Acadia Realty Trust (AKR) 2017 Q3 法說會逐字稿

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

And now I'd like to introduce your host for today's program, Nishant Sheth. Please go ahead.

Good afternoon and thank you for joining us for the Third Quarter 2017 Acadia Realty Trust Earnings Conference Call. My name is Nishant Sheth and I'm a Senior Analyst in our Capital Markets Department. Before we begin, please be aware that statements made during this 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, November 3rd, 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 begin 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.

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

Thank you, Nishant. Good morning.

Over the past several quarters, we've discussed some of the legitimate headwinds impacting retail real estate and then tried to shed some light regarding confusion between which of these headwinds are more traditional, short term and cyclical and which are longer term secular changes. So today in reviewing our third quarter results, I'll discuss how these trends are impacting the different growth drivers of our business.

In general, we're seeing things play out consistent with our overall thesis with a few worthwhile observations. First observation, we see stability, notwithstanding overly negative and overly simplified headlines around retailer headwinds. As we look at our core portfolio, as we look at our cash flows they remain solid and long term growth prospects remain strong.

But the fact that we see stability, the fact that we see long term embedded growth doesn't ignore that a variety of retailers are facing real challenges. Now these challenges are having different short term and they're likely going to have different long term impact on retail real estate depending on the property type and the retailer. But to view all retailer challenges as somehow permanent or caused solely by e-commerce, it's missing the point.

My other observation is looking at our third quarter results, that this summer new activity, both in terms of new leases and new investments was quieter than we had hoped. Now while some of this might be attributable to summer holidays and I get that patience is a virtue, it's just not one of my strong points. And it certainly doesn't help our short term metrics. So I'm pleased that we're seeing things start to pick up. But more important, when we take a step back, we look at the different drivers of our business, I like how we're positioned. I like it both in terms of our core portfolio, as well as our fund platform.

First in terms of our core, it's a well diversified, well leased portfolio with strong embedded long term growth. As we explained on the last call and then John will discuss further today, our portfolio NOI is poised to grow at a 4% per annum clip over the next five years with realistic, rational and achievable assumptions. And while a quieter summer means incremental leasing is taking a bit longer, we also need to keep this in perspective. For instance, on the street component of our portfolio, as John will explain, we have less than a dozen key spaces to lease, and while the timing of these leases are very important to our short term metrics, given the quality of the location, given that the rent conversations we're having with retailers today are consistent with our expectations, I'm confident we get there, it's just a matter of timing.

Furthermore, in the past few weeks, we've begun to see important signs of retailer reemergence, especially in the live-work-play gateway markets and urban markets where we're focused. We're seeing this in Chicago where in Lincoln Park the screens to stores trend is playing out nicely and recently we signed a lease with online home furnishing retailer Serena & Lily on Armitage Avenue. They're joining Bonobos and Warby Parker, who are tenants of ours there, as well as elsewhere in our portfolio. We're seeing it in Chicago in Rush and Walton Street, where the expansion of Lululemon is well underway and we're going to soon begin redeveloping the building housing the current Burton Snowboards and that will complement recent additions to that corridor of Aritzia, Versace, Dior and Tesla.

We're seeing it in Washington D.C., where there's continued interest from a variety of retailers, ranging from new fashion concepts coming to M Street, to off price retailers in our urban assets. For example, in the third quarter at Rhode Island Place, T.J. Maxx relocated into a superstore location and then we nicely and profitably backfilled it with a Ross Dress for Less store.

Now while we're seeing increased tenant interest in both street and urban, there's no doubt that there has been a fair amount of volatility and a lot of headline noise around street retail, so I'd like to spend a few minutes discussing that.

In trying to understand some of the volatility, I think it's worth looking at New York City, which is getting more than its fair share of headlines. In some corridors in New York City, rents doubled from 2010 to 2015 and thus, the decline from the peak to current has been meaningful. Thankfully, we were not particularly aggressive in joining the trees growing to the sky club and thus New York City street retail is only 8% of our NOI. Nevertheless, we have a handful of spaces to lease there and I think it's instructive to observe how things played out.

In short, rents grew too far, too fast. By 2015 things began to peak. Foot traffic was still strong and still is strong, but whether it was a stronger dollar, merchandising missteps, shopper fatigue, combined with apparel going into a broad based nationwide funk that resulted in retailers slowing their expansion plans, pruning their fleets and then pushing back on rents. And at the same time, a host of entrepreneurial landlords, they were trying to vacate existing below market tenants and replace them with tenants at ever increasing peak rents.

This has created the standoff and visibly noticeable vacancy rates that exist today. And while it may take some time to stabilize, it feels much more cyclical than secular. In short, it's been much more about old fashioned greed than about Amazon.

And now that rents are beginning to settle, retailers are beginning to step up. This rollercoaster can be painful for some, that's the nature of a cyclical business, but it creates opportunities for others as we think will be the case for us.

As it relates to our portfolio, we certainly liked watching rents grow well in excess of our expectation in a handful of the markets we were active in. But our rental growth goals for our street retail portfolio were always far more modest. As you may recall on prior calls, we laid out that our goal was to achieve about 200 basis points stronger rental growth from our street retail portfolio than our stabilized suburban portfolio. And that equates to about 4% annual growth, 2% to 3% contractual, and then a bit more through mark to markets over time.

Now if market rents grew 5% per annum or 6% per annum, that's great. But only if retailer sales and profitability could keep up. In any event, 10% per annum, or 20% per annum market rental growth was just not sustainable.

So reflecting over the last five years, not withstanding the noise, notwithstanding the rollercoaster ride, we see things playing out consistent with our original thesis. And our retailers are telling us that once they regain their sea legs, the must have locations, the properties we own, the gateway markets we're located in, that's where they're going to return to.

This retailer enthusiasm is also reflected in the progress we're making in our core redevelopments, also in live-work-play gateway markets. As John will discuss, our projects are moving ahead nicely.

Then in terms of the suburban component of our core, which is about 25% of our portfolio, there we see general stability as well and while we're not immune to the trends impacting the suburban side of our business, whether it's pressure on some box retailers or interesting trends impacting supermarkets and drug retailers, we do not feel overly exposed to any one tenant or any one product type in the suburban side. And as always, location matters most.

Another driver of long term growth for our core portfolios are core acquisitions, but disciplined match funding is essential and thus in the third quarter, core acquisitions were quiet. Lack of currency and limited motivation or distress so far on the part of sellers for the highest quality properties kept our on balance sheet core purchases sidelined. But we're beginning to see certain owners recognize that they bit off more than they can chew and if the stars align, we'll be there.

Then the other main driver of our businesses are fund platform. And while new fund investment activity was also a bit quiet, we're seeing that beginning to change. Sellers are beginning to be willing to transact at where the market will clear. And as Amy will discuss, our high yield opportunities continue to present themselves. The challenge there to date has been being able to get comfortable that the NOI will remain intact.

Then on the disposition side of the fund business, activity continues to be productive and profitable.

Finally, in terms of interest income from on balance sheet lending, as John will discuss, mezzanine capital is coming back to us faster than we're currently redeploying it. This is a high class problem and one that we suspect will reverse itself, given some of the dislocations in the market.

So in conclusion, while we look forward to increased activity because that's what we're built for, we ought not confuse activity with value creation. And from that perspective, we're doing the right thing staying disciplined and positioning ourselves appropriately. Most importantly, as we look out over the next several years, we like what we see. Our core portfolio has strong embedded growth with the right assets in the right locations. Our profitable fund platform continues to provide additional value creation opportunities and our balance sheet metrics are right where we want them.

With that, I'll thank our team for their efforts 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, as discussed on several calls, our funds have been pursing a barbell strategy, acquiring both high quality value add properties and high yield or other opportunistic investments. On the value add front, retailer interest in high quality urban and street retail remains strong, although the process for leasing space is taking longer. And despite all the negative headlines, from an acquisition perspective, there is no actionable distress to speak of.

On the other end of the barbell, we are finding interesting buying opportunities in the 7.5% to 8.5% cap rate range. The focus here has been on stable properties and solid, but less favored secondary markets. This has included Wake Forest, North Carolina; Canton, Michigan; and Santa Fe, New Mexico.

These assets may not have the right long term profile for the public markets, but on a oneoff or portfolio basis, we can take these assets private and using two-thirds leverage generate mid-teens current returns for our finite life funds.

Unless it's a lease up opportunity, at these cap rates we don't need much growth in NOI to meet our target returns, but we do need stability. As a result, finding these types of centers in good locations with profitably stores and rational co-tenancy clauses has been akin to finding needles in a haystack. But be assured as we look ahead to our own exit we are sober to the fact that sponsorship matters and are careful not to assume that the next buyer will achieve the same attractive financing terms as us.

During the third quarter, Fund V added two high yield properties to its portfolio for an aggregate $70 million. The first is a first 380,000 square foot power center located in North Carolina, about 60 miles northwest of Charlotte for $44 million. And the second is a 190,000 square foot suburban shopping center in Michigan, about 30 miles west of Detroit for $26 million. Both properties are well leased at 96% occupancy or better to a solid collection of discounter or best in class retailers, including T.J. Maxx, Old Navy, Coles, DICK's Sporting Goods and Ulta.

Year-to-date our fund platform has acquired $141 million of properties and has $107 million under letter of intent. Assuming that all pending investments close, we will be at the low end of our original 2017 fund acquisition guidance and above the midpoint of our revised guidance of $140 million to $300 million. That said, we remain focused on returns, not volume, and are highly confident that our investment discipline will be rewarded.

Looking ahead on a leveraged basis, we still have approximately $1.3 billion of fund side dry powder available to deploy and we feel good about our pipeline.

Turning now to dispositions, year-to-date our fund platform has sold or entered into contracts to sell $240 million of investments, of which $53 million was completed during the third quarter and $106 million was completed in October.

Looking ahead, our near term disposition pipeline is also strong, underscoring the fact that the capital markets still have a strong appetite for our stabilized properties, especially our urban investments. As previously discussed, in July Fund III sold new Hyde Park shopping center, a 32,000 square foot retail strip center, for $22 million and this sale generated a 14% internal rate of return and a 1.6 multiple on the fund's equity. And then in September, Fund II sold 216th Street, which is a newly built single tenant office building in the Inwood section of Northern Manhattan for $31 million. And this sale generated a 15% internal rate of return and a 3.3 multiple on the fund's equity.

Then in October, Fund IV in partnership with a local developer sold four properties in its Broughton Street collection in Savannah, Georgia for $10 million. The total Broughton Street collection contains 23 properties and approximately 200,000 square foot of retail, residential and office space. The four sold properties total 17,000 square foot and are fully occupied to key retail tenants, such as Vineyard Vines, L'Occitane and Savannah Taphouse.

Our partnership has been successful in attracting national retailers to this charming next generation street retail market, however we had an opportunity to execute on a partial sale of the collection at attractive pricing and we did so. As you recall, this is a structured transaction where the fund's capital is senior with a 15% preferred return.

Also in October, Fund II in partnership with Washington Square Partners sold 7 DeKalb, which is City Point's residential Tower 1 in Brooklyn, New York for $96 million. As you recall in mid-2010 we opportunistically acquired all of City Point's residential component, totaling 1.1 million square feet of development rights. 7 DeKalb is the last of three towers sold by the partnership and the building has 250 apartments of which 80% are affordable.

Now with respect to our overall City Point project, since 2006 more than 8 million square feet of new development has been completed within roughly a quarter mile radius of City Point, or said another way, about a three block radius. Most of this new development is residential and note this metric does not include our own 2 million square foot project.

Looking ahead, City Point is still at the center of a construction zone with another 3 million square feet of development either in construction or in the pipeline. And this includes a new 380,000 square foot office building with a 300 plus seat public school and a new 1 acre public park, both directly across Gold Street from City Point.

As the neighboring construction subsides, our project will reach stabilization, but in the meantime it would be foolish for us to grumble too long or too loudly about the continued densification of downtown Brooklyn. Today all our upper level anchors are open and thriving. In addition, our food anchors, DeKalb Market and Trader Joe's, are exceeding expectations on the concourse level, bringing an additional shot of energy, foot traffic and authenticity to our already strong retail project. In fact, the sales per square foot trend for the food hall already puts it in good company among our top performing retailers with a lot more runway ahead of it.

In this rapidly changing retail landscape, we believe that City Point is a forward looking project that is well positioned to thrive by uniquely responding to the demands of the Brooklyn shopper. Ultimately, the rents we achieve for street level small shops fronting Prince and Gold Streets will be a key driver of the project's value. And here we remain focused on continuing to cultivate an eclectic and experiential merchandise mix to complement our food, entertainment and value oriented anchors.

To that point, we're excited to welcome Fellow Barber, who's opening this month and we will also be opening the first brick and mortar store for Joybird, who is an online midcentury modern furniture retailer.

The future of retail demands authenticity and excitement and on this City Point surely delivers. The project may be taking longer to stabilize, but we're confident that the long term growth profile is strong.

So in conclusion, we had another productive quarter in our fund platform. We continue 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.

Thank you, Amy. And good morning.

I would like to first start off by reviewing our third quarter results. We had a strong quarter with FFO coming in above our expectations at $0.37 per share, which was assisted by approximately $0.02 of profit taking within our fund business, including $400,000 of net promote from a Fund III asset sale. We are not anticipating any additional promote for the balance of the year and we continue to reaffirm $10 million of remaining net promote income from Fund III. Although very early in the disposition process, we are currently projecting that up to half of this could be captured in the second half of 2018.

As you've seen in our release, we have tightened or guidance range for the balance of 2017 to $1.45 to $1.49. As we guided on our prior call, this is slightly below our original midpoint and was driven by the lower than anticipated investment volumes that Ken discussed along with earlier than expected repayments within our structured finance portfolio.

Now moving on to occupancy. One of our key strategies to enhance our NAV and generate long term growth is through the recapture of space, particularly on our street assets. We continue to believe that the long term benefits of this strategy will far outweigh the short term volatility this generates in our quarterly metrics.

I wanted to provide some color on the spaces that we've recaptured over the course of the year. In aggregate, this space is comprised of 30 leases with ABR of approximately $5.5 million. While we are certainly active on all 30 of these leases, as I have shared on prior calls, the vast majority of NOI and thus our short term performance will be driven by the timing of achieving rent commencement dates on really just a handful or 11 leases with ABR or approximately $3.4 million. Doing the math, this equates to $300,000 a month or approximately 100 basis points impact on our quarterly same store NOI metric.

These 11 leases comprise 20,000 square feet within our Chicago and New York City street retail portfolios. As I'll discuss in a moment, we have actually executed in the last few days one of these 11 leases within our Chicago portfolio.

So breaking down these 11 leases a bit further, Chicago comprises 5 of the 11 leases with roughly $1.1 million of ABR and approximately 15,000 square feet at our high quality live-work-play locations on Chestnut Street and within our Armitage portfolio.

As Ken mentioned, we have just signed a lease with Serena & Lily for about a third of our available Chicago Street space. We are anticipating a rent commencement date on this lease late in the second quarter of 2018.

Just to further illustrate the point on timing, the execution of this lease was several months behind our initial expectations and obviously a drag on our short term metrics, but more importantly, we hit the rents that we were projecting on that space.

So now moving on to New York City. We have six spaces to lease on less than 5,000 square feet. The projected annual rents are approximately $2.3 million and these leases are located on Madison Avenue underneath the Carlisle Hotel, SoHo and West 54th Street. We will continue to provide leasing updates throughout the balance of the year and into 2018 on these handful of leases.

So in terms of NOI, as we anticipated, our same store NOI was flat for the quarter. After equalizing the comparable periods for the recapture of space that I have just discussed, our same store NOI would have grown approximately 4% for the most recent quarter, with our street in urban continuing to outperform our suburban portfolio by nearly 200 basis points.

As you recall from prior calls, we are continuing to anticipate a $4 million impact from recapturing space during 2017. This is the driver as to why our short term growth in 2017 is temporarily off our long term growth expectation.

As we have shared on prior calls, our fourth quarter will feel the full impact of our occupancy shift. As Ken mentioned, during the third quarter we recaptured approximately 25,000 square feet from T.J. Maxx in one of our D.C. locations and profitably backfilled it with Ross Dress for Less. So while accretive long time, it does result in down time and thus a short term drag on our FFO and same store NOI, we are projecting seven months of downtime as Ross completes its build out and works towards a Q2 2018 rent commencement date. Thus, given these timing shifts, we expect our full year same store NOI to be relatively flat with negative same store NOI of 1% to 3% projected for the fourth quarter of 2017.

Consistent with Ken's observations on it being a slow summer, and evidenced by our recently executed lease with Serena & Lily, the timing of RCDs has slipped beyond our initial expectations, but it's really just that. It's timing. While the process is taking longer, the market rents that we have assumed in our internal models remain in line with the pricing discussions we are having with tenants and brokers. So whether we lease these spaces at the beginning, middle or end of 2018, it has a very negligible impact on our 4% long term core growth, or more importantly, the value of our portfolio.

So now I wanted to move on to an update against our growth plan. As you recall, we have previously laid out our plan for 4% annual growth or $20 million of incremental NOI through 2021. Half of that growth is comprised of contractual rent bumps with the balance being split between lease up and redevelopment. So in thinking about this from an FFO perspective, the lease up and redevelopment portions of our plan are projected to generate $0.10 to $0.12 of additional FFO through 2021. While the contractual growth portion of our plan will certainly drive our cash and same store NOI growth, it doesn't impact FFO, given the mechanics of how straight line rents are used for GAAP reporting purposes.

So in terms of our redevelopment efforts, during the quarter we have made significant progress on our City Center project in San Francisco, which is the single largest driver of growth in our plan. As you recall, we plan to add 35,000 square feet of prime retail space to this 200,000 square foot Target anchored center. We have been fully approved by the planning department and no further appeals exist. We anticipate receiving our construction permit in the first quarter with the majority of construction being completed during 2018. Our leasing is well in line with our expectations and over 80% of this space is leased or at lease. We are anticipating RCDs as early as the second half of 2019.

As you will also recall from our first quarter call, as part of the City Center redevelopment, we will also be recapturing approximately 55,000 square feet of space from Best Buy in early 2018 upon the expiration of their lease. Between rent and reimbursements, this translates to approximately $4 million of FFO or $0.04 per share in 2018 to reflect downtime. We have strong interest and are in active discussions with a number of exciting retailers and expect to profitably re-lease the space with an anticipated RCD in the first half of 2019.

Now moving on to our balance sheet. We remain disciplined in our capital allocation practices. We have not issued any equity, nor have we increased our leverage throughout the year. Our ratios remain best in class and our debt is appropriately staggered with no meaningful maturities in the next few years.

I want to take a moment to highlight a couple of areas of dry powder embedded in our balance sheet and the growth engine that this provides us. Starting with our structured finance portfolio, we are anticipating proceeds of approximately $60 million from the profitable repayment of loans during 2017 and into 2018. Through September 30th, we have received about $12 million of these proceeds with the balance projected over the course of the next few months.

As Ken mentioned, while these payments are short term dilutive prior to reinvestment, it is also a driver of future growth as it enables us to redeploy these proceeds from what has transitioned over the past few years to a primarily first mortgage book to a more accretive mezzanine book.

We intend to keep our investment levels within our structured finance business, consistent with our past practice, which is operated at less than 10% of our GAV.

So now moving on to our fund business. We have already raised the capital on Fund V, and as Amy discussed, on a leveraged basis we are targeting $1.3 billion of acquisition volumes over the next few years. So to put this in perspective of future growth, generally speaking every $500 million of growth volume, this generates roughly $0.05 to $0.07 of FFO from the incremental NOI and related fees we earn.

Further, as we think about the fee earning portion of our business, upon the substantial completion of City Point within Fund II this past year, we are anticipating our aggregate fee business will revert back to historical levels, which has averaged $20 million and we expect this to start in 2018.

So in closing, we had a very strong quarter, and more importantly, a strong outlook for meaningful value creation given our high quality portfolio and the strength of our balance sheet.

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

(Operator Instructions) Christy McElroy, Citi.

This is Katie McConnell on for Christy. Can you provide some more color around the slower leasing velocity? And relative to your previous expectation that the bulk of leasing will be done in six to nine months, how are you thinking about that timeframe today and how that could impact potentially lower NOI growth in 2018 versus your initial 5% to 7% expectation?

Let me take a first cut at it, John, and then maybe you could add some detail and reiterate how timing sensitive it is.

The summer was quiet, as I had said. If you'd asked me six, nine months ago, I said we had a dozen leases to do and we could simply achieve that being the lease of the month club. And now we've got to be more like the lease of the week club if we want to get rent commencement dates done by January 1. And so frankly, I don't see that, but that being said, in the past several weeks, first Serena & Lily stepped up and now our team's working with a handful of other retailers who are showing legitimate interest at legitimate rents. So from my perspective, what I care about is will that NOI be there at some point in the next year? I care less about the specific timing, although I get that that impacts our quarterly results. I care about that $20 million of NOI that John talks about, and for that we're feeling good.

So John, why don't you reiterate then from a timing perspective the impact of when these leases occur?

I think, as Ken said, I think it really is going to be driven by these 11, which is really now 10 leases, given the Serena & Lily lease we executed. So I mean breaking that down a bit, so assuming we have 2% to 3% growth already accomplished. Again following up on what Ken said, in order to get this incremental leasing or from these 10 leases, in order to get that incremental, call it 3% to 4% of incremental growth, we would need to sign those on January 1st. And the way that I think about it is every month that we slip, again averaging those 10 leases, is going to cost us 25 basis points of growth each month that it slips beyond January 1st.

So again, what I can say is that while we are very confident on the prices that we are assuming that will enable us to capture that growth and the way that we think about how that flows up in our NOI over the next four years, I think that I share Ken's confidence that hitting a January 1st date on each of these 10 remaining leases does not look to be like it's going to happen.

And let me just one final point. As John articulated, it's close to 400 basis points of embedded growth. If it hits January 1, then our numbers look at the high end of whatever we had expected. As long as it shows up, it may not help for the quarter, but as long as it shows up and we feel good about that, then from an NAV perspective we'll be fine.

Craig Schmidt, Bank of America.

This is Justin Devry on for Craig. While we hear your point on retailers remerging with demand for space, we've noticed some of your peers have stated it's taking a little bit longer in general to get deals done as retailers on the whole are just being more selective now on where they want to open stores. I'm curious if you guys are seeing this as well.

Yes, absolutely. Whether we want to term this the rise of the CFO, no insult intended, John, but the financial side of the business is much more active. And part of this transition is seeing new, exciting merchants emerge and emerge with the capital to do a deal. And this shifting, this shuffling of the deck, changing of leadership is going to take a while. And until it does, things are happening slower than they should. And that's fine because I'd rather see the new emerging retailers be disciplined and be careful about how they're making their decisions than to flame out.

And appreciate the update on City Point. Curious if there's anything you learned from leasing this project that can be applied to perhaps the urban assets in the core portfolio. Specifically as it pertains to the food hall and having that in place and some of the big boxes in place before leasing the small shop space.

Absolutely. And yes, City Point is very instructive to us on what's working, what the shopper today is interested in. So there's that saying that's been around that food is the new fashion and fitness is the new food and we're seeing all of that. That the shopper wants authentic, the shopper wants real. The retailer online originally wants profits and so what we're also starting to see is that the retailers are saying hey, we need to be in a place like this that has a dynamic food hall, that has Alamo Drafthouse, which I used to think of them as a movie theater and then as I spent time there, I realized that's another food outlet, it's another entertainment outlet. All of that matters.

But what we're also seeing is along with that combination of food and entertainment, that there are legitimate retailers who are recognizing that that's what they want to be around. And so we're trying to be patient, we're trying to be disciplined in which ones we're bringing in, but you're going to see a bunch of formerly online only stores, Amy referenced a couple of them, starting to show up. I have no reason to think that they're not also going to show up in our core as they begin to get better grounded in terms of their business.

(Operator Instructions) Todd Thomas, KeyBanc Capital Markets.

Just a follow-up on the leasing activity in the Chicago and New York street portfolios for the 11 spaces. You commented that you hit the rent projected on the space in Chicago, but how are rents trending for the remainder of that space based on discussions? I understand the timing's a little uncertain, but how confident are you in achieving the rents that you've projected?

The good news is we didn't buy too much, we avoided the vintage that would make the peak rents necessary. So when I say we're achieving our rents, thankfully we bought 2010, '11, '12, '13 and as you may recall, we kind of stepped to the sidelines for '14, '15 because we articulated that rental assumptions were growing too high and we couldn't get there. So our rental assumptions were more rational and thus we're getting to them.

The volatility, Todd, has been the bigger issue. The fact that retailers have been a little sluggish and I don't blame them. When you saw rents growing 10%, 20% a year, less Chicago, more New York, and then you see them declining 10%, 20%, 30%, if you're the new head of real estate for an up and coming retailer, you want to be really careful that you're finding the bottom or finding stability. And so they've all been taking their time.

That being said, we are seeing them start to show up at the rents that we assumed and so it's achieving our long term 4% growth, and that's why I said we tried to avoid this 10% to 20% conversation, that rollercoaster and we are getting there.

And how much time does it take from lease signing to rent commencement for some of these smaller street retail spaces on average?

Todd, it's totally dependent on the retailer. I think on Serena & Lily I mentioned, so we've signed that literally in the past few days and they're not going to be in the space until the second quarter of '18. And that could be given they're new to the retail space as they transition from an e-commerce player. So it's really dependent upon who the nature of the retailer is, but for an anchor, for example, on Ross, that took seven months, but I think on some of these street retail and the space and it oftentimes doesn't need much work to get up and running, it could take in the 60 to 90 day range. So it's very volatile in the nature of the retailer that's taking it and what their plans are for the space.

And then just maybe if I shift over to the acquisitions a little bit here. Ken, you've been disciplined now for many quarters, particularly in the core, as you mentioned, and you commented that patience isn't one of your strongest characteristics. If we think ahead, what's the strategy if some opportunities do present themselves, as you expect, but you don't have the right currency to work with?

And you're absolutely right, it is a match funding process and if you don't have the currency then you better be willing to lever up. And we historically have not, especially when you're in periods of high volatility, like we are right now. And then usually what you see people do, if they're smart about it, if they're saying we're not willing to lever up, we're not willing to issue our stock, we should go leverage off of other institutional capital, use our skills, use our capabilities, because boy, there's good opportunities out there.

Now usually then they go and they say, oh, we've got to go raise money, we've got to go get commitments. We have that money, we've got the commitments. We've got $1.3 billion of buying power right now fully subject to only our discretion.

So what I say is, and I hope it's not the case, but if do not have the ability to do on balance sheet acquisitions and opportunities present themselves, we've got the capital. You've seen us do this before, whether it was in Cortlandt Manor, dating to Mervyn's and Albertson's, a whole variety of things. Thus we have that issue solved. That being said, on the on balance sheet side, I'd like to continue to grow our core portfolio. We doubled it over the last five years until the recent correction. I think we can double it again, not every quarter, but you ought to be able to assume five years from now we will find opportunities one way or another because if this is a permanent correction that is a whole different set of conversations to have. I think right now what you have is a lot of noise, a lot of confusion in the marketplace. This will settle down and then we will start seeing opportunities add to the growth profile of our existing core portfolio.

Vince Tibone, Greenstreet Advisor.

Do you guys expect to recapture any of the street retail spaces expiring in '18? And can you also provide an update on the Prince Street properties in SoHo? Are you still proactively to take back that space? And if not, when do those leases expire?

In terms of the expiring, so we still, and UNOde50 is still actually in their space in SoHo and Foley, Foley I think is through 2020. So we have some time on the Foley space.

In terms of 2018, we have some expirations, but nothing overly meaningful ends going into 2018.

And then to be specific on Prince Street, yes, we're going to get back UNOde50, their lease has expired and we're getting them back shortly. The Foley, Foley we would take it back tomorrow, but they have more term left, so that negotiation is ongoing.

Just to confirm, when is the first retailer you referred to, when are they moving out or when does their lease expire?

UNOde50 is moving out and they actually may have just moved out in the past few days. I think it was October 31st if I remember correctly.

And you kind of touched on this, but do think street retail cap rates in New York and Chicago have moved higher based on kind of the slowing leasing velocity? I mean I'm sure cap rates have gone higher for assets that now have above market rents, but what about stabilized assets that still have embedded in mark to market opportunities? Do you think cap rates have moved there as well?

And again, it depends which hat I'm wearing, but in general cap rates have not moved that much using the clarification which you just did, which is if the retailer is either in profitable and it looks like they're going to be long term at a rational rent, those are trading. Just saw a deal in San Francisco near stuff we own that's sub 4 cap. And I have every reason to think whether it's Madison Avenue., Chicago is always a little bit higher, but Rush and Walton, where we're expanding, Lululemon, those cap rates are probably as low or pretty darn close as ever, except it's all about the rents.

So if you're getting 3% contractual growth, if there's a view that this is a very strong area, the Rush and Walton Street, Carter in Chicago for instance, where tenants are signing up, they're signing new leases. They're long term viable, strong retailers, like a Lululemon, like Aritzia or even Tesla, but I won't get into the whole technology thing. There we're seeing cap rates hold. So that's a long way of saying the devil's in the details. It's about the rents, but if the rents feel good, people want to own in these gateway markets and are being very aggressive on pricing. I'd love to see cap rates back up a little bit more because we want to buy more of that stuff.

Lizzie Li, Boenning.

I'm wondering if you could elaborate a little bit more on the prepayment on the mezzanine (inaudible) the upcoming payment. What kind of asset is really into current plans for their reinvestment?

You'll see in the press release that we put in roughly $30 million or $32 million I believe is what we had in there that we expect in 2017. $12 million of that came in the first half of the year. We've received notice that another $20 million is coming in at some point in the -- shortly after the next few weeks, which was intended to go out through 2019. It's roughly, if I recall, an 8% return that we're getting on the money.

So we are actively looking at opportunities to redeploy that, trying to redeploy that and in a way obviously where we get the returns that we're shooting for and we're in the early stages of looking at that, Lizzie. So I'd say stay tuned and I think when we get that back, we'll announced where we deploy it, but are in the markets looking to add that.

And as I said on my call that's one that's a relatively small portion of our business, but a meaningful one where we'll keep it at around 10% of our GAV.

And just to put some context on this, at different times we've been able to put money out at mid-teens plus returns in mezzanine. And when those come back, there's a real challenge as to whether there's redeployment. As John just articulated, these were relatively straightforward financings that we did either because we were hoping to then convert them into and own assets that we've opted not to, or for whatever other reasons.

So redeploying it, whether it redeploys via our fund business, whether it redeploys versus core, or ongoing mezz, we'll see. But one way or another, it's kind of hard to complain about having money coming back, given all of the dislocations in volatility in the market.

And 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.

Thank you all for listening in. We look forward to talking to you again 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.