Acadia Realty Trust (AKR) 2014 Q3 法說會逐字稿

Good morning and welcome to the third-quarter 2014 Acadia Realty Trust earnings conference call. As a reminder, this conference is being recorded. (Operator Instructions) I would now like to turn the call over to Amy Racanello, Vice President of Capital Markets and Investments. Please proceed.

Good afternoon and thank you for joining us for the third-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 October 29, 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.

Thanks, Amy. Good afternoon, thank you for joining us today. I'll start with an overview of our third-quarter results. Then Jon will review our earnings and our other metrics.

We're very pleased with our third-quarter results, both with respect to our existing asset performance as well as our new investment activity. In terms of our existing assets, let's first look at our core portfolio performance.

Our third-quarter same store NOI growth of 7.7% was the result of solid contributions throughout our portfolio. Consistent with last quarter, our properties remained 97% leased and although physical occupancy was down 60 basis points since last quarter, this decline was primarily driven by value-creating events, including the addition of a new acquisition to our core portfolio.

More specifically, the 92% occupied Bedford Hills Shopping Center as well as the recapture of approximately 16,000 square feet of below market street retail space, of which approximately 85% has already been re-leased.

Looking ahead, given our portfolio's already high occupancy levels, we'll continue to focus our attention on selectively recapturing under-utilized and below market space, particularly within our street retail portfolio where tenant demand continues to drive market rents upward.

In terms of our third-quarter leasing spread, our leasing team achieved a blended 23% spread on new leases on a GAAP basis, primarily driven by activity within our street retail portfolio. Then with respect to renewals, during the third quarter we achieved a respectable 8% increase in those rents. It's worth noting that all of the renewals were for space in our suburban shopping centers. And furthermore, the majority of these renewals were on a contractual basis.

Now, in terms of our core portfolio acquisition activity, during and subsequent to the third quarter we completed a $154 million of acquisitions, which brings our year to date transaction volume to just under $300 million.

As you'll recall, $300 million was the high end of our initial 2014 guidance. So based on completed transactions as well as our current pipeline, we're now increasing our 2014 core acquisition guidance to between $400 million and $500 million, of which approximately 70% is projected to be high street retail. The balance will be either urban or dense suburban properties.

As previously reported, during the third quarter we completed our Prince Street acquisition in SoHo where we utilized OP Units to fund the majority of that transaction. Over the years, many luxury retailers, including Chanel, Louis Vuitton, Burberry, Ralph Lauren have chosen to cluster on or between Prince Street as well as Spring Street where we also own two other properties.

Tenant demand in this submarket remains strong with rents exceeding $800 a square foot for a larger format space, and $1,000 a square foot for smaller stores. The in-place rents at the property we acquired are significantly below market. The first of these leases we'll reset to market in 2017. And additionally, we're exploring opportunities to harvest this embedded value ahead of schedule.

And once we do, the unleveraged yield is projected to be between 5% and 6% at today's rents. And if the current trends continue, it'll be even higher. This is at least 100 basis points to 200 basis points higher than the cap rate that the asset would trade at today if it were fully stabilized.

In addition to aggregating assets in the nation's top street retail corridors, we'll continue to add both urban as well as dense suburban properties to our portfolio. This includes our third-quarter acquisition of Bedford Hills Shopping Center in Westchester as well as our recent acquisition of the Shops at Grand Avenue, which is another high-performing supermarket-anchored shopping center. This one in Queens, New York.

Queens is the fourth densest county in the United States. Keep in mind that in the shopping center industry, 100,000 residents within three miles of a shopping center is considered pretty darn dense. The Shops at Grand Avenue has 100,000 residents within a one mile resident -- within a one mile radius. And then within two miles, the number of residents increases to more than 0.5 million.

The property's anchor, Stop & Shop, is the dominant grocer in the area, given its size and ample on-site parking. In short, this is a welcomed addition to our traditional shopping center portfolio.

Now, taking a step back. It's worth discussing the significant growth of our core portfolio over the past several years. Assuming that we reached the midpoint of our current core portfolio acquisition guidance, then in less than four years we will have more than doubled the size of our core portfolio, equating to a compounded annual growth rate of in excess of 20%.

And for 2014, we're on track to exceed that rate despite the fact that the base amount keeps growing. And given our still relatively small size, there's no reason that we shouldn't be able to maintain this pace. That being said, our focus is not simply on getting bigger, but on building a differentiated retail real estate portfolio.

Nearly 85% of our portfolio's value is now concentrated in the nation's top ten MSAs. Our portfolio's three-mile population density is approximately 350,000 with an average household income in excess of $100,000.

Furthermore, by year-end we will have increased our high street retail concentration from approximately 15% a few years ago to 50%, with then urban retail, such as the Shops at Grand Avenue, now comprising an additional 10%. And then the remaining 40% dominated by primarily dense suburban properties.

While on the short-term we continue to see decent NOI growth across most of the retail sector, it's pretty clear to us that in the long run, given the clear and inevitable changes in retailing, our portfolio contains the type of assets that will fuel long term growth.

Turning now to our fund platform. As we previously discussed, our fund acquisition activities are centered around four key strategies. First is street retail turn-around opportunities. Then there's next generation street retail. Third is distressed retailers. And finally, opportunistic.

With respect to new street retail investments, subsequent to the third quarter, our Fund IV closed on or entered into contracts to acquire three re-developments on the Upper East Side of Manhattan for an aggregate purchase price of just under $100 million.

The two completed acquisitions, one's located on 61st Street and the other on 71st Street, are part of our Off Madison strategy. Today, rents on Madison Avenue are generally north of $1,000 a square foot, with certain prime spaces commanding nearly double that.

Both of our recently acquired properties are located approximately a hundred feet off of Madison Avenue, providing retailers with high visibility and solid co-tenancy. Co-tenants include Barneys and Hermes at the 61st Street property, Ralph Lauren and Prada at the 71st Street property.

To date, several luxury retailers have already set up shop off Madison, including Monique Lhuillier and Badgley Mischka. And now we're seeing other luxury retailers beginning to seek this kind of unique flagship space and recognize the attractive value proposition of an off Madison location.

Including existing investments and those currently under contract, we've now allocated about 40% of Fund IV's total capital commitments with almost two years remaining in the fund's investment period. And even though it's a very competitive investment environment, we're going to continue to remain focused on those areas that are consistent with our core competencies.

Given the continued compression in cap rates are existing, fund investments have certainly benefitted as well. For example, as previously announced, during the third quarter we completed the sale of our two Lincoln Road portfolios, separately owned by Fund III and Fund IV, for $342 million.

In three years or less, both funds achieved internal rates of return of approximately 50%, with Fund III generating an equity multiple of 3 times, and Fund IV generating an equity multiple of nearly 2 times.

Consistent with our fund platform's buy, fix, sell mandate, we're now exploring the opportunistic sales of our other stabilized fund assets, including several high-quality properties owned in Fund III. That being said, several of our funds still have a significant amount of embedded growth in them.

For example, at City Point, where we are 65% pre-leased on a square footage basis, that only represents 40% of the projected revenues. Thus, we still have a significant amount of upside in a very hot market.

Elsewhere in our fund portfolio, at our Lincoln Park Center property we completed the re-anchoring of the former Borders Book space to design within reach an Eddie Bauer. And at our Third Avenue and 67th Street property on the Upper East Side, we fully re-leased that property and replaced Lucky Brand Jeans on the street level with Vineyard Vines at more than double the rent.

So in conclusion, during the third quarter we made steady progress across both of our operating platforms. And looking ahead, notwithstanding recent volatility in the global economy, we like how we're positioned.

First, our existing core portfolio continues to produce solid internal growth. And then by selectively adding high-quality street retail, urban, as well as dense suburban properties, primarily in live, work, play cities, we're keeping this portfolio relevant and positioned for continued solid growth.

Then at the fund level, we continue to make important progress on our existing investments while also remaining well-positioned for both new acquisitions and opportunistic sales.

Finally, we continue to maintain a very safe and secure balance sheet with plenty of dry powder. With that, I'd like to thank the team for their hard work over the past quarter and turn the call over to Jon.

Thanks. Good afternoon, everybody.

As Ken has already touched on our portfolio performance, what I'd like to do for this call is focus more on the balance sheet and earnings, not just for the current quarter, but similar to our previous earnings conference call, also look ahead to the factors which will contribute to our future earnings growth.

First, though, starting with our current quarter's earnings, results were consistent with our expectations and guidance range. Reported FFO for the third quarter was $0.30. This includes acquisition costs of $1.7 million or $0.03 on the deals we closed on during the quarter, keeping in mind that our earnings guidance is before such costs.

This result also includes $0.01 of positive event dilution for the quarter related to the sale of the Fund III and Fund IV's Lincoln Road portfolios. As we monetize fund assets, there is some short-term earnings dilution in terms of NOI and fee income but keep in mind that this will be offset in part by the future redeployment of capital for new Fund IV acquisitions.

And more importantly, this creates significant value and income, effectively positioning us to increase our 20% co-involvement interest in the funds to 36%, due to our carried interest. For the balance of this year, and this is consistent with our increased guidance from last quarter, we are expecting FFO between $1.35 and $1.40.

In evaluating where we currently forecast we end the year at within this range, the positive event dilution from Lincoln Road that I just discussed is about $0.06 on an annual basis.

As we close middle of the third quarter, this dilution should total $0.02 to $0.03 for third and fourth quarters of this year. So our current expectation is we finish the year out not at the top but in the bottom half of this guidance range.

Looking at earnings beyond 2014, and recall in our last call we spoke about the fund platform and specifically as it relates to Fund III, the expected contribution to earnings growth over the next several years.

It's worth briefly summarizing the details we walked through with everyone on the last call. There's only about $80 million of unreturned capital in Fund III. After this is distributed, Acadia will receive a promoted share or combined 36% co-investment in promote of all remaining distributions.

In evaluating the timing and estimated proceeds for Fund III, approximately 85% of the remaining Fund III assets are either stabilized or approaching stabilization. And valuing these at, say, an average 6 cap would generate $300 million of net proceeds. Or approximately $220 million of profit after the return of that remaining $80 million of fund capital that I just mentioned. Of this, Acadia would receive $29 million to $33 million of promote, which is net of our self-paid portion as a co-investor, and $40 million on our co-invested equity.

If the recognition of this promote income were to occur ratably over the next three to five years, and taking into consideration the positive event dilution similar to Lincoln Road, the annual net FFO contribution would be roughly $3 million to $6 million per year, or $0.05 to $0.10 per share starting as early as 2015, next year.

This does not include the additional FFO of $0.10 to $0.15 from the anticipated sale of Fund II's City Point tower three air rights, which I've discussed before and is currently under contract.

In addition to the NAV and earnings accretion, this planned multi-year roll out of capital recycling will generate additional cash capital gains for the REET arising from both our co-investment and promoted share of profits, which in turn will provide special dividends to our shareholders.

Total anticipated capital gains from Fund III, again assuming an average 6 cap for value, should total approximately $200 million to $250 million. Our co-investment and promoted share net of this would generate approximately $60 million to $75 million in additional capital gains, i.e., taxable income for the REET. Averaging these gains ratably over the same three- to five-year period as mentioned before and net of the positive event dilution, we're expecting multi-year special dividends ranging from $0.20 to $0.30 annually.

These will start this year following the sale of Lincoln Road. And these cash-sourced dividends will obviously vary year over year, depending on future events, including timing of fund sales and tax strategies.

One last observation related to earnings before I turn to the balance sheet, as we continue to grow the core portfolio, which, as Ken mentioned, 2014 alone will be $400 million to $500 million, core portfolio earnings as a share of our total earnings increases and has increased significantly over the last four years.

Core FFO, separate from our funds and first mortgage and mezzanine investments, comprises approximately 80% of our FFO before G&A. This compares with about 67% four years ago, 2011.

Turning to our balance sheet, we continue to maintain a low-risk and low-cost capital platform. We've accomplished this through the multi-year consistent matched funding of investments on a leverage-neutral basis.

So in the case of this year, even slightly reducing our overall leverage levels, using both common shares and OP Units for equity, an appropriate amount of long-term fixed rate debt.

Looking at our 2014 investment and capital raising activity, to date we've invested a total of $340 million for core and pro rata share of fund investments. 75% of this or approximately $260 million has been sourced through equity comprised of issuance under our ATM, OP Units, conversion of first mortgage investments, and asset recycling.

Of that $260 million of equity, $160 million has been funded from the issuance of equity in OP Units. The other $100 million is from conversion of the existing first mortgage investment and collections on other notes, which was about $60 million. And then proceeds from asset sales, which is the other $40 million. Along with match funding the equity, we also continue to opportunistically lock in long term rates.

During the month, we've taken advantage of the rally in treasuries through both refinancing and swaps. And locking in attractive long term rates on an aggregate $72 million of debt at a weighted average 3.7% all-in rate for a weighted term of the next eight years. And to put this in perspective, this represents about 15% of our total outstanding debt. And this effectively shifts our weighted average maturity an entire year for the entire portfolio.

So as a result of all this, our balance sheet continues to be one of the lowest levered and strongest in our sector. We have no amounts outstanding on our unsecured line of credit. In addition, we'll be adding another $200 million of capacity to our ATM this quarter and that's proven to be an efficient low-cost vehicle for match funding our acquisition program over the last three years.

So in conclusion, given our current financial platform, we're positioned and have the capital capacity and sufficient flexibility to source the acquisition programs in both the core and fund platforms.

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

Great, thank you. (Operator Instructions) Craig Schmidt, Bank of America.

I was wondering at City Point, are you specifically holding off some of the leasable space?

Yes. But I think it's worth kind of thinking about that in the overall context of what we have done and how we have risk mitigated it. So remember we have signed all of the anchor leases, which consists of levels five, four, three and two.

We are going to deliver the anchor spaces starting in the first half of next year. And then assume the openings about a year after that. So early 2016. We have sold off all of the residential and are under contract for the final residential piece phase three.

There's really no point, and we certainly don't have any need, to rush the leasing of the street retail, which is what's left. We've done a good job of, I think, laying off mitigating the risks for those areas that we're less comfortable with. And gosh, there's not a lot that I'm more comfortable with than the street retail leasing for the final phase.

So there are several retailers now that we're actively engaged with. And assuming we fit them in in the right spots, the right time, and the right rents, Craig, yes, then we'll go. But they can't open for all intents and purposes until that 2016 time period. So that's what our team is then gauging it based on.

Okay. And then just thinking about 2015, what are some of the things that might slow same store NOI from particularly the pace in third quarter 2014?

Yes. So --

You want to take it?

I'll take first crack at that. So actually what is going to favorably impact same store NOI is what I would talk about first. And when you look at what's in the same store NOI pool currently, we have our 2013 and 2014 acquisitions, totaling about $0.5 billion, are not in the pool as it's currently reported on.

Obviously, next year the 2013 acquisitions roll in on a same store basis. But there's still the 2014 acquisitions that will still not be included in the metric. And all of those acquisitions shift when you look at the proportion of contribution, suburban portfolio versus street retail portfolio to the same store NOI pool, right now 20%, 30% of it is street versus the balance being suburban.

That shifts forward to 50-50, as Ken mentioned, once you include all those acquisitions. So that's on the positive side. On the negative side, as we mentioned in the press release, when you look at certainly this quarter's results, the 7.7%, that did include some additional contribution from relatively lower expenses net of recoveries this year versus last year. And that accounted for about 2% of the 7.7% result this year. So but even backing that out, we're at 5.5% this quarter and year to date.

Looking forward to 2015, there is some lease up in our current result this year, 50 basis points to 75 basis points in the suburban portfolio. Beyond that, there's really no other significant one-time or individual drivers. Rather, it's more of a portfolio-wide experience.

Yes. Jon, I think you covered all that. Craig, what's worth understanding, and we do think that same store NOI is an important metric. And when we post numbers like 7%, we especially think it's important. Although as Jon pointed out, it's really 5% if you take out some of the one-time positives.

5% is still really good. And in fact a stabilized retail portfolio, if you just run out the numbers, is 1% to 2%, maybe 2% to 3%, depending on the specific assets and the specific contracts. And we talked at length between the distinction between street retail, which should be about 100 basis points higher than more traditional suburban.

The other distinction, along with a lag effect of when these assets come in, that's just worth thinking about. And again, I don't think it's super important. But keep in mind that all of the activities in our fund business, and I just talked about putting Vineyard Vines in in replace of Lucky Jeans and doubling the rent.

All of that activity, whether it's lease spreads or same store, in the case of our dual platform, the fund platform does not report through into the core. So to some degree there is a slight distinction versus if everything were reported together.

That being said, we like what we're seeing in our portfolio. We like the tenant interest, 97% occupancy is pretty darn good. I'd love the leasing team to get it up 100 basis points or 200 basis points, but trees are not going to grow to the sky on the side.

What they're going to achieve, and they're working real hard at it, is seeing that we can get back some of these spaces and re-lease them at very attractive re-lease spreads. Given how small our portfolio is and how even smaller the reported numbers, every quarter it can vary. Let's hope that they're good variances that Jon talks down as opposed to the other way.

Okay, thank you. That's helpful.

Thanks, Craig.

Thank you. Todd Thomas, KeyBanc Capital.

Thinking about your core street retail assets, I was wondering how do the capital markets view these properties today? How financeable are they? And what kinds of terms can you get for some of these properties that the Company's acquiring in SoHo, Tribeca, and Chicago, for example?

Yes. So the easy piece of this is where the debt markets are. And look at your screen, look at the ten year, spreads are real tight. And the lending community very much likes these kind of assets. We just locked in today for phase one of City Point.

Now, I agree, that's not on the core, but the same thing would apply. This was seven years money at below 3%.

That's right. All in (inaudible).

And the same would be true for other core urban where there's tremendous lender demand. Now, the good news, bad news is, it bleeds through to cap rates. Right now, cap rates for high-quality street retail, depending on the growth profile, the strong tenant demand, et cetera, we're seeing trades below 4% for even stabilized assets.

We've not had the guts to reach that high. Certainly below 5%. And it has been supported but these are low cap rates. But when you look at the ten year treasury is, when you look at alternative investments, when you look at how much tenant demand and sales growth we're seeing there, I kind of get it.

So if you think you can put dollars to work in the 5 to 6 cap range for this really high-quality street retail, I think you're going to have a hard time seeing dollars go to work. We're fortunate. We have great deal flow. We have a lot of strong relationships in some streets. We're already on those streets and active.

And then finally, I'd say one of the reasons we've been able to stay active in a competitive market is the issuance of OP Units, which is a real differentiator.

Okay. That's helpful. Yes, speaking with the OP Units, curious to get your thoughts. You mentioned that units were issued to fund the Prince Street deal. I would potentially think that we'd see more deals using units occur, just given basis issues and gains many owners of street retail properties might have.

And so I'm just curious whether you feel you are seeing a shift at all in sentiment from sellers willing to transact with units. Do you think that we'll start to see a bit of -- more of an uptick in the (inaudible) you using units here as a currency?

Probably. It's impossible to predict because it takes two to execute on something like this. However, the shift we've seen over the past year or two, whether it was our Tribeca transaction, our SoHo transaction, some other conversations we're currently having, is that sellers continue to be interested in the tax deferral attributes of OP Units.

Because if they take stock, they don't pay taxes up front. Only when they sell the stock. And they're also becoming more and more interested or expressing interest in the asset diversification.

And so if you are the owner of street retail and you want to contribute it to a portfolio that diversifies it but still is of an upper tier quality, we're then in a very narrow club. And we like that because it's a much easier conversation.

And as opposed to a few years ago where sellers would often get tripped up on either low volume, too small a portfolio, that seems to have gone away. And now it's just the age old issue of at what price?

And that's fine. We'll deal with that. We'll continue to lose more deals than we win. But at our size, as long as we can maintain the kind of growth that we're doing, the OP Units will be one, but only one of many different ways that we can capitalize the transaction.

And when you look at the OP Units that we've issued over the last 12 months, it's totaled between Prince Street and the deal we did fourth quarter last year on West Broadway. It totals about $75 million of OP Units. So there's been a fair amount of use of that currency over the last 12 months.

Okay. That's helpful. Thank you.

Thanks, Todd.

Great, thank you, Todd. Jay Carlington, Green Street Advisors.

Just with respect to the lower operating cost benefit this quarter and NOI, is that something that would become a more sustainable contributor to NOI as the pool transitions to include more street retail? Just kind of (multiple speakers) wondering about that, given the lower expenses associated with street retail.

Yes. By and large for this quarter it really was more a function within the suburban portfolio. And it was just on a relative basis year over year and the current year. We just had lower repair and maintenance expense.

So the brief answer is don't look for this to be a recurring contribution. All that being said, you're exactly right in terms of the overall characteristic of the street portfolio having lower expenses. But I don't think that certainly wasn't a driver of the expense savings this quarter.

But so as a follow up, so as street retail becomes a bigger component, does that benefit kind of contribute a little bit of a tailwind?

Perhaps slightly. Yes. Yes.

Okay.

And let me just chime in. The expense savings piece, Jay, will be just one piece of that. What we're seeing, especially as we're beginning to aggregate more and more buildings on a given submarket, that's true on our Rush and Walton in Chicago as well as Clark and Diversey in Chicago, for instance.

We are starting to see economies of scale. Maybe not in terms of the specific expenses. But then our ability to drive tenants, move tenants around, a host of other things that we're still in the early stages of seeing the benefits of that scalability. But the wind will be at our backs as that continues.

Okay, that's helpful. And then I guess my second question, just, Ken, you guys have been active in the tri-state area and the Chicago market, but pretty quiet with respect to transaction activity in the D.C. Metro area. Is that a Company decision? Or is there anything maybe market-specific going on there?

It's not a Company decision. We like D.C. We've done a -- we've come close recently on a couple transactions. So if we had won them, then that wouldn't be the case. I would expect to see us continue to build D.C. street retail.

That being said, there's a bunch of cross currents in D.C. that have made other types of assets less attractive to us. But for Georgetown, for a few of the other street retail components in D.C., we like that. And if we can add to it, great.

Okay, thank you.

Sure.

Thank you. (Operator Instructions) Christy McElroy, Citi.

Just on the street retail line of questioning. Regarding the Off Madison collection that you're buying and fund for that you talked about, Ken. Can you talk about the difference in cap rates for these types of locations? The Upper East Side Off Madison versus sort of right on Madison even in Midtown. And you talked about $1,000 a foot on Madison. What sort of market rent for this type of space that you're buying?

So let me first not answer the market rent conversation, at the slightly paranoid reason that if our retailers or their brokers that we're currently negotiating with are listening or get the transcript, they don't need to know my thoughts. But it would be at a meaningful discount. And we can afford that.

So in terms of cap rates, cap rates on Madison Avenue for relatively stabilized retail are below 4%. I say relatively stabilized because rents have continued to grow so substantially that it's kind of hard to gauge, well, now rents are fully stabilized.

And the ability to re-mark to market many of those leases is much faster than in traditional suburban. So the buyers who are buying at sub 4% are going to see substantially higher growth than elsewhere.

That is not the play here nor does it need to be. These are both fabulous townhomes slash flagship opportunities for retailers. And then on top of it will be office and/or residential. That is affording retailers the ability to have their boutique flagship pay a discount, but I did not tell you what that discount is, off of the rents I was quoting.

And have a real unique presence and still attracting the -- and if you're standing on Madison Avenue and if you look east on 61st Street, you see this building. And if you look west on 71st Street right next to the Ralph Lauren, you see our other building. So it's not like a distant trek. It's a hundred feet. They're offered a real opportunity there.

What cap rate we exit at, call it five years from now, will probably be more dependent on where interest rates are and exactly how these settle. And the fact that these kind of assets or Madison Avenue trades up for and these probably are not that far behind it.

And on the Chicago street retail that you have under contract, is that a portfolio? Are these one-off assets? And can you provide a little color around location and maybe perhaps going in yield?

See, you like to trigger all of my paranoia. Which is until a deal is closed, I am loath to talk about it. Obviously we have a quarterly call and the lawyers, et cetera, want, if we sign a contract, to discuss it.

It is a contract for street retail that is very consistent with the other types of Chicago street retail we own. We're very excited about getting it closed, but it's still subject to the various conditions, primarily lender's consent.

So I'm going to leave it at that, other than to finally say Chicago has been a great city for us to invest retail in. We continue to like it. We're very pleased with the retailer interest in that city. And we look forward to adding additional assets.

Well, just on location, you talked a little bit about clusters when you talked about economies of scale. Are these assets nearby the assets that you currently own?

Yes.

Okay. Thank you.

But it -- I don't want to be particularly coy about this nor a pain in the neck. It's just that when deals don't happen, when bumps in the road occur, I don't want to over-promise. Our focus, and we've been pretty clear about where we're acquiring in Chicago and where we are not.

And those markets that we are active in, we're going to remain active in. And I think we're getting only better at, both in terms of deal flow but also the synergies that are showing up. Whether it's on a Rush Street, whether it's on a North Michigan Avenue, Clark and Diversey, or some of our other Lincoln Park assets, we're going to continue to add to those. And I think it'll be very good for our stakeholders.

Sure. Thanks, Ken.

Sure.

Thank you, Christy. Ross Nussbaum, UBS.

So I've got a couple questions here. So let's first remind me, when I think about the allocation between investments, between the core portfolio and the funds and I see that in the core you put the Prince Street deals. And then into the funds, you put the Off Madison deals. How do you figure out which of New York street retail goes where?

Right.

And in --

Very important distinction, which is we cannot issue OP Units in a fund structure. So when we have, and so the distinction between a leased but significant mark to market, significant lease up on Prince Street, you'd say -- geez, why is that not a fund transaction?

Because the OP Units are an arrow in our quiver but only in our public company quiver. So we then get the appropriate waiver and proceed on the public. Same thing we did in Tribeca, Ross.

In general, the other side of it is you should think about our funds being opportunistic overall. Higher risk and higher return. And in some instances, the funds are going to be priced out of certain markets, et cetera. Certainly stabilized core would not be something the fund could do.

Heavy lifting turn around where we're fully vacating a building or pretty darn close to that, we ought to be able to get the return. So far we have. And since we, as Jon pointed out, invest 20%, again, you get the additional 20% carry.

It's not as though, oh, darn, Off Madison is in the funds. We're going to hopefully make a lot of money for our shareholders as we turn around and stabilize those assets. So that is the distinction.

And the same sort of (inaudible) question on Bedford Green versus the Wilmington, Delaware, asset. What was -- was there anything structurally that prevented Bedford from winding up in the funds? Or it was just more of a core asset?

It's more of a --

From a cash flow perspective.

Wasn't that long ago, Ross, that you lived in Connecticut. But there is a fundamental difference between dense suburban like Westchester. And I love Wilmington, but and Wilmington.

So Wilmington is a higher risk and more of a shorter term buy it, re-anchor it, and sell it. Whereas Bedford and Westchester, we are thrilled to own that for a very long time as we have for our White Plains Crossroads property or Greenwich, Connecticut, et cetera.

Got it. Okay. So now that I got that straightened out, if I'm looking at your supplemental correctly, you're kind enough to give us the base rents for these new acquisitions.

I'm assuming those are gross ABRs but that the net rent isn't going to be too far off. Am I looking at Prince Street and saying you're getting about, give or take, a 2% cash yield going in on Prince Street?

Yes. Not that far off. Because these rents, when these leases mature, as I pointed out, if we mark to market at today's, we're between 5% and 6%. And if these market rents continue to grow and if you look at how they have, we'll do in excess of 6%.

And the timeframe, again, was what on Prince Street for the roll?

It's starting 2017.

Okay.

So --

And then (multiple speakers) --

So, Ross, whenever you say -- hey, geez, how come you're doing all the high risk stuff in the funds? You see, we've got some. And this is what, whether it was Lincoln Road or otherwise, that's what it feels like.

And the same sort of question on Bedford Green. If my math is right, that's at sub 5% cap rate --

That --

-- going in on an asset that's got 5.1% debt on it for another three years. Help me with that one.

Yes, there is a pretty significant pop in the not distant future. And your math's a little off on the net to gross.

Okay. So that stabilizes where, do you think?

Again, north of the sixes.

North of the six. Okay. That's all I had. Thank you.

Sure.

Thank you, Ross. Rich Moore, RBC Capital Markets.

It seems, Ken, like when you make acquisitions in the core it's a mix now of street and the other property types you kind of went through. And I'm curious going forward, you're about 50-50 at this point street and other property types. Call it suburban. Where does that go from here? Is that -- does that head into 60% to 70% street? Or are you kind of half and half in your acquisition thinking?

No, I think it continues to grow. This year we're forecasting 70% street retail and 30% other. And then the other, keep in mind, ranges from urban like what we just acquired in Queens to dense suburban such as Bedford.

So in all cases, you're talking about real dense major market acquisitions. But 70% is high street retail. Live, work, play. Retails that are retailers. And the demand has been very strong.

If we can achieve the roughly 20% growth per year, and there's no promise that that'll occur, it just feels pretty good right now in terms of deal flow, capital markets, and our ability to execute.

If we can continue that, and if it's anywhere from a two-thirds to 75% street retail, which is also what our negotiated deal flow looks like, then I would expect the street retail component to grow from 50% to 60% over the next few years. The urban to grow from its current 10% to probably 15%.

And then the balance will be dense suburban, keeping in mind that we probably will also dispose of a handful of our more traditional suburban centers. And so that will then skew the numbers even further.

Okay, good, thank you. And then without getting you nervous with your retailers, I sort of get this feeling that street retail rents are growing unusually fast. Maybe that's just a misconception. And there's obviously very little in the way of expense growth.

So it strikes me that 100 basis points higher same store NOI growth for street retail over suburban seems a little bit light. I mean, you can get 200 basis points higher by getting a regional mall. So am I missing something there?

No, you're not. It's semantics but it's an important semantic, which is what we have said is that we believe that we will achieve 100 basis points higher contractual growth. And so when we enter into a lease, and we've done several recently on the street retail front, we are tending to get 3% contractual growth annually. Or 15% every five years, which is just slightly different. Whereas in the suburban, it's about 100 basis points less.

So if all market rents grew at the same level, if all retailers continued in their contractual obligations, that's where the 100 basis points shows up. What our experience has been to date is that in street retail, we pick up about another 100 basis points.

I can't point exactly when it'll occur because it means that a retailer is giving up their lease sooner than contractual. Or it means that market rents are growing faster, which they have been on our street retail markets than in our suburban.

But something is occurring, as it has been, that then is adding about another 100 basis points. And thus, as we look at the different markets and compare them, we're probably more inclined to think of it more like a 200 basis point spread. But contractually I only want to talk about the 100 basis points, because that I can at least see in my projection.

Okay, good. Thank you. So would you say that the street retail rents for a good quality street retailer are growing similarly to say what mall rents are growing at, at good regional malls like Roosevelt Field, something like that?

I don't hold myself out to be a regional mall expert. From the conversations I have with my friends who are, I think street retail rents for the great streets are growing faster. But it -- that will vary and the A mall business is going to always be a very important part for many of our retailers.

It's just that as they're discovering the significant benefits of street retail, and there are, and there's some huge distinctions, that's growing faster. I'll note, for instance, in our Lincoln Park properties, we signed Bonobos, who two years ago had no physical locations. We just signed Warby Parker, same thing.

They're probably several years away from showing up in any meaningful way in the more traditional mall. But they want to be on these high streets and we want to own that kind of real estate.

Got it. Good. Thanks, Ken.

Sure.

Great, thank you. And at this time, Ken, we have no further questions. So I would like to turn the call back over to you for closing remarks.

Great. I'd like to thank everyone for taking the time to join us today. And we'll speak to you all again soon.

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