Acadia Realty Trust (AKR) 2016 Q2 法說會逐字稿

Got day, ladies and gentlemen, and welcome to the Acadia Realty Trust second-quarter 2016 earnings call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. [Levi Levenfish]. Sir, you may begin.

Good afternoon, and thank you for joining us for the second-quarter 2016 Acadia Realty Trust earnings conference call. My name is Levi Levenfish, and I'm a summer intern in our acquisitions department.

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 27, 2016, and the Company undertakes no duty to update them.

During this call, management may refer to certain non-GAAP financial measures, including funds from operation 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.

At this time, it is my pleasure to introduce Acadia's President and Chief Executive Officer, Ken Bernstein.

Thank you, Levi. Great job. Levi is one of 13 summer associates who have joined us at Acadia for the summer. It's a great group, and I expect they'll be making a significant impact in the real estate industry in years to come.

We had a busy and productive quarter, so I'll start with an overview of our core portfolio, both existing assets as well as new investments. Then I'll make some observations on the other key drivers of our business. At that time, I'll turn the call over for one last time to Jon Grisham, who as you know, is retiring this year as our CFO. Jon will then introduce our new CFO, John Gottfried. And, finally, Amy will update you on the details of our fund platform.

Given the continued waves of macro volatility, we are always looking to see the potential impact to us, both in terms of the real estate capital markets as well as real estate operating fundamentals. And while we've seen some shifts in the real estate capital markets, when we look at our operating fundamentals, both in terms of our portfolio performance last quarter, as well as in discussions with our retailers, we see the fundamentals of our business on sound footing.

In terms of our existing assets in our core portfolio, as John Gottfried will discuss in detail, our same-store NOI for the quarter, as well as for the year, remains on target. As you'll recall, we previously forecasted the second quarter NOI would dip but then bounce back in the third quarter, and this remains on track.

Consistent with our thesis, when we look at the different segments of our core portfolio, street retail continues to outperform our suburban portfolio by between 100 and 200 basis points. This outperformance is also consistent with the feedback that we get from our retailers who continue to show greater enthusiasm for key street and urban locations, where they can better establish and differentiate their brand to the consumer in the evolving omni-channel world that we live in.

Now, no one should confuse this retailer enthusiasm with their willingness to pay ever-increasing or unlimited amounts of rent. In some instances, this pushback has resulted in increased vacancy on some streets. Fortunately, as it relates to our existing portfolio, we're well insulated. This is due to the fact that the majority of our leases are of an older vintage. And when you take into account the substantial growth in market rent on most streets over the past several years, older leases are, almost without exception, below market.

Based on several industry reports as well as our own internal experience, market rents on the various streets that we do business in have grown over the last five years by anywhere from roughly 5% a year to as much as 20% a year. Now, this significant annual growth has caused some landlords to become too aggressive on their re-leasing assumptions. And from an investment perspective, this growth has caused some sellers and many recent buyers to underwrite re-leasing rents that were also too aggressive. This is a major reason that in 2015 we didn't add any street retail to our core portfolio.

What we've seen so far in 2016 is a return to more realistic growth assumptions. And when you combine that with the sidelining of some more levered buyers, we've seen an increase in attractive deal flow. So, while some landlords and recent buyers may be disappointed that leases aren't getting done at continually record-setting rental rates, the current market works just fine for us. Even in the luxury segment, which has come under some pressure, where landlords are realistic, retailers are showing up.

This certainly has been the case for us with our 991 Madison Avenue property. As we discussed on our last call, we acquired a controlling interest in the street retail on Madison Avenue between 76th and 77th Street under the Carlyle Hotel. Already we have successfully signed new leases with two existing tenants. Both Vera Wang and Perrin Paris have elected to sign permanent leases with us at rents which were very consistent with our expectations.

Vera Wang has been in this location for almost 30 years, and has exciting plans for their flagship location here. And there's no doubt in my mind that that over the long term, these kind of locations are going to drive outperformance. So whether it's on Madison Avenue or North Michigan Avenue, retailers are continuing to focus their resources on their most impactful, must-have locations in key gateway markets.

And as it relates to our portfolio, whether New York, Chicago, San Francisco, DC, or Boston, our goal is to continue to build upon our portfolio so that it remains positioned to benefit from the ongoing evolution of retailing.

Our acquisition activity this year, as a whole, is a nice blend of street and urban retail in all of our key gateway markets, with downside protection plus long-term growth.

In the second quarter, we continued with this activity, with signing the Smithfield portfolio, first and foremost, which is a five-property portfolio in Chicago. The three largest properties represent about 90% of the portfolio's value. Two of the properties are on State Street; the third on North Avenue. The State Street properties are located in the heart of Chicago's Loop, one of the main shopping corridors in Chicago. Tenants include Nordstrom Rack, H&M, and Walgreens.

The North Avenue property is located on one of the best corners of Lincoln Park's premier North Avenue retail corridor, a submarket that we have been very active in over the last several years.

All three properties have strong tenancy, robust tenant sales, and most importantly, below-market rents. We expect the majority of these assets to close towards the end of the third quarter.

Then in Washington, DC, we further expanded on our existing joint venture with the [Eastbank] Group on Georgetown's M Street corridor, where we already own seven properties with them, and we acquired a 20% interest in 17 additional buildings, primarily on M Street. Retailers in this portfolio range from lululemon to Bonobos, from Kit and Ace to Brooks Brothers.

Then in San Francisco, we will be acquiring 555 9th Street, a 150,000 square foot urban shopping center. This is our second core acquisition in San Francisco. With this acquisition, we will own two of the three most dominant urban shopping centers in the city. The property is anchored by Trader Joe's, Nordstrom Rack, and Bed Bath & Beyond, all of which have been successfully operating at this property for close to 15 years. We expect this deal to close in the fourth quarter.

Finally, on Newbury Street in Boston, we made a small investment in a retail building occupied by Starbucks. The property's growth is driven by Starbucks' lease, which has 3% annual contractual rent growth.

Then looking at our 2016 acquisitions on a combined basis, along with the strong defensive profile that I discussed, the combination of contractual growth and lease-up should provide strong long-term growth. In fact, this $480 million of acquisitions, on a combined basis over the next five years, should provide us with compounded annual NOI growth of approximately 5% a year. In the event we are fortunate enough to get back any of the below-market anchor leases, this growth would be even higher than this 5% target.

Then as John Gottfried will outline, our focus has been to make sure that we matchfund these acquisitions in a disciplined manner. And, finally, as Amy will discuss, we are utilizing our complementary fund platform to ensure that we can profitably execute on a broad range of more opportunistic investments within our key retail competencies.

I will let Amy discuss in detail our progress over the quarter with respect to our existing investments, as well as the successful fundraising launch of Fund V. But I will make a few observations.

The volatility in the marketplace, combined with various regulatory and other matters, is making some lenders skittish and is creating opportunities for well-capitalized companies like ours who can provide sellers with certainty of execution. And given this volatility, having discretionary dry powder, not exposed to the fluctuations in the public markets, feels like a good thing. In 2015, we were aggressive net sellers in our fund. In hindsight, it was a good time to liquidate assets at significant profits.

In 2016, while we are continuing to monetize, stabilize properties, we're also seeing an increase in our new investment pipeline, and this should certainly keep things interesting.

So to summarize, Acadia is well-positioned. First, our differentiated core portfolio, with its focus on urban and street retail in key markets, has a good defensive profile and strong growth prospects. Second, our balance sheet and liquidity are right where we want them to be. And finally, our opportunistic fund platform is well capitalized for growth opportunities as they may present themselves.

And with that, I'd like to thank our team for their efforts over the last quarter. And I will turn the call over to Jon Grisham. Jon, on behalf of all of Acadia, from our summer interns through to our Board of Trustees, thank you for your hard work, thank you for your leadership, thank you for your partnership.

Thank you, Ken. I must confess: since announcing my retirement last year, I've been drunk with excitement, planning the upcoming post-work decades of fun and adventure. Although my wife, Jo, who has been my anchor over the last 35 years, has been trying her best to sober me up some. Just last weekend, she was pointing out all the projects around the house that I have deferred over the years, citing work as an excuse; and that my day of reckoning as it relates to this procrastination is approaching fast.

What an extraordinary experience it has been working with Ken and the team at Acadia over last 18 years. They are the heart and soul of Acadia and they embody the qualities of intelligence, innovation, intensity, and integrity. And John Gottfried, as the newest member of the team, personifies these same qualities.

I've known John for six years, during which he led the New York real estate assurance practice for Pricewaterhouse. And although PwC is not our auditor, given his broad client base of large public REITs, I would often seek John out as a sounding board and trusted advisor on not only complex accounting issues, but on broader thoughts and observations on industry best practices.

And now that I have worked with him more closely over the last couple of months, I realized that in addition to this expertise, his business acumen, temperament, and passion for the business will make John not just a good CFO, but a great one.

I'm grateful to Ken for the tremendous opportunity and experience of being part of the Acadia team. I will always consider myself a member of the Acadia family, and I'm excited about the future for this very unique and dynamic company. I'm also grateful for the opportunity to have worked with and gotten to know many of you on this call, and I wish all of you great success in the future.

So, with that, I would like to turn the call over to Acadia's Chief Financial Officer, John Gottfried.

Thank you, Jon. I appreciate the words. I certainly have some big shoes to step into. Good afternoon, everyone. I look forward to meeting and working with each of you over the next few months. I'm excited to continue providing the level of accessibility and transparency to which you have grown accustomed to. Before I discuss our operating results and balance sheet matters, I wanted to provide an update on the transition from Jon Grisham to myself.

Although, as Jon just mentioned, we have been transitioning in formerly for several months following the April announcement, upon my official start date on June 27, we have literally been working side to side over the past month, truly capitalizing on this well-planned opportunity to execute a seamless transition of Jon's over 18 years of institutional knowledge, relationships with key marketplace constituents, as well as his day-to-day responsibilities of operating this business.

I'm also excited to continue Jon's leadership in the execution of our balance sheet strategy, which as Ken just mentioned, has been to fund our acquisitions on a leverage-neutral basis, as well as maintaining our best-in-class leverage ratios, and continue our progression towards an unsecured borrower; as well as continuing partnering with high-quality institutions in the execution of our highly profitable, opportunistic, and value-added strategies through our fund platform.

Now I'd like to take us through our quarterly earnings. Earnings for the second quarter came in as we expected at $0.38 before transaction costs. Furthermore, we have reaffirmed our annual guidance to $1.52 to $1.60, again, before any transaction cost, as well as any expectations of additional one-time items.

Our second-quarter results include net promote earnings of $0.03 per share relating to the sale of Heritage within Fund III. Amy will provide further color on our fund activities, but our fund platform continues to provide extremely attractive returns for both our REIT shareholders and investors in these funds.

Our quarterly results include incremental interest income of approximately $1.3 million, which was driven by a first mortgage loan that we originated this quarter and I'll talk about shortly, with the balance of the increase in the interest income line item being driven primarily by adjustments non-recurring, related to movements in our aggregate loan pool. These increases in interest income were offset by other minor items.

Over the balance of the year, we continue to project that our normalized quarterly FFO operations will generate between $0.34 to $0.36 prior to the recognition of any net promote income. In terms of our promote, we expect the continued monetization of Fund III assets will provide us with $0.04 to $0.06 of net promote income, which we expect to earn later in the second half of the year, most likely in the fourth quarter.

As I will discuss shortly, we have increased our acquisition guidance to $500 million to $600 million. You will also note that our annual earnings guidance has not been adjusted to reflect these acquisitions.

Of the $480 million of announced acquisitions that we have closed on, $190 million -- we have closed on $190 million, much of which we actually incorporate into our initial guidance. And given that we anticipate closing on the balance of our pipeline later in the year, we don't expect much in the way of 2016 accretion. However, as Ken just discussed, these are all high-quality urban and street assets that we believe will provide moderate accretion in 2017, as well as strong growth beyond that.

Moving on to same-property NOI. Same-property NOI for the three and six months ended June 30, 2016, increased 2.3% and 3% from the comparable 2015 periods. We continue to expect that we will achieve 3% to 4% of annual same-store NOI for the year. As we projected, and Jon discussed in our first-quarter call, our same-store NOI of 2.3% came in as we expected, and was largely driven by downtime of a single tenant at one of our suburban properties, along with a handful of other, smaller items on both the revenue and expense side.

As it relates to our same-store NOI, keep in mind a few points. Consistent with past quarters, approximately 12% or $3.5 million of our NOI, which is predominantly urban, is not yet reflected in our same-store NOI for the second quarter.

Secondly, the composition of our current NOI same-store pool is not really indicative of our in-place and projected portfolio, when you factor in our previously closed and pending 2016 acquisitions. For the most recent quarter, the composition of our same-store pool that's driving the 2.3% is roughly split 50-50 between our street and urban and suburban portfolios, since that does not incorporate any recent or contemplated acquisitions.

However, as our currently projected acquisition pipeline moves into our same-store pool over the next year or so, we expect that our ratio of street and urban to suburban will move -- will trend towards 65% of the same-store pool.

Therefore, in addition to a larger pool that is less susceptible to relatively minor variances, we also believe the migration of our same-store pool to more accurately reflect our urban and street investments that we've made will continue to generate meaningful growth in our forward-looking NOI, as Ken just discussed.

In terms of occupancy, occupancy in our core portfolio remains high and stable, at over 96%. Leasing spreads on new leases for the quarter were 17% on a GAAP basis and 9% on a cash basis, based upon approximately 200,000 square feet of leasing activity, of which 80% involved lease renewals, primarily within our suburban portfolio.

On the acquisition front, of the $480 million of closed and pending acquisitions that Ken just discussed, we have locked in all the necessary equity that we need to acquire these investments on a leverage-neutral basis. We have raised nearly $300 million of equity proceeds on a year-to-date basis, and included within this $300 million is $125 million of equity that was raised on a forward basis in early April. And this was used to matchfund the expected closing of our acquisitions.

Of the $125 million of forward equity, we have drawn $30 million of this forward during the second quarter, and anticipate the balance of the forward being used in connection with our acquisition of 555 9th Street later in the year. Furthermore, given that we have already identified $480 million of acquisitions, we have increased our annual acquisition guidance to $500 million to $600 million for the year.

Additionally, during the quarter, we made a first mortgage loan investment of $110 million at an incremental rate of 5% to the partners involved in our Brandywine portfolio. This loan was combined with the pre-existing mezzanine loan that we discussed in 2012 and bore interest at a rate of 15%, to result in a net first mortgage loan position of $153 million at a blended average interest rate of 8.1%.

The Brandywine portfolio is a property that we know very well. And we took the opportunity to consolidate our mezzanine loan into a first position, as well as provide financing alternative to our partners at market terms, at what we believe is a prudent loan to value ratio. This is a high-quality asset that we've known for a long time, and will continue to work with our partner as they valuate their interest in respect to this investment.

From a borrowing perspective, we have no amounts outstanding on our $150 million revolving credit facility. Additionally, during the quarter, we amended our unsecured credit agreements to extend the terms of our revolver and term loan, as well as obtain an additional $100 million of unsecured proceeds. The covenants and pricing of this facility are generally consistent with our prior facility.

Furthermore, we have no meaningful debt maturities for the balance of the year. And our healthy balance sheet and access to capital -- including our soon-to-be-launched Fund V, which Amy will discuss -- will continue to provide us -- continue to enable us to execute our prudent capital allocation growth strategy.

In conclusion, I'm thrilled to be joining Acadia at such an exciting time. Given Acadia's deep and talented team of professional and solid portfolios, and its numerous avenues to access capital -- whether that be in the public, private, or unsecured markets -- I believe we have a continuing opportunity to create meaningful long-term shareholder value by continuing to allocate capital in a disciplined manner and maintaining our healthy balance sheet.

With that, I will turn it over to Amy to provide an update on our fund activities.

Thanks, John. Today I will review the steady and important progress that we continue to make on our fund platform's buy-fix-sell mandate. Beginning with acquisitions, today several factors, including volatility in the capital markets and noise in the retailing industry, have converged to create an interesting environment for opportunistic and value-add investing in retail real estate.

As we discussed on previous calls, when market volatility strikes and debt spreads widen, sellers do what they normally do, at least initially, and move to the sidelines. However, we are now beginning to see more motivated sellers and borrowers; and as importantly, we have discretionary dollars immediately available to deploy into new investments.

Year to date, we have acquired or entered into contracts to acquire $64 million of investments on behalf of Fund IV. We have now allocated about two-thirds of Fund IV's capital commitments.

As you'll recall, we have already started to monetize Fund IV's profits, with the very successful sale of the fund's Lincoln Road investment. We are pleased with composition of Fund IV's current portfolio and will continue to identify new investments on Fund IV's behalf through August 9.

Fund V's investment period is then expected to begin on August 10. Following the conclusion of Fund IV's investment period, any unallocated commitments will be released.

Looking ahead, we have successfully launched the capital raising for Fund V, which is expected to be of similar size and have similar terms to Fund IV. With leverage, this provides us with up to $1.5 billion of buying power. We are very appreciative of the strong support that our existing investor base has shown for our disciplined investment approach.

To that point, existing Fund IV investors are expected to represent 95% or more of Fund V's capital commitments. These investors include, among others, endowments, foundations, and pension funds. Acadia will co-invest a minimum of 20% of the total capital raised, and expects to complete the final closing during third-quarter 2016.

Turning now to dispositions, as Ken discussed, pricing for high-quality assets is holding steady. Accordingly, our disposition pipeline remains on track, and we continue to evaluate our portfolio for assets that are right for disposition.

Based on our observations of market signals, we have already been active sellers of fund assets. Over the past two years, we have completed more than $800 million of dispositions across our fund platform. And this includes nearly $500 million of Fund III asset sales, of which $47 million was completed during the second quarter.

As detailed in our press release and as previously discussed, in April we completed the sale of Heritage Shops at Millennium Park in Chicago. Heritage Shops is an example of one of our high-yielding investments. In 2011, we were able to opportunistically acquire this property at an attractive cap rate. During our five-year hold, this property maintained its strong leased rate. At exit, we generated a 34% IRR and a 3-multiple on Fund III's equity investment, with nearly half of the profit resulting from property operations.

Lastly, consistent with prior quarters, we continue to make important progress on our existing fund redevelopment pipeline, including City Point in downtown Brooklyn, where our anchor tenants are enthusiastically proceeding toward their respective grand openings.

So in conclusion, we had another productive quarter in our fund platform. We continued to execute on our key opportunistic and value-add investment strategies. We very profitably recycled capital through asset sales. We made continued progress on our existing redevelopment pipeline. And we successfully launched the capital raising for Fund V, which should provide us with valuable dry powder to make new opportunistic and value-add investments over the next few years for the benefit of all of our stakeholders.

Thanks for your time. Now I will ask the operator to open the call for questions.

(Operator Instructions). Todd Thomas, KeyBanc.

Just a first question. Ken, I was just curious: you mentioned that the $480 million combined investment pool for this year is expected to generate 5% NOI growth over the next five years. I was just wondering how that stacks up relative to the 2014 and 2015 acquisitions, for example.

I think the growth profile is slightly higher, but I'd have to think back to the specifics of 2014-2015. But I bet it's about 100 basis points higher. And then, equally importantly, and it kind of makes sense if you think about the environment we're in, I also like the defensive profile of a host of these assets that we're adding. Whether it's Walgreens or Trader Joe's, these longer-term, below-market leases within periodic lease-up opportunities, I think are going to be a really good addition to the portfolio.

Okay. And then your comments about growth expectations for street retail leases normalizing a bit, what does that mean for pricing on assets? Has that changed as a result? Or are cap rates reflecting a slightly less optimistic rent growth environment versus where expectations were over the last year or two?

It's a little tricky. I don't think that cap rates have moved, but let me explain what I mean by that. If you have a stabilized asset with high-quality retail leases of a longer-term nature, those cap rates have remained solid; and for the key markets that we play in, they remain at very low levels. And I think that's understandable, given the growth profile and defensive nature.

Where things got tricky over the last couple of years was street retail, where leases were expiring in two, three, four, five years, and sellers were demanding that the buyers underwrite a doubling of rents. Because if rents had been growing by 20% a year for five years, they said, why not double again over the next five years? That was just silly. And we didn't play in that, and that has not turned out so well for those folks.

Is that a change in cap rates? I'm not so sure. It is certainly a change in expectations. And I would say it's inuring to our benefit, because those folks who believed that trees were going to grow out of the sky, I think they have been sidelined. And now we're able to sit down with sellers and have intelligent conversations. We're able to sit down with retailers and have intelligent conversations about what is a realistic price, what is a realistic growth profile, what is a realistic rent. And now that's coming together very nicely.

All right. And just a last follow-up, then. On the buyer pool, you had commented that it's -- had thinned out over the last few quarters, I guess. Have you seen the competition decrease further in the last few weeks or months, or would you say it's leveled off? How would you characterize it today?

There is less debt in the marketplace. There is less entrepreneurial debt in the marketplace. So those folks who are counting on 80% plus leverage have been sidelined, and are continually more so. On top of that, everyone is concerned about a wide variety of issues out there. So there is a certain pool of institutional capital that has also gotten more cautious. And then, finally, there's some people who made promises they can't keep, and I see them on the sidelines as well.

So, it is a thinner pool. And sellers are now saying to us -- on a regular enough basis that it feels more like a trend than one-off -- hey, if we can come to terms directly, we would rather do that than expose the property to a lengthy marketing. And we know you have the capital, whether it's a fund transaction, where it's fully discretionary capital, or given our balance sheet strength, on-balance sheet core acquisitions. Certainty of execution seems to be so much more important than it was, let's say, a year ago, and I expect that trend to continue.

Okay, great. Thanks a lot. And best of luck in retirement, Jon.

Craig Schmidt, Bank of America.

I'm noticing obviously the difference between the Fund IV expiring and Fund V. You don't miss a beat. I'm wondering, just given Amy's comments and this event, does that suggest you are looking at striking on some more existing opportunities? I know you had a little bit more challenge buying the opportunistic acquisitions, but it seems like you are going out of your way to make sure you have the flexibility to strike here.

Yes. So, we have definitely been disciplined, and for very good reasons, as Amy pointed out. Fund IV has been a very, what we believe, profitable fund. Lincoln Road has already been monetized, and we feel very good about our other investments. So, it would be crazy to lose that discipline and just spend the money. But in a lot of the conversations we're having, sellers want to make sure that the capital is there, and we want to make sure that we have that, as well; so, thus, we're lining it up.

But for those folks who take the point of view, well, it's about assets under management, it's about AUM, use that money or lose it -- I think that's contrary to our overall philosophy. And what I have found is when people take the approach of use or lose it, it too often turns into use it and lose it, which doesn't work for any of us. So let's see what hits over the next few weeks. But whether it's August 8, 9, or 10, we're ready to take advantage of the opportunities.

Great. And then I saw that two of the acquisitions in the Smithfield portfolio are right in the North Loop area. What are you observing there that makes this an attractive core acquisition?

Well, State Street is probably one of the better, if not best, established street retail corridors for the kind of retailers that are speaking to today's live-work-play environment. So whether it's Nordstrom Rack or H&M, Walgreens -- Craig, you and I have visited it -- that's their flagship location where they sell everything from typical Walgreens products to food to wine, et cetera. Those kind of retailers in these kind of locations are the future of retailing, and that's the kind of real estate we should own.

Great, thank you. And then, also, I want to wish Jon Grisham a successful retirement.

Thanks, Craig.

Jay Carlington, Green Street Advisors.

Ken, maybe just to follow up on a lot of the core activity that we've been seeing here this year. Is that just because there's more core product on the market? Or is it your cost of equity that's maybe influencing why you are pursuing those types of deals?

And I guess it would be C, which is that certainty of execution seems to be making enough of a difference. It's hard for me to articulate that cap rates have moved as much as sellers are more realistic about what lease-up prospects should look like and how they get capitalized into a deal. And sellers are much more appreciative of the fact that we have that capital and we're ready to go. So, I would attribute it to that shift.

I don't think that there is more core on the market. Although if someone has an asset that is stabilized and they are thinking of monetizing, given where rates are, given where the market is, please call us. And I don't know why they would wait. So that's where we see it.

Okay. And maybe, John, looking at the $1.3 million you mentioned in incremental interest income. Is that a run rate that's going to continue? And if so, what is offsetting the benefit there?

Yes, so I think that would be the run rate we would consider going forward, would be the incremental $1.3 million, and I'd take that against Q1 interest income. So, roughly, call it $5 million of pro rata interest income Q3 and Q4. And I think the offsets would be just our cost of capital and the leverage that we've used to fund that. So the spread isn't as wide as you would otherwise think.

Okay, great. And Jon, I guess I'll pass on my condolences on your retirement.

Thank you, Jay, I think.

Thanks.

Christy McElroy, Citi.

Just to follow up on the street retail questions, realizing that asking rent -- like, asking rent expectations have changed. But as a result of some of the vacancy, are you seeing any market rent declines? So, effectively market rent versus asking rent; market rent being as measured by the leases that actually get signed. Has that been trending lower, or is that still flat to higher?

It is street-by-street and space-by-space specific, but my sense is that there have been movements in both. I say my sense, because we don't have a lot of lease turning, so I can't speak to our own portfolio, and so far we've been very pleased with what execution we have seen. Well, first of all, we're not part of the asking rent community that is asking for absurd rents, so maybe we're not getting disappointed there.

But in terms of actual rents, there definitely have been some shifts, and I would point them out as follows. For those markets where rents have been growing 10%, 15%, 20% a year -- well, if rents have fallen off back to 2015 levels -- that's not a large amount of time, but that could be a 20% drop. And so, each space and each landlord has to think about that individually. We don't have a lot of that. So it is not as though we've seen that shift directly, but there were expectations that were unnecessarily optimistic. We weren't part of that.

And if those have normalized, it's working to our benefit, because it's sidelining some of the other folks and enabling us to execute on a more rational basis.

Okay. And in terms of the settlement of the remaining forward equity offering, John, I think you mentioned later in the year. What's the expected close time for 555 9th, and would you expect to issue more on the ATM this year?

So, expected close time is going to be in the fourth quarter. At some point I would say probably the latter fourth quarter, just given it's a complicated process with the loan assumptions that we're working through. But it's on track, but we're projecting that to be in the latter half of the fourth quarter. And I think we will continue to evaluate whether it makes sense to use our ATM, which we just re-upped in early July.

Great, thanks. And Jon, again, good luck. I'm sure if you get tired of house projects that Ken will let you come back as a summer intern, and you can do the Safe Harbor on the call.

Great idea. Thanks, Christy.

Rich Moore, RBC Capital Markets.

Well, you can be a summer intern here, if you want.

The job offers are already starting, Jon.

The job offers are coming. (laughter)

Time to start that new career.

So, I'm looking just here at the guidance, what you have for acquisitions going forward for the rest of the year, and I'm thinking it ranges from nothing to a little. And I'm curious, is that because you are sandbagging, which I sort of suspect? Or is there just not that much that you're seeing at this point for the rest of the year in the pipeline?

So, again, I'm confronted with neither A nor B, but C. We are not trying to sandbag anyone. We are seeing plenty of good deal flow. So, what I guess I would add to that, Rich, is acquisition volume guidance has been about my least favorite of all of our guidance metrics. Because we are, first and foremost, about creating NAV growth per share, and people try to model immediate earnings acquisitions accretion, and it's kind of silly.

If we see good deals, we'll do them, provided the capital markets are there for us; and if we don't, we won't. We are currently seeing good deals. Let's see what plays out. Let's see when it hits. It felt like a good placeholder for now, and stay tuned.

Okay. All right. That's fair, Ken. Thank you. And then on the Brandywine asset, help us understand exactly what's going on there. Because I wouldn't think that's an asset you really want to own, despite the fact that it may, in fact, be a good asset. With your move toward more street retail, urban retail, that kind of thing, another suburban center is probably not top on your list. So why this investment, I guess, and where does it go from here? Do you think you end up with that asset? Is that the idea?

So, first of all, within our core competencies is a wide range of skills, and we like Brandywine just fine. We own 20%-plus of it, and if we didn't like it, we wouldn't. And we like our overall portfolio.

But you are absolutely correct: our march forward is towards the more productive, more high-demand-by-retailer locations in street and urban. That being said, within our given portfolio, we're always faced with different opportunities to either potentially buy out partners or recapitalize. And there's a lot of ways we can solve this.

So, the answer of what are we going to do, I don't know yet, but what you have seen in many instances is we have successfully brought in institutional partners. You saw us do that recently in Cortlandt Manor. You have seen us aggressively sell assets. We can do that as well. And we are very comfortable owning an asset that we have for the last 10 years owned.

So, let's see how it shakes out. But I wouldn't overthink it other than it made abundant sense for us to make the mezzanine loan when we did. It made an equal amount of sense for us to clean up, unencumber, and have a first mortgage on this.

And the asset is a very good asset -- although, again, not part of street and urban -- very good asset, with Target and Lowe's and Trader Joe's and Bed Bath & Beyond, and the list goes on and on. So, if not on our balance sheet, it will look very good on someone else's.

All right. Good, great, thank you. And Jon, best of luck. And if you do want to do sell-side research, call us first.

Rich, it looks like a lot of fun. I'm going to have to think about that, though.

Yes, I'll bet it does.

Michael Mueller, JPMorgan.

So, quick question. Value-add and opportunistic; it's a pretty broad term. So in thinking about Fund V and money going out the door into the funds, what types of investments do you see going into the fund over the next few years?

So, first of all, with the following caveat that every time I think I know what two years from now will look like, I have been proven profoundly wrong in terms of where the opportunities are. And the nice thing about the fund business is, within our core competencies, we have fully discretionary capital to execute where we see opportunities at the time.

So if you were to ask me today, what I would observe is that cap rates for high-quality core are about as low as I've ever seen them; and that new development opportunities are really hard to do in open air retail, but that the spread between high quality and then more secondary cap rates is about as wide as I've seen.

And the bid for high yield is starting to look real attractive. They are harder to finance. There's some tricks to them. I wouldn't want to own them long-term, but we are seeing some high-yield opportunities now that look pretty darn compelling. That would fall into the opportunistic. It would absolutely fall into the category of things that you would not want to see in our core portfolio, on our balance sheet. And that would blend very nicely into our fund platform.

Then on top of that, some of the other, more traditional types of fund acquisitions you've seen us do. So, heavy lifting turnarounds, even in great markets; higher risk? But we have the expertise to buy a building, vacate it, put in the right tenants. You've seen us do it in our off Madison development and we're doing it elsewhere. Or what we're doing on Broughton Street in Savannah, Georgia, where we're finding great streets where we can own a significant amount of square footage, and then bring in the national/international retailers that we work with.

All of those could fit very nicely into the heavy lifting, value-add, and opportunistic. But if I were to guess today, it is watching cap rates inch up for the more generic assets at some point, given that the CMBS market doesn't seem to be financing them as aggressively, given that the balance sheet lenders aren't -- there does seem to be some opportunity there.

Got it. So a little bit more of clipping a higher coupon as opposed to banking on cap recompression?

Yes.

Got it, okay. Okay. That's great. And Jon, congratulations, and hope to run into you in the Poconos at some point.

I'll be waiting for you. Thanks, Mike.

(Operator Instructions). Floris van Dijkum, Boenning's.

Guys, quick question; or maybe Ken, a strategic question. As you think about -- and Jon, you sort of alluded to this in your prepared remarks as well -- what the Company as going to look like in -- next year, or in two years' time.

But if you think out a little bit further (technical difficulty) time, how do we think about the proportions [create] retail and your portfolio relative to your typical suburban assets? And also, how should we think about the growth that you will be churning at that point?

Sure. Why don't I take a stab at that, John, and then add any color to it. A few distinctions: one, what John Gottfried talked about in prepared remarks was the percentages of NOI, which obviously, based on cap rates, is different in terms of percentage of values. And, so, right now, where we sit today, just under half of the value as we attribute it of our core portfolio is street retail. A little over 20% is urban, and this is inclusive of the acquisitions that we anticipate to close over the next few months. And then roughly 30% is suburban.

And I'm fine with that balance, and I would never want to confine ourselves to not adding an urban or a street because of some metrics. Most focused on making sure we have adequate geographic diversity, adequate tenant diversification, adequate growth, and adequate defensive profile. And within that gamut, I see a nice balance with what we have.

That being said, as we look at deals to add to our core -- and we try to stay agnostic as to what might come in today that we're interested in. If it's within any of those areas and it's priced correctly, we will take it down.

But where we have seen most of the opportunities to create long-term value, it has been in the street and the urban. Not because the cap rates are higher; they're not. But because the long-term growth profile, the long-term tenant demand -- as we talk to our retailers and hear what they are interested in -- we keep seeing better long-term value creation in those. So if that's the case, I would expect to see us grow our portfolio by about 20% a year. This year it looks like it will be higher. Last year it was a little bit lower.

So assume 20% a year, or roughly a doubling over the next five years, with the vast majority being where our retailers are most enthusiastic about going. If their enthusiasm remains for street and urban, then that's where you'll see the majority of the growth. So far in the omni-channel world we're living in, that's what we're seeing. But if asking rents are too high, and retailers say we don't need it; if there are shifts in how retailers are thinking about the future, we're going to shift with it.

Right now, though, it feels like we are responding to the right opportunities based on what we're seeing demographically, based on what we're seeing in terms of omni-channel retailing and how our retailers are going to grow, and based on the capital markets. So that's about as lengthy a -- here's what you should expect over the next five years.

John, anything you want to add?

Yes, the only thing I'd add, Floris, was that if we think about the timing when these acquisitions will -- were put in place, and when they're projected to be in place -- we're not going to see the results of what's been a fairly sizable investment in the past year until Q4 2017 and into Q1 2018. So I think it's somewhat forward-looking in terms of just how the math works for same-store NOI; that we are really not going to see their true growth in these assets in that reported number for quite a ways out.

So, if I mentioned before, I don't love giving guidance as to acquisition volume. We all share a certain level of cynicism with respect to what same-store NOI means or doesn't. That doesn't change our point of view of what we're going to add, how we're going to add it, et cetera.

Perfect. Thanks, guys. And Jon, good luck.

Thank you, Floris.

Thank you. And I'm showing no further questions at this time.

I'd like to turn the call back to Mr. Bernstein for closing remarks.

Great. Thank you all for joining us on our summer session of earnings call. And I wish everyone a pleasant balance of the summer. And again, Jon Grisham, thank you. Have a good summer, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.