Acadia Realty Trust (AKR) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Acadia Realty Trust First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Christian Campusano, Analyst of Acquisitions. Please go ahead.

Good afternoon, and thank you for joining us for the First Quarter 2017 Acadia Realty Trust Earnings Conference Call. 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, April 25, 2017, 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.

President and Chief Executive Officer, Ken Bernstein, will kick off today's management remarks with a market overview and discussion of the company's core portfolio; followed by Amy Racanello, Senior Vice President of Capital Markets and Investments, who will discuss the company's fund platform. Then, Chief Financial Officer, John Gottfried, will conclude today's prepared remarks with a review of the company's earnings, operating results and balance sheet. (Operator Instructions)

Now it is my pleasure to turn the call over to Ken.

Thank you, Christian. Great job.

Good afternoon. As is generally the case with first-quarter calls, it's been less than 2 months since our year-end earnings call, so there's less to update than in the other quarters. That being said, there's been a flood of news about the demise of retailing and retail real estate. And while there's reason for legitimate concern, there's too much overgeneralization going on. So before we delve into our first-quarter results, I'd like to provide some thoughts as to what we're seeing, and how we're positioning ourselves.

We're currently experiencing a convergence of typical cyclical headwinds with then longer-term secular shifts as a result of technology, and I think it's important to separate these 2 different components. On the cyclical side, a strong dollar, mild winter, food deflation or changes in style are all contributors to a flood of negative results for a broad range of our retailers.

Now, some of these challenges are simply the result of once-strong retailers losing their edge, many over-expanded, others just under-delivered. Others are being driven by short-term financial issues. In some instances, these cyclical headwinds have been then accelerated further by continued growth of e-commerce, but retailing has always been Darwinian and it's always been cyclical. And if we, as landlords, choose our locations wisely and structure our leases thoughtfully, then we should be fairly well insulated from these cyclical shifts.

In terms of longer-term secular trends, there's no doubt that retailing and shopping patterns are evolving. Technology is a critical factor driving these changes, in my view, in 2 important ways: first, is the continued growth in e-commerce; and then, there's the increased price transparency as a result of technology.

In terms of e-commerce, the convenience of home delivery and ease of selecting certain products online makes this channel compelling in many instances. Furthermore, e-commerce retailers and their investors are currently more focused on gaining market share than achieving traditional profit metrics, which makes this channel a formidable competitor to traditional retailers.

The apparel industry seems to have been hit earlier and more significantly than many of us expected, but this disruption is likely to impact almost every type of retailing. The good news is that, over time, the pricing subsidies in e-commerce will likely moderate. And traditional retailers will have competitive omnichannel capabilities that complement their bricks-and-mortar locations.

Furthermore, it's also highly likely that virtually all successful online retailers today are going to have strong bricks-and-mortar presence in the future. They're going to do this to reduce their cost per acquisition of customer. They're going to do this to connect with their customer, and finally, to strengthen their margins.

This screen-to-store evolution is playing out as we speak, with retailers ranging from Warby Parker to Bonobos and a host of others. And while these new retailers will view their use of bricks-and-mortar perhaps differently than conventional retailers, we think Acadia is very well positioned for this shift.

Then the second key change is increased price transparency. Today, the shopper can price virtually any product, anytime, anywhere. Thus, a retailer, especially a reseller of broadly available products, has to competitively price its merchandise or it's going to lose market share. When there were fewer channels, this was less of an issue, but today, too many consumers are saying, "Why pay full price when off-price is around the corner or a click away?" And this is true for a wide range of goods, from handbags to razor blades. And while there are qualitative differences between full price and discount, the consumer today appears adequately confused, perhaps a bit fatigued and frozen.

Going forward, successful retailers are going to have to better clarify their value proposition, from pricing clarity to use of data to energize and inform sales staff -- all of that's going to matter. Equally importantly, the brands themselves are likely going to take a more direct control of their relationship with their customer. Bricks-and-mortar real estate will be an important, if not, essential component of this.

The best example is Apple who does this externally well. The consumer knows that the products available for sale at Apple cannot be found discounted either online or off-line, so buy in their store, buy online, Apple doesn't care. Apple wins. And while Apple could have been a dominant brand without ever having a physical store, there's little doubt that they have benefited tremendously from their bricks-and-mortar presence, especially as they're now taking that in-store experience to yet another level.

lululemon is another retailer with similar pricing discipline in a very competitive market. And there's a host of other brands that are using bricks and mortar to achieve these goals, whether it's Sonos, with their store in SoHo or Under Armour, and even Dyson opening flagship stores on Fifth Avenue. Expect to see brands continue to connect with their customer directly using certain key flagship locations to execute this win-win omnichannel execution.

And Acadia's well positioned for this shift as well. In our conversations with our retailers, it's becoming clear that no product type is bulletproof, recession-proof or Amazon-proof, but our retailers are fairly consistent in their focus on quality over quantity as they continue to transition their real estate demand. We're seeing this play out in terms of number of stores, size of stores and, most importantly, in terms of location.

And this is resulting in an ongoing separation between the have locations and the have-nots. Retailers are shedding stores in secondary locations and continue to focus on their best in fleet. To be clear, retailers are being very disciplined in terms of the rents they're willing to pay and their costs to open, but we're also finding them almost always choosing the quality of the location over pure pricing.

In SoHo, we're beginning to see examples of existing retailers using current vacancies in that market as relocation upgrade opportunities, and we expect to see that trend continue.

So as we digest the impact of these cyclical and these secular shifts, we're thinking about both our existing inventory and, as importantly, our future inventory, because the key for us to create long-term shareholder value is to observe both short- and long-term shifts, and then use our team's skill set and our diverse capital base to adjust accordingly and profitably. And given how we see these trends played out, we like how we're positioned, both from the perspective of our existing portfolio, and our growth prospects for the future.

In terms of our existing core portfolio, it benefits from a strong defensive profile to address some of the current challenges, but has the kind of locations that should outperform as some of these longer trends play out. It also has solid long-term embedded internal growth to ensure that we benefit as the market improves. 85% of our portfolio is in 5 key gateway cities: D.C., New York, Boston, Chicago, San Francisco. 70% consists of high-barrier-to-entry, supply-constrained street and urban retail, with products focused on serving the daily needs dominated by necessity-based and value retailers reaching their shoppers where they live, work and play. That's supermarkets, pharmacy, food, fitness.

Our top tenants are dominated by retailers ranging from Target to Trader Joe's, Stop & Shop and Walgreens. And then, on the apparel side, it's dominated by value-focused off-price and fast-fashion retailers, ranging from H&M to T.J. Maxx to Nordstrom Rack.

The portfolio's also well positioned to benefit from the shift in retailing that I discussed. We're capturing our fair share of screens to stores. Our real estate has attracted Bonobos and Warby Parker and will continue to do so. On the flagship front, our expansion of lululemon into a flagship store on Rush Street in Chicago is but one example of the flagship portion of our portfolio.

Discount retailers are also continuing to gravitate to high-quality, dense urban locations, and T.J. Maxx coming to our Clark and Diversey property in Lincoln Park is another example of that.

Our core portfolio is also positioned for long-term, strong embedded growth. As we discussed in detail on our last call, we're successfully recapturing several below-market spaces this year. And while there'll be some short-term downtime, the growth is going to bounce back nicely in 2018 and beyond. And then we have several other projects that will continue to drive growth further down the road. And as John will discuss, we're making solid progress on all of these fronts.

As we think about external growth for our core portfolio and the opportunities going forward, we like how we're positioned as well. This year, cap rates for high-quality properties have not seemed to move much, although there's fewer bidders and less product on the market. And then, given the downward movement in retail REIT stock prices, it'll be interesting to see how this divergence is reconciled.

The secondary market, cap rates continue to move up, in some instances over 100 basis points, with many of the more aggressive capital providers focused elsewhere.

Over the last 6 years, we've grown our core portfolio gross asset value by more than 3x. And looking ahead, we're confident that we can maintain this level of growth, but not every quarter. Even though we're confident that over the long term, high barrier to entry street-and-urban retail in key gateway markets is going to enjoy outsized growth, we will continue to avoid those lease vintages and those transactions where rents have outstripped the market. Because even though our retailers remain very enthusiastic about high-quality bricks-and-mortar real estate, that doesn't mean that they can afford to pay rents growing at unsustainable rates.

As we've said on several previous calls, we've never believed that trees are going to grow to the sky, and there will be periods when landlords push too hard and tenants stretch too far. That's why we were on the sidelines as it relates to street retail acquisitions in 2015, and even in 2016, our acquisitions were focused on downside protection, while in the long term having strong embedded growth. As a result, we dodged many bullets over the last couple of years, and that's enabled us to avoid some of the exposures that others are experiencing. If we can avoid the difficult vintages and still create this growth, we win.

So as it relates to core external growth, while it's a bit early, sellers are starting to be more realistic and hopefully a bit more motivated. And when the capital markets solidify and given the strength of our balance sheet, we're confident that we're going to see some very accretive opportunities as we have in the past.

And our strong positioning goes beyond our core portfolio. As Amy will discuss in a minute, our buy-fix-sell fund platform is well positioned, both in terms of existing investments as well as dry powder in Fund V. And this enables us to create value at all parts of the cycle.

In short, notwithstanding a lot of noise out there, we continue to like how we're positioned. Our core portfolio remains in a strong position with both a strong defensive profile, but also sufficient opportunities for growth. Our complementary fund platform remains active on all fronts, and our strong balance sheet is fully reloaded, giving us transactional flexibility. And most importantly, we have a management team that's energized and has positioned us for long-term success.

I'd like to thank the management team for their hard work over the past quarter and turn the call over to Amy.

Thanks, Ken. Today, I'll review the steady and important progress that we continue to make on our fund platform's buy-fix-sell mandate.

Beginning with acquisitions. We continue to employ a barbell approach to investing our fund commitments. On one hand, we continue to pursue opportunities to acquire well-located assets in key markets where our team can add value through lease-up and redevelopment. A recent example is 717 North Michigan Avenue in Chicago, which Fund IV acquired at the end of last year. On the other hand, we are selectively acquiring high-yielding stable shopping centers in non-primary markets when we can do so at attractive pricing.

On the high-yield front, during the first quarter, Fund IV acquired Lincoln Place for $35 million. This 272,000-square-foot shopping center anchored by Kohl's, Marshalls and Ross Dress for Less is located within the St. Louis MSA. The current leased rate exceeds 90%, and with minimal lease-up and rational leverage, this investment should generate attractive mid-teens cash-on-cash returns throughout the fund's hold period.

Given retailing headwinds and headlines, our high-yield investments are certainly a contrarian call. However, you should know that we are selecting needles from a haystack, carefully reviewing a long list of items, including rents, cotenancies and tenant sales. And our team has a proven track record acquiring, redeveloping, operating and selling these types of shopping centers.

The acquisition of Lincoln Place successfully closes out Fund IV. And looking ahead, given last year's successful fundraise, we have approximately $1.5 billion of dry powder available on a leveraged basis in Fund V to deploy into new opportunistic and value-add investments. We like having this much discretionary capital on call because it enables us to remain highly opportunistic, especially now, given ongoing disruption in both the capital markets and the retailing industry.

Turning now to dispositions, during the first quarter we completed $48 million of dispositions across our fund platform. As discussed on our last call, in January, Fund IV -- in partnership with MCB Real Estate -- sold 2819 Kennedy Blvd in North Bergen, New Jersey for $19 million. This is a 40,000-square-foot property that was previously owned and occupied by Toys "R" Us. We acquired the property in 2013 and completed a facade renovation then we re-leased the Toys "R" Us box to ALDI Supermarket and Crunch Fitness. This sale generated a 21% internal rate of return and a 2.5 multiple on the fund's equity investment.

And in February, Fund III, also in partnership with MCB, sold Arundel Plaza in Glen Burnie, Maryland for $29 million. This is a 265,000-square-foot supermarket-anchored property. During our 4.5-year hold period, our value-add activities included increasing the gross serviceability by demolishing an AMF bowling alley and executing a 20-year lease with existing tenant, Giant, for an expanded 66,000-square-foot supermarket. This sale generated a 16% internal rate of return and a 1.7 multiple on the fund's equity.

Last week, consistent with prior quarters, we continued to make important progress on our existing fund projects. For example, in Chicago, in Fund IV, we are actively engaged in discussions with retailers to lease space at 717 North Michigan Avenue, the former Saks Fifth Avenue men's store that occupies a prime corner of the Magnificent Mile. And we're also beginning facade work at 938 Western North Avenue, another great corner in Lincoln Park.

Additionally, in Westchester County, New York, our site work is well underway at Fund III's Cortlandt Crossing, a 130,000-square-foot development that has already been 50% pre-leased to ShopRite. And in Downtown Brooklyn at Fund II's City Point development, all our upper-level anchors -- Target, Century 21 and Alamo Drafthouse -- are open for business. Prince Street is activating with last week's grand opening of Flying Tiger Copenhagen, and our food-centric tenants on the concourse level, which include Trader Joe's and DeKalb Market, are all expected to open within the next 60 days.

So in conclusion, we had another productive quarter in our fund platform. We continued to execute on our barbell investment strategy, sell our stabilized assets at significant profits and create value within our existing fund portfolio.

Now I'll turn the call over to John, who will review our earnings, operating results and balance-sheet metrics.

Thank you, Amy, and good afternoon.

I will first start off by highlighting our quarterly operating metrics, which performed solidly and in line with our expectations.

Starting with our earnings, our portfolio continued to perform in line with our expectations, with FFO of $0.40 per share. The $0.40 included profits of approximately $0.03 from the anticipated monetization of one of our structured finance investments, along with net promote income that we earned from a profitable disposition in Fund III.

We continue to reaffirm $10 million of remaining net promote income from Fund III, which, as previously discussed, we expect to continue realizing in 2018 and beyond.

Furthermore, as you just heard from Amy, we continue to recognize sizable gains in Fund IV, which moves us closer to being in the promote position within the next few years as we continue to profitably return capital to our Fund IV investors. Our earnings guidance does not anticipate the recognition of any additional promote income during 2017.

The impact to our quarterly earnings and annual guidance from the recently announced store closings and bankruptcies was nominal at a few hundred thousand dollars, which was in line with our underlying assumptions and our quarterly and annual guidance.

Our first-quarter FFO reflected the full impact of our 2016 acquisitions. These acquisitions are continuing to perform in line with our prior guidance of $0.06 of annual accretion, which equates to roughly 5% of our in-place core FFO. We continue to reaffirm our annual guidance of $1.44 to $1.54 for the full year 2017, which equates to $0.35 to $0.38 per quarter. This could vary based upon the timing and amount of acquisitions, dispositions and structured financing activities within our core and fund businesses.

Lastly, on earnings, as it relates to the balance of the year, following the projected dip in occupancy over the course of the next few quarters, along with the projected repayment of some of our structured finance investments, all else being equal we anticipate our quarterly FFO run rate to soften in the second half of the year before continuing along our growth profile into 2018, following the profitable recapture and re-leasing of space.

Leased occupancy remains strong and stable at March 31 at 95.7%. We are planning to recapture another 100 basis points or so of space, which represents roughly 50,000 square feet throughout the balance of this year, the vast majority of this recapture occurring during the second quarter. Our occupancy is anticipated to begin leveling in the third quarter before trending back up into 2018 as we profitably re-lease the space. While this temporary dip in occupancy will create some noise in both our short-term same-store NOI and FFO, it is thesis-consistent with our strategy of recapturing high-demand space and profitably re-leasing it to create long-term NOI and value creation.

Leasing activity on both our new and renewed leases was predominantly within our suburban portfolio, with combined cash and GAAP spreads of 7% and 21%, respectively, on approximately 164,000 square feet of leasing activity.

Now moving on to our same-store NOI. Our same-store NOI came in flat as we previously guided, which was driven by the dip in occupancy that we have previously discussed. While our overall core NOI -- same-store NOI was flat, our street and urban same-store NOI grew by approximately 2.5% during the quarter, which was offset by softness within our suburban portfolio, which was driven primarily by onetime items.

However, after adjusting for the dip in occupancy that I just described as well as the other onetime items within the suburban portfolio, our street and urban could have otherwise grown closer to 4% for the quarter, which was, again, roughly 200 basis points stronger than our suburban portfolio on an equalized basis, which continues to operate in line with our historical performance and overall thesis.

Just to provide a bit of color on the difference between the actual street and urban same-store NOI of approximately 2.5% for the quarter and the nearly 4% after adjusting for the dip in occupancy, this delta was driven from the routine lease rollover of 2 leases in Chicago, which have contributed roughly $150,000 of NOI on less than 10,000 square feet of space. We are projecting rent commencement on both of these leases within the next 6 to 12 months at solid lease spreads.

In the aggregate, we are expecting to successfully recapture a total of 90,000 square feet of occupancy in 2017, 1/3 of which has already occurred. We are continuing to project relatively flat same-store NOI growth of 0% to 2% for the full year 2017 to reflect the anticipated downtime, followed by 5% to 7% growth in 2018 as we profitably recapture this occupancy.

While we continue to reaffirm our expectations, please keep in mind the law of small numbers and the outsized impacts, whether those are positive or negative, that even slight deviations in rent commencement dates will have on quarterly percentage changes.

As we think about 2018, at the risk of oversimplifying our current progression towards our projected growth of 5% to 7%, I want to provide some color around the key drivers of those assumptions and where we stand against those today. While there are numerous moving parts that ultimately drive the growth of our business, we are roughly 50% of the way there towards achieving our 6% projected growth in our same-store NOI for 2018 through a combination of executed leases and renewals, along with contractual ramp-ups.

Furthermore, the population of leases that make up the remainder of our projected growth is comprised of roughly 10 leases. Of these 10 leases, nearly half of that growth is being driven from the lease-up of approximately 2,500 square feet on the retail portion of the Carlyle Hotel on Madison Avenue.

As we think about this investment, more important than its impact on our periodic same-store NOI, you may recall that our Madison Avenue investment was acquired in a structure that entitles us to a preferred return of 6% on our invested capital. So irrespective as to precisely which quarter we achieve the lease-up in our reported same-store NOI, our investment continues to be very well insulated, given the preferred structure.

As we think about 2018, I want to provide an update on our previously-announced embedded value creation and our progression towards the 6% to 7% of NOI growth that we expect to harvest from a group of assets within our street and urban portfolio. This group of assets is comprised of 8 properties, which is expected to contribute an incremental $5 million to $6 million, an annual NOI over the course of the next 5 years, with a capital expenditure outlay of roughly $60 million.

During the past few months, our team has made significant progress towards achieving this growth, with executed transactions on 4 of the 8 identified properties, including the execution of the lululemon expansion on Rush and Walton, resulting in an 18% cash rent spread, the retenanting of M Street in Washington, D.C. at a 50% spread, both of which were completed with virtually no downtime and fairly nominal out-of-pocket cost. We have also executed a lease with T.J. Maxx on Clark and Diversey as part of that redevelopment.

Furthermore, our team has made significant progress with the redevelopment and densification of City Center in San Francisco, with the ongoing permitting with the city as well as securing the necessary tenant approvals, including the recapture of 55,000 square feet at the Best Buy space in the first half of 2018, which was critical to the overall project development plans.

As we move through the balance of the year, I will continue to provide updates as to where we stand against both our short-term goals and beyond. But we continue to reaffirm our expectation of our profitable recapture and re-leasing of space, enabling us to achieve not only the projected 5% to 7% same-store NOI growth in 2018, but more importantly, the continued growth of our overall NOI, which is integral to this -- to our strategy of creating long-term NAV.

Moving on to our balance sheet, our balance sheet has never been stronger. With our core debt-to-EBITDA at 4.4x, along with our overall low leverage and nominal debt maturities, we are well positioned to withstand any shocks that could occur in the financial markets.

Further, given our access to capital through the dry powder of $1.5 billion in our fund business as well as through liquidity available through retained cash flow and liquidity from our available lines, we are uniquely positioned to capitalize on opportunities that may arise. Our $150 million line is fully available to us with no amounts drawn on March 31 and a minor amount of scheduled debt maturities in 2017, which we will repay or refinance at rates well below our existing pricing.

In summary, our operating metrics remain strong and stable and our business is performing well in line with our expectations. We are excited about the opportunity that we believe will be available for continued growth of our business, given our strong balance sheet and access to public and private capital through our dual platform.

With that, I will turn it over to the operator for questions.

(Operator Instructions) Our first question comes from the line of Paul Adornato from BMO Capital.

Ken, you touched on, very briefly, supermarkets and some of the challenges facing them. I was wondering if you could drill down a little bit. Do you like supermarkets over the intermediate or longer term in terms of investment by AKR?

Paul, like most of our investments, it's going to be very location-specific. I do not believe, or more importantly, when I talk to our supermarket operators as well as cotenants, I don't think they believe that there is any specific safe haven, that they're somehow immune to some of the challenges that other retailers are facing.

The good news is many of them are very focused on how that's going to play out. So the bottom line is if you have the right supermarket in the right location, that is probably good real estate and your cotenancies probably do well. If you have a diverse shopping center where a supermarket is one of many tenants, and we have several of those, especially in the fund, those are probably fine. But the 20th century thought that somehow every supermarket-anchored shopping center is safe; that's not what our retailers are telling us.

And secondly, I was wondering if you could give us some idea of how we should think about the urban and street portfolio over time in terms of market exposure. Will it be opportunistic? Or are there kind of goals in terms of exposure to certain markets?

Well, for the near term, I think we should stick with the markets that we know well. There is, as I've said over the years, a down tax to enter any new market. That doesn't mean that you can't blow it around the corner. But we're in D.C., New York, Boston, Chicago, San Francisco, and I think that we could easily double the size of our portfolio without adding a new market.

If there are opportunities or changes in circumstances, then I would certainly welcome a handful of other opportunities. But what you should expect, just as we've doubled and tripled the size of our portfolio over the last 5, 6 years, you should expect, if you look forward 5, 6 years from now, you will see similar growth, similar profile with the focus that as retailing evolves, you're going to see retailers gravitating towards these critical markets and we should own those.

Our next question comes from the line of Craig Schmidt from Bank of America.

Are you seeing a growing vacancy surrounding your urban high street retail assets? And how do you make sure that you get people trading up to your assets and not using your assets to trade up into others?

Yes. And by the way, everyone thinks their assets are perfect, but there is always, I suppose, a slightly better corner, et cetera.

Well, one of the keys, Craig, is to own a diverse portfolio that is, in general, high-quality. And if we do that, we are more likely to be net winners than losers. But there are certainly examples where retailers have said to us, not that they're leaving necessarily us, "But, you know what, there's another corner or there's another spot that we would prefer to be in." And I think we need to recognize that and need to recognize as good as our portfolio is, there may be those instances.

But when you look at our portfolio, when you look at its concentration on key streets like Rush and Walton, we did not get Tesla, our neighbors did. That's okay. We expanded lululemon. When you look at what we're doing on Clark and Diversey in Chicago, we didn't get Nordstrom Rack. That's okay, we got T.J. Maxx.

So as long as we're winning more and as long as we continue to curate a portfolio that is positioned to win more of the discounters, more of the traditional successful retailers as well as the screens to stores, as long as we have that kind of space that Warby Parker wants, that Bonobos wants, that the whole next generation of those type of retailers want, then we will win. And so far, that's how it feels like it's playing out.

Okay. Great. And then, just, is there any advantage here in waiting to acquire some of the more opportunistic assets, just given the retail headwinds and the retail headlines? Is there, maybe, advantage in holding off when there's a little bit more blood in the water?

Maybe. I mean as Amy reiterated, we recognize this as contrarian. She also mentioned that we have yet to put any of Fund V to work. Contrarian, by definition, means lonely. And we are catching falling knives. So we need to be careful about that.

However, we also are small enough that we can pick asset by asset and get this right. I think what you will see is we're being cautious. We're being careful. But there are dislocations in the market right now that have nothing to do with the underlying fundamentals at the asset level.

Where you can buy profitable stores in good locations, where, as best we can tell in our conversations with our retailers, these stores are slated to be profitable for years to come -- and yet the opportunity to buy those, because of the headlines that you're reading or because non-traded REITs have yet to reload or because of debt market issues, then it's incumbent on us to do that, be a little early. Our stakeholders understand that. Be a little patient. As long as we're disciplined, as long as we're thoughtful in our underwriting, we've been at this for a couple of decades, and we'll get it right.

Our next question comes from the line of Christy McElroy from Citi.

Just to follow-up on Craig's last question, just for that higher-yield opportunistic stuff that you're buying in the funds, there's been a lot of talk about how much power center cap rates have risen versus centers with a grocery component. The center you bought in March was more of a power center. I know you went under contract on it earlier. But are you seeing more opportunity in that category? And do you think that maybe power centers are, maybe, being mispriced in an environment where you don't necessarily see grocers as a safe haven?

Yes. So just because you don't love something doesn't mean you like something else more. But if and when we can buy, and what we have articulated is roughly a 400 basis point spread from our borrowing costs. And remember, the benefit of the fund structure, higher risk, higher return, more leverage, about 2/3 leverage to achieve that return, where we can borrow at 3.5% to 4% and buy 7.5% to 8%, and if you're borrowing at 4.5%, then you need to raise it up; and where that cash flow is clean, meaning dividend-able, if we can get a mid-teens return, because of a widening of the spreads of power versus supermarket or, frankly, power versus other alternative debt instruments, that mid-teens return strikes me as pretty compelling.

The devil's in the details though, so one bankruptcy takes a lot of fun out of that dividend. And we do struggle with where might this all settle out. If we believe that the underlying real estate and the retailers are fundamentally sound and are not going to get disintermediated in their entirety and if the cash flow can hold, it doesn't have to grow a lot, if it can hold, then it's thesis-consistent.

What I would caution you is, Amy mentioned needles in a haystack, I have been disappointed with how many assets don't withstand that general scrutiny, so we're not going to do assets just because we have some forecasted volume. We'll buy them when they make sense. We recognize that there's been this dislocation. It's been more of a private market dislocation, it strikes me, than public. But if it's there, we'll do it and if it's not, we'll find other things.

Okay. And you talked a lot about sort of overgeneralization. Have you seen a material change in how retailers are approaching leasing flagships, given the balance of location and cost and just that added pressure from shareholders to improve margins? There's been a lot of noise around sort of the Polo lease on Fifth Avenue, which is an extreme example, but it's what's generating headlines around the Street and so.

Yes. So there are a host of issues going on and I think we'll only have a clearer understanding of what made sense and what was silly a year or 2 from now. Some of it is public shareholders. Other instances, it's private equity. There are accounting reasons that, in some instances, it makes sense to close a store to get it out of your ongoing forward-looking EBITDA, even if it makes no economic sense. So that's just silly.

But in general, retailers -- and when we say retailers, it's a wide variety of occupants. More often than not, what we're finding is that those who are the most aggressive today control their brand. They control their pricing, they control how they interact with their customer, and they understand and know that having an exciting physical presence in certain key markets, not everywhere in the country, in certain key markets, is critical. If you look at Apple's most recent or what they're going to be announcing and doing, it's very exciting and it's absolutely about great physical presence. So we're going to see more and more of those, and we're going to catch our fair share of them.

Our next question comes from the line of Todd Thomas from KeyBanc Capital.

Ken, you mentioned that retailers are using some of the vacancy to make relocation upgrades. And you used SoHo as an example. Sounds like some shuffling around. So does the vacancy market-wide linger for a period of time before being absorbed? Is that the expectation? Or are you starting to see a stabilization and some absorption taking place? And then, what is your read on rents as you look ahead the next 6 to 12 months in some of these markets?

So a few observations. And the team -- we walked SoHo last week. The first observation is there's no lack of foot traffic. So we can blame it on the dollar and the weather but you can't blame it on foot traffic. And the other observation is that secondary streets, not Prince, not Spring, that aspire to get to primary rents, they're going to struggle for a while.

But the key streets where it appears visually there's a lot of vacancy, as we walked with the team, we kept hearing so-and-so's moving from down the block there, over here. And there seems to be enough momentum that while when you walk around, it feels like there's plenty of stores closed, most of them are either spoken for or secondary locations or there is a subset of ownership that paid peak, peak prices, underwrote peak, peak rents and has very little near-term motivation to do anything and so those may sit for a while.

So let's see over the next 12 months how it shakes out. But I think, with confidence, you're going to see a host of retailers reemerge either from existing locations or coming in because this is creating an interesting opportunity in a market that, today, now is much more interesting for the retailers than in 2015, when rents across the board were just growing too fast.

Okay. And then, today, as you think about today, has the number of potential tenants that you're talking to about a specific store or a space in the street and urban retail portfolio, has that decreased, held constant or even increased? And then, how does that demand in the street and urban retail portfolio compare to the suburban portfolio? Or what happened to the -- sorry, what's happened to the suburban portfolio, I guess, in the same manner?

So in both -- and there are 2 somewhat different conversations, but in either case, Sports Authority doesn't seem to be returning our phone calls for urban or suburban. And there are a bunch of retailers who are, for a wide variety of reasons, are sidelined.

On the suburban side, thankfully, T.J. Maxx is continuing to be disciplined, but open new stores, and there's 5 or 6 other retailers behind them that are also doing a solid job on that front. We're getting our share of that. And then, T.J. showing up on the urban side, I think, is real important as well.

The apparel space is going through some very difficult times, and so there are fewer apparel retailers showing up. From Acadia's perspective, I'm frankly fine with that. We have been more about live-work-play. We have been as much about Trader Joe's as we have been about any given apparel. But there are clearly fewer apparel, and let's let that shakeout occur over the next year or 2, and there'll be some exciting new concepts coming in at the right time. And then, on the flagship front, I actually think we're starting to see some more new interesting ideas that are going to make 2017 probably, if not 2018, a net positive.

Our next question comes from the line of Michael Mueller from JP Morgan.

I guess, Ken, given your comments at the beginning about seeing less buyers, less product on the market, and less buyers out there, I'm curious as to where you think the clearing cap rates are today for the types of properties that you buy for your core portfolio relative to 6 months ago. So do you think they've moved more significantly?

And there's always an interesting dynamic when you turn to the sellers or their brokers and you say, "But my stock price has moved downward." And they say, "Well, we don't care." So if there are other bidders showing up private, sovereigns, et cetera, then the market clears. There has been enough of a slowdown and Acadia is not alone in the repricing on the public side. There's been enough of a slowdown that sellers are saying, "Don't run away so fast." Sellers are saying, "Certainty of execution matters." And we'll be patient; let's see how this plays out.

I've said in the past that the REIT market has correctly predicted 9 of the last 5 real estate corrections. I don't know how this shakes out. I would keep your eye on the 10-year treasury, which, compared to last July, may feel high and yet still below 2.5% for a lot of debt-oriented buyers buying high-quality, iconic real estate at 100 to 200 basis points north of the 10-year or whatever other debt instruments they're choosing to think about, especially on a global basis. There's still a fair amount of capital out there from that perspective. Once some of the noise around where our cash flow is going settles, we'll see where this settles out.

Got it. And just one other one. For the 90,000 square feet of recapture space you talked about for 2017, you said 1/3 is done. So for the remaining 2/3 that it sounds like is happening soon, can you give us a little color on what sort of space that is, and where?

Yes. Sure, Mike. This is John. So I think, as I talked about, the balance of that is going to happen in Q2, and it's kind of spread throughout our portfolio. But we're getting, probably, I would say on a GLA basis, I'll get the exact numbers, but split pretty evenly between suburban and street. And urban, obviously, the street and urban rents are higher, but probably split between those 2.

Our next question comes from the line of Floris van Dijkum from Boenning.

In the 7 projects you guys cited on your last call, any sort of updates you can give people at this point? Or is it still too early in terms of your projections and your -- and who you might be getting, for example, in D.C. or at the Burton space and Walton Street?

It is still just slightly early on some of those. At the risk of repeating what we talked about on the last call, the lululemon expansion is well underway. John mentioned the densification in San Francisco. That's further out. That would be kind of a year away in terms of details.

M Street, I think on the next call, we'll give you absolute clarity on. Lease is signed so it's just we want the tenants to get their ducks in a row. And then, there's a handful of others. John, I don't know if there are any others. But we tried to give as much color on the last call and that was only a couple of months ago. So...

I think that's right. I think that's where we're at on progression, Floris.

Okay. And in terms of the -- I guess, the CapEx, you mentioned something about a $60 million outlay. Is that -- can you relate that to how that relates to these 7 projects, and maybe where most of the -- the bulk of that capital will be spent? Is it City Center?

Yes. Absolutely, Floris. So I think that's going to be -- I'd say the bulk of that's going to be really between 2 projects, which are going to be City Center as well as Clark and Diversey, which is a complete redevelopment of that in Chicago. So I would say that would comprise the bulk of the dollars.

And it's -- it's worth noting, Floris, that when we talk about the kind of growth we're going to be able to drive, we do not have to come to you guys for more money. To need less than $100 million to execute this kind of growth speaks to both the assets, but also to our fund structure, where most of our heavy lifting, most of our capital-intensive investments, we are leveraging off of our institutional capital, so that we're not overly beholden to the public markets, given the fluctuations that can occur there.

Our next question is a follow-up from the line of Paul Adornato from BMO Capital.

Just briefly, you mentioned a little bit about City Point. Was wondering when we might hear a little bit more on ground floor small shop leasing? And is now a good time to be hitting the market, given the kind of ebb and flow of local market conditions?

Sure. The anchors are doing well. Alamo Drafthouse has become a great addition to the city's entertainment options. As we talked about, we're real excited that DeKalb Market will be opening shortly. That, if you recall, is about 40 vendors ranging from Katz's Deli to Ample Hills to Guss' Pickles.

And then right now, we have the high-class problem of lots of construction on Gold Street. So Gold Street, we think will be a key frontage for our project right now, including the third tower at City Point, which is being developed by Extell. There's 3 residential buildings under construction. An office building is planned, and the upcoming Willoughby Square Park. So long term, great; shorter term a little disruption on our key frontage. But we do think this is a good time to be curating the right collection of retailers on Prince Street, and you should expect to be hearing additional information on the next few calls.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Ken Bernstein for any further remarks.

I'd like to thank everyone for taking the time, and we will speak to you next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.