. On the street retail, is your stance still or maybe -- I can't remember if you formalized this -- but is your stance that you won't buy any of those street retail -- on this case, obviously the Lincoln Road, but you wouldn't bring any of those into the core, right, if they were in the fund previously?

It's not an easy process, Rich, to do it. So our stance is not never, our stance is we're going to make sure we get best execution for our fund investors -- period, end of story. And what we have found is while the REIT could be a buyer, there are -- we have special committees set up to do that.

Almost without exception, every time we have looked at it, there has been an outside buyer whose cost of capital is lower and we need to be respectful of that and move on.

Okay, good, got you. Then our friends at General Growth have been suddenly very active in the street retail scene. And I'm wondering if you guys look at any of those kind of assets -- they were looking more at the Fifth Avenue kind of stuff. Is that the kind of thing you guys would look at as well? Doesn't seem that you have typically done that?

Sure. Now, Rich, I don't want to be a -- much of a noodler, but this was a third question. But a lot of people are asking about GGP, so I will comment on it. I think the world of Sandeep. He is extremely talented, this is within his core competencies, and the market has at $300 million to -- we're now seeing $700 million, $800 million plus trade is one that I think we should all look at.

I think that their spending time in street retail is absolutely a net positive for our industry and net positive for Acadia. There is an overlap. We did look at some of those assets. Obviously, we didn't win. At some size, you would look at it and say geez, that may be too big for Acadia to take down in one lump sum. Okay.

In other cases, we will fiercely compete and let's hope we win our fair share. But whether or not we overlap or not, the fact that there will be more high quality, smart, high integrity, institutional quality owners in street retail will be a net positive, because one of the big problems in street retail has been the historic reputation of it being so fragmented and of such questionable landlords and their ability to deliver the space on time, quality, etc.

So we are seeing a very nice shift. There's going to be plenty of assets available for Acadia. You could just walk up and down the street in Soho or on Madison Avenue or a half a dozen other of these key markets and you would easily get to $25 billion of assets.

So I am not particularly concerned about the entrance of any one or two new owners, but where it is a high quality one like that, I think it's great.

Okay, great. Thanks, guys.

Ross Nussbaum, UBS Securities.

Two questions. The first is on your comments on the dividend. I just want to make sure I'm understanding things correctly. So first question is why wouldn't you be able to 1031 some of these gains to potentially avoid being quote forced to raise the dividend? So let's start with that one.

So recall that these aren't our funds and it really doesn't lend itself to 1031 transactions. These are assets that we need to monetize and return capital.

So to the extent that it's a promote, it is not directly tied to a specific real estate piece. It's capital gains --

Right.

So that's good in terms of the context of it, but it still would require a distribution. Which as a shareholder, I will tell you, selling assets at huge profits and distributing appropriately is hardly the end of the world.

Okay, that's helpful. So question number two is as you think about where the dividends may be going over the next year or two or three, and Ken, knowing that at your heart, you are reasonable guy, it would seem to me that the recurring dividend perhaps would be tied to your recurring core wholly owned portfolio and that there may be special dividends perhaps paid out over the next one, two, three, four years, distributing those gains, but we shouldn't necessarily think about that as 100% recurring? Is that a reasonable way think about it?

Correct.

Yes, yes. And I think you meant reasonable in a complimentary way, so I will certainly take it that way. And by the way, Ross, we have run into that in the past as it relates to FFO as well, which is promote income and if it's adding $0.05 to $0.10 a year, well, that's great. We'll take it.

If it's adding to our dividend, fine, but we all need to recognize -- and we will bend over backwards to articulate -- here's our normalized dividend or our normalized FFO and here's the other bucket that is going to show up for a while, so we should all enjoy it, but it's going to show up for a while and not be infinite like in nature.

And we need to recognize that as well so that there's no disappointment or we certainly don't want to read five years from now, Acadia forced into a dividend cut. We will do our best to provide that transparency.

Okay, great. And then the next question I had is -- and I might have missed this but I don't think I did -- I didn't hear the words Fund V come out of your mouth on this call. And you may remember, you and I had a conversation in Vegas, where I communicated my view that I would prefer not to see a Fund V, that I would like to see you do these deals on your own.

And if you happen to be a partner then, go find one but at least have the flexibility to start doing these on your own. Can you talk a little bit about what the future holds on that front?

It is early to contemplate a Fund V, because we are in the midst of Fund IV. It is early to contemplate not a Fund V because -- let's remember how nice it is to collect these regular promote payments before we say geez, this is not such a good business.

We will have this discussion in a year or so. We will have much better visibility as to what Fund III and then Fund IV and don't forget Fund II -- what all of these start looking like. This is a very good business. That being said, as we get larger, I could see us coming to the conclusion that calling them dual platforms may not make sense and there may be other alternatives. We will revisit that down the road.

Sounds good. You know where I am. Thanks.

Michael Mueller, JP Morgan.

I was just wondering, when we're thinking about Broughton Street, what the scope of the development work to be done there is, if you could just kind of walk through it? Is it basically funding TIs for new tenants or is it something more substantial?

There is some new development opportunity there, Mike, but for the most part, it is redoing some fabulous historic buildings. Some over time either deteriorated or didn't keep up with more recent tenant technologies. So it's not just a simple retenanting; these are more the lines of gut rehab.

One or two of the parcels will be new developments, but for the most part, these are existing buildings. I urge you to go down and see it. It's a fabulous street and I would think over the next three to five years it will look substantially different, but it won't be new development.

Okay, great, thanks.

And thank you. We have no further questions at this time. I will now turn the call over to Kenneth Bernstein for closing remarks.

Great, thanks, everybody, for taking the time. Enjoy the rest of your summer and we will see you in the fall.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.