Acadia Realty Trust (AKR) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Acadia Realty Trust Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I'd now like to turn the conference over to Jarette Seligman, you may begin.

Good morning, and thank you for joining us for the Fourth Quarter 2017 Acadia Realty Trust Earnings Conference Call. My name is Jarette Seligman, and I'm a leasing representative in our Leasing Department.

Before we begin, please be aware that statements made during the call that are not historical maybe 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, February 22, 2018. 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 the 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 Funds 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. Good morning. When we go through a multi-quarter stock correction, as we have over the past year, it's appropriate for us to carefully review what's working in our company and what isn't. Over the past year, we've faced concerns regarding weakness in bricks and mortar retailing and now more recently concerns about inflation and rising interest rates.

From our perspective, while we appreciate the concerns around both retail fundamentals as well as bond market jitters, we believe the market has oversimplified and overreacted to both of these concerns. And given the embedded growth in our core portfolio from lease-up and redevelopment, given the strength of our balance sheet, given the dry powder in our Fund platform, we're confident that we're well positioned to create long-term growth, even as the long-overdue shakeout amongst retailers plays out, and even as the reinflation of the economy progresses. As we think about our company and how it's positioned, there are 2 key areas of differentiation, and both have pros and cons to them. First of all is the fact that we operate under a dual platform, more specifically that we operate a solid core portfolio and a discretionary investment platform.

Then the second area of differentiation is, in fact, the composition of our core portfolio. And I'd like to spend a few minutes discussing that today. Our core portfolio is concentrated in 5 key gateway markets: Washington D.C., New York, Boston, Chicago and San Francisco. With street and urban retail assets representing about 70% of our core value. Now, given all the noise and the confusion around street and urban retail, it's easy to lose sight of the strength, of the stability, the embedded growth and the long-term demand for this kind of real estate.

So with that in mind, I'd like to review our 10 largest investments, which make up about 3/4 of the value of our street and urban portfolio. The largest is in Chicago, then San Francisco, then New York, and finally, Georgetown in Washington, DC.

In Chicago, our largest investments are in 4 key corridors. That consists of 2 buildings on North Michigan Avenue's Miracle Mile, 3 on State Street, then in the Gold Coast on Rush/Walton, we have 5 buildings. Most recently, we completed the expansion of our Lululemon to turn that into a flagship store. We have one more building to redevelop on that corridor and neighboring tenants include Versace, Dior, Tesla, Aritzia. Then fourth and finally, in Chicago, is Lincoln Park, where -- on the Clark and Diversey corridor we have 5 buildings. We are redeveloping one of them, adding T.J. Maxx onto the second level, Bluemercury will be at the street level, and we have good leasing traction for the balance of that street-level leasing. Then across the street from that property, we have another building we own where we're exploring the opportunity to densify that project by adding a large-format tenant to our second floor. On this block, our tenants already include Trader Joe's and Starbucks, and thanks to the quality of the location, thanks to our redevelopments and our key tenants, street-level rents here have increased substantially above any prior peaks and above our prior projections.

Second largest component is San Francisco, where we have 2 urban shopping centers, the largest of which is City Center, which we are redeveloping and densifying that target anchor property by adding an additional anchor and additional square footage onto our existing parking lot. Then the second property is 555 9th Street anchored by a Trader Joe's and a Nordstrom Rack. And while that property is not currently slated for redevelopment, it does potentially have densification opportunities in the future.

Third is New York City, which is our headquarters. And while New York City street retail is less than 10% of our street and urban growth asset value, and no single investment makes it to the top 10 list. If you combine SoHo and Madison Avenue, it represents about half of our New York City retail GAV, and we have some impactful leasing under negotiation there. The balance of our New York City street retail is well-leased and high-demand residential neighborhoods, including Tribeca, Union Square and The Bowery.

Then fourth and finally is the M Street corridor in Georgetown, Washington, DC, where with our partners EastBanc and Jamestown, we own 26 buildings and have a meaningful presence in the Georgetown market.

While our street and urban assets are of high institutional demand, and there is often a premium in the private markets for assembling a multibillion-dollar portfolio of this quality, I want to be clear, we're not trophy collecting. Our thesis has been that high-barrier-to-entry location should provide higher long-term growth, more specifically, they should throw off in excess of 200 basis points of superior, long-term net operating income growth compared to our suburban portfolio. Notwithstanding, the current volatility this thesis is playing out as we expected. Now I appreciate that it's hard to reconcile the concept of street and urban retail providing superior long-term growth when the headlines discuss asking rents in some high-profile streets is declining between 10% and as much as 50%, and where vacancies on these same streets are so noticeable. I appreciate that if someone owns 1 retail building, whether it's on Fifth Avenue or Madison Avenue, with a lease that they signed at 2015 peak rents and they lost their tenant, their occupancy just went to 0. And if they re-leased it at 30% less rent, well, their value probably deteriorated by 30% before even taking into account cost or leverage. And I guess, that, that's a big problem, and that is easy to extrapolate from that analysis of a single asset to then a portfolio. But in the case of our portfolio rather than one building, our street and urban portfolio consists of approximately 100 buildings. Rather than being dominated by 2015 peak rents in 2015. We signed less than 10 street leases representing less than 3% of our NOI. And given the long-dated nature and the vintage of the majority of our leases to tenants ranging from Target to Trader Joe's to T.J. Maxx, rather than our occupancy dropping to 0, it's slated to drop to just under 94%, and then we expect it to grow from there. And rather than losing 30% of our NOI as a result of this so-called retail Armageddon, last year our NOI was flat. And this year we expect our net operating income to grow. And then when adding the growth from a handful of redevelopments, we expect solid growth for many more years to come.

Now, this is not to minimize the roller coaster in rents and the increase in vacancies on some of the great retail streets. Nor is it to ignore the fact that the re-leasing of certain key spaces in our portfolio is taking longer than we anticipated. And rents in some cases are coming in lower than we had once hoped. The growth we expected to be in place in the first half of this year is now not expected to show up until later this year. And this 6-month delay, it's frustrating as heck and has a significant impact to our quarterly operating metrics. But the impact to our long-term projected growth and to our long-term net asset value is, in fact, minimal. The difference in our forecasted NOI growth from what we had hoped for at the peak of the market compared to today is estimated to be between $3 million and $5 million less than net operating income somewhere down the line. That translates through probably to about $80 million of real estate value. And while that's certainly not insignificant, it's less than $1 a share of net asset value, which is relatively small compared to the stock sell-off.

As a rebate to our overall core portfolio metrics in 2018 performance, as John will discuss, while our lease-up and redevelopments are creating temporary softness in our short-term metrics for the first half of this year. The recapture of this occupancy and its impact has been anticipated for a while and upon lease up, we're anticipating solid acceleration.

Now we recognize that the next couple of quarters are going to be critical to getting our short-term quarterly metrics back to where we want them.

Of the leasing we need to accomplish this year, roughly 1/3 of it's been leased, another 1/3 is in active lease negotiations, and the final 1/3 is being keenly focused on by our leasing team.

Finally, while we appreciate the concerns around retailer headwinds compared to 1 year ago, we're seeing a meaningful improvement in retailer interest, especially in our street and urban corridors.

The second component of our dual platform is our Fund business, I'll touch on that briefly. I appreciate it adds complexity. I appreciate that it adds to earnings volatility as we monetize assets. But it continues to be a profitable business, the fee-strings are stable, and as Amy will touch on, our co-investment returns are meaningful. The ability to leverage off of strong institutional investor relationships, the ability to have significant discretionary capital to invest, especially when reprices are as volatile as they are, that makes inherent sense.

Finally, in terms of our balance sheet, as we have always said, balance sheet strength matters. As John will discuss, our core debt-to-gross asset value is less than 25%. Our redevelopment capital needs are minimal, and our redeployment of proceeds from our structured loans and Fund sales into our stock buyback program while possibly short-term dilutive to FFO is very timely. And we appreciate the pros and cons to a stock buyback program. But given our low leverage, given the limited capital needed to fund our redevelopment pipeline, given the continued proceeds that we expect from Fund dispositions, the opportunity to buy assets at a material discount to their value is too compelling to pass up.

In short, while it has certainly been a bumpy road over the last year, I like how we're positioned, and we will remain focused on realizing upon the embedded value that exists in our company.

I'd like to now 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 platforms, buy-fix-sell mandate. Beginning with acquisitions, as discussed on several calls, our Funds have been pursuing a barbell strategy, acquiring both high-quality value-add properties and high-yield or other opportunistic investments.

During 2017, our Fund platform acquired $203 million of properties. This is at the low-end of our original 2017 Fund acquisition guidance of $200 million to $600 million.

In the fourth quarter of 2017 and year-to-date 2018, Fund V acquired, or entered into contracts to acquire, 2 more high-yield properties for an aggregate $107 million. Our volume says it all, we remain highly selective. Last year's distress did not create actionable investment opportunities. As we begin 2018, cap rates for suburban centers in nonprime markets continue to move up. In fact, asking cap rates for these types of properties are up 50 to 100 basis points from 1 year ago, an indication that sellers are becoming more realistic. We're seeing plenty of deal flow, especially non-supermarket anchored centers. Our usual competitors still haven't shown up, although we don't expect this to be the case forever.

Given return in cost currents, we will continue to proceed with caution, although we're optimistic about putting capital to work. To date, we've allocated approximately 20% of Fund V's capital commitments. This leaves us with $1.2 billion of dry powder available to deploy through the summer of 2021.

So far, all of Fund V's investments have been high-yield. Despite the movement in rates, due to our strong banking relationships, we've been able to finance 65% of our purchase price at an all-in cost of 4% to 4.5%. With acquisition cap rates between 7.5% and 8.5%, this means we are generating a mid-teens current return on our equity investments.

On the other end of the investment spectrum, we're just beginning to see bright spots of demand from our retailers, particularly in our key urban and street retail locations. This may lead to increased value-add opportunities in 2018.

One of the many benefits of the Fund business is our ability to pursue a broad range of profitable investment activities. We can be contrarian as we are with our high-yield strategy. We can pursue highly profitable but nonconforming transactions, such as Mervyns and Albertsons in our retailer-controlled property or RCP venture. And we can complete large-scale ground-up developments in urban markets.

More recently, rise in construction costs and retailer headwinds have made ground-up development a less attractive place to allocate new capital. In fact, the last time we committed to a new ground-up development was in 2012. But we can use these important skills to re-lease and redevelop urban, street retail and suburban properties.

Over the years, we've been able to generate very attractive returns on our Fund investments. In fact, we recently reviewed our investment returns by pieces across Funds I through IV. This covers the period 2002 to 2017. We analyzed real-life returns for sold investments and projected returns for the balance. Excluding ground-up developments and the RCP venture, 2 areas we are -- where we are currently inactive, our investments are projected to deliver an IRR in excess of 20%, and we expect to double our equity.

We still have a few ground-up developments in our existing portfolio, the largest of which is City Point. As expected, City Point's anchors are delivering strong sales, particularly Alamo Drafthouse and DeKalb Market, 2 tenants whose value propositions are clearly resonating with the residents of Downtown Brooklyn and the surrounding brownstone communities.

Looking ahead, we envision the merchandise mix for City Point's Prince Street to SKU towards forward-looking experience for retailers. This would be similar to Chicago's Armitage Avenue where we own 9 properties in our core portfolio and have welcomed several young retailing concepts, including Warby Parker, Bonobos and Serena & Lily.

Turning now to dispositions. In 2017 and year-to-date 2018, our Fund platform sold, or entered into contracts to sell, $380 million of investments, of which $240 million was completed during the fourth quarter as detailed in our press release. To our surprise, we were net sellers during 2017. We recognized that it's a difficult time to sell some retails. In fact, that reality has created interesting buying opportunities for us over the past 12 months. But with cap rates for high-quality stable properties at the same levels as in 2016, give or take 25 to 50 basis points, it makes sense to sell a few of our stabilized Fund IV properties where we had already achieved our target multiple, liquidate at fair pricing properties in our order vintage funds and take some tips off the table in Savannah, Georgia, by selling a handful of properties where cap rates met or exceeded expectations. Fortunately, we've already sold a lot of our earlier vintage suburban assets, and we're seeing increased interest from institutional investors for office and residential. This bodes well for our 2018 disposition pipeline, which is primarily mixed-use.

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

Now, I'll turn the call over to John.

Thank you, Amy, and good morning. I will start off with the discussion of our fourth quarter performance and key metrics, and then close with an overview of our 2018 guidance and balance sheet.

Starting with our earnings. We came in above our expectations at $0.35. This was driven by $0.02 of activity, primarily within our Fund business. More importantly, our full year FFO, excluding that promote income, grew by approximately 5% in 2017. This growth reflected a full year impact of the accretive acquisitions we executed in 2016.

Now moving on to our occupancy. Consistent with our expectations, our occupancy ended the quarter just under 94%. We believe that our occupancy now reflects substantially all of the space we had anticipated recapturing. As Ken mentioned, although we still have some work to do, we are seeing meaningful traction in our leasing efforts. Based upon our current leasing status, we're anticipating the bulk of our high-dollar street leases to be in place in the second half of the year. From that, we see roughly 350 to 400 basis points of NOI growth coming from our lease-up with the high-dollar leases anticipated to start showing up in our earnings in the second half of the year. During the fourth quarter, we signed over 40,000 square feet of space within our core portfolio with strong cash spread of approximately 3% at a fairly nominal cost of $6 a foot.

Now moving on to our same-store NOI. As previously discussed, the fourth quarter same-store NOI reflected the full impact of the declines in occupancy that occurred throughout the year. It's worth noting that if you stripped out the noise from these occupancy declines, our same-store NOI would have otherwise grown approximately 3% for the fourth quarter and for the full year, with our street and urban outperforming our suburban by over 200 basis points.

As discussed on prior calls, we recaptured approximately 55,000 square feet from Best Buy at our City Center property in San Francisco. We are in discussions with several exciting retailers, and we anticipate profitably re-leasing the space with an expected rent commencement date occurring in the second half of 2019.

As Ken mentioned, given what we believe is a 6-month delay in lease-up, we expect that our first half of 2018 will look largely like the fourth quarter. The occupancy that we recaptured throughout 2017 will continue to be a negative headwind on our 2018 quarterly metrics. We're expecting that this occupancy disconnect will normalize in the second half of 2018 with accelerated growth for the balance of the year and into 2019 in conjunction with the execution of our leasing plans.

Now moving on to an update of our redevelopment projects. We continue to reaffirm our expectations of a 4% CAGR over the next several years. Although a bit too early to guide with certainty, we're becoming increasingly confident with accelerated NOI growth starting to meaningfully show up in our earnings in 2019. As Ken mentioned, we're continuing to make progress on the redevelopment portion of our strategy. As you'll recall, the 4% CAGR is comprised of approximately half coming from contraction of rent bumps with the balance being split between lease-up and the redevelopment of 4 core assets.

The single largest driver of redevelopment plan comes from our City Center asset in San Francisco. This redevelopment will add approximately 30,000 square feet of retail space. We are at lease on approximately 80% of this space, and construction will begin shortly with an expected completion and tenant delivery in early 2019. We are continuing to expect red commencement dates in the second half of 2019.

Now moving on to our 2018 FFO guidance of $1.33 to $1.45 per share. As you'll see in our release, we have provided additional details outlining the key components and drivers of our underlying assumptions. Our 2018 FFO reflects a reduction of roughly $0.18 coming from 3 key items: Approximately $0.10 is coming from our structured finance repayments, and $0.08 is split between the City Center recapture and our straight line rent in below market lease adjustment. It's important to note that none of the $0.18 had an impact on our NAV. Rather it is largely timing based as we redeploy the proceeds from our structured finance book back into our business and execute our leasing plans.

In terms of additional FFO drivers, as Amy mentioned, we have over $1 billion of remaining dry powder to deploy on Fund V. Upon full investment, this is anticipated to generate in excess of $0.10 of incremental FFO when factoring in the NOI and related fees. Although we came in below our initial expectation of Fund acquisitions in 2017, we are optimistic that our continued patience and discipline will prove to be a prudent decision that will reward both our Fund and REIT investors. Additionally, our 2018 guidance does not yet reflect potential profits from the recently announced Albertsons and Rite-Aid transaction. We will provide an update as further information becomes available.

So in summary, while a few moving pieces, the key takeaway is that our 2018 FFO guidance is now at a new normal. Following the redeployment of the proceeds from our structured finance book back into our business and the successful execution of our lease-up efforts, we expect that our recurring FFO along with the expected growth will revert back to historical levels.

Now moving on to our balance sheet. Our liquidity and financial position has never been stronger. Our core leverage is approximately 25% of our GAV and approximately 70% of our current NOI is unencumbered. Between cash-in-hand, capital recycling within our Fund platform and available borrowings at our corporate revolver, we have tremendous flexibility and firepower in our balance sheet. We will aggressively use this capital advantage to increase our NAV, including share repurchases that Ken has discussed.

As previously announced, our board, once again, increased our quarterly dividend in November of 2017. In addition to meeting our tax requirements as a REIT, this increase, more importantly, reflects our continued expectation and conviction of 4% growth over the next several years. Throughout 2017, we have not issued any equity. During the fourth quarter, we reduced our pro rata leverage by over $70 million, utilizing the net proceeds received from our structured finance portfolio along with asset sales within our Fund business.

Additionally, during 2017, we opportunistically converted approximately $90 million of loans that we made a few years ago into an incremental ownership position. No cash was or will be exchanged, and this was done in conjunction with our partners' tax planning strategy. This conversion enables us to capture further growth on this asset, which we will discuss in further detail at a later point.

Lastly, after year-end, we completed a refinancing of our corporate facility. This strategic refinancing resulted in a reduction in overall borrowing cost, extension of maturities, improved lending terms and expansion of our bank group.

So in closing, while we have some work to do on our leasing efforts in 2018, we believe we are well poised for growth in the second half of 2018, but more importantly, as we enter 2019 and beyond.

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

(Operator Instructions) Our first question comes from the line of Christine McElroy of Citi.

John, just wanted to reconcile some of the comments that you made regarding the leasing and the same-store NOI trajectory sort of in the second half. You had said that you expect the majority of the street leases to be in place in second half. Does that mean commencing rent? And what does that imply for how many leases you've signed today? You've talked about like these 11 street retail leases. Maybe you could just kind of walk us through what needs to happen to sort of get to that? And thinking about the 2% to 7% range, what's sort of realistic? It seems like if you're still working on the leasing today, it would take longer for that rent to commence?

Hey, thanks, Christy. So I think, and Ken sort of outlined in his speaking points that we are in various stages of -- whether it's ROI, whether at lease, et cetera. So what we don't have each and all of those signs, which is why we have the wide range, given the high [AVR] we do have -- we are at a point where we do have increased confidence that we could get there and to get to the higher rent, obviously means we have the other rents in place. And mid towards the toe-end of third quarter to get to where we want to be. But if we are seeing arching optimism, we are trading paper back and forth with potential tenants, that we do have additional optimism, Ken must want to add on to your points, but good chunk of them are in active discussions and negotiations.

And Christy, you're right to focus on the rent commencement date because that will be the critical determinant for what the -- each quarter, each month same-store NOI looks like. The good news from my perspective is -- and it's been relatively recent, it really was after the holiday season, retailers came back and said, we want these kind of locations. They are at realistic rents, we are at realistic rents. So now it really boils down to what the rent commencement dates will be. And that will determine whether it hits in the third quarter or the fourth quarter, what I remain very confident about is that it's going to hit. And so from a net asset value perspective, we're going to get there. To your question though, the timing, as it impacts third or fourth quarter for your modeling, I get that those will be critical as soon as we have set rent commencement dates, we're going to let you all know.

And so related to that. If I just look at the FFO reconciliation on Page 5, which is really helpful. If I look at that core NOI, the growth that's implied there is at the midpoint just over 1%. So I think, it's 0.8% to 1.3%. So how should we think about that in the buildup to FFO relative to that? Same-store NOI growth range of 1% to 3%. It seems like to me that the upper end of that 1% to 3% range is not currently in your FFO guidance?

Keep in mind, Christy, that City Center is a big, big negative that came out. So we got that space back in January this year, and as I mentioned on the third quarter call, was over $0.04 of FFO. So $3.5 million, $4 million, yet to factor that movement into it. And the only way that this growth coming into -- into the back half of the year, I don't think that's why they have a huge-- it will have a big impact on quarterly metric given on our call and $300,000 moves us 100 basis points on a quarterly basis. Really from an FFO and NOI perspective, it's not overly meaningful in '18 when we have it back-ended in the second half of the year.

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

You sort of touched on this, but I -- I'm curious what the change in the attitude from the retail tenants for leasing in spring 2018 versus 2017? I mean, is it more attractive rents? Or is it that their view of the consumers has improved?

I think it's a host of factors, and I don't want to pretend to generalize for every retailer. But the holiday season was stronger, I think, that's a plus. Retailers are feeling better about the economy, the consumer is positive, that's a plus. Then, what had happened in 2015, rents got too far ahead of themselves, '16, '17, though retailer wants to catch a falling knife, if they think rents are going to decline in perpetuity. And so a bunch of them were on the sidelines either because of their own business issues, but also because there was this feeling, Wow! rents are going to continue to decline, the headlines in the media were horrible. And at some point in the past couple of months, retailers recognized these are essential stores, essential for their brand. These are profitable stores at today's rents. And so, rather than waiting to see how much cheaper they can get, we're seeing retailer step up in Chicago, Craig, that -- early with T.J. Maxx, because they had tremendous amount of confidence in their business. And we're building a new building for them on Clark and Diversey because they said, yes, this rent works. We're going to relocate to this because it will be profitable. And now you're starting to see it in some of the more volatile markets, like Madison Avenue, like SoHo, although those rents grew way too fast for too long. So they had further to drop. But as it relates to the retailers we're dealing with and the spaces we're dealing with, we're now finally seeing real retailers step up at realistic rents, and from a long-term real estate value creation perspective, that's what we want.

Great. And turning to City Point, I know you're trying to do something unique on the first level, I wonder how leasing was going on that first level at City Point?

It's finally gaining traction, and thank goodness the food hall is crushing it. Alamo Drafthouse upstairs is also doing significantly better than anyone could have reasonably expected. So it's bringing in the kind of shopper that we want to see show up here. Because what we have said for a while is we want to, on the street level, differentiate Prince Street from Fulton Street. And Fulton Street is doing just fine, but there's all of these new residents in Downtown Brooklyn who clearly have a desire for a new type of shopping experience, and we're proving that out. The negative headwind, and if anyone has walked around Downtown Brooklyn, it's still a construction zone. So I'd say, almost half of our best retail street GLA is still burdened by scaffolding and other new high-rise development that's going on. It's hard to complain about all those new residents coming in, because sooner or later, they translate through to our shopper. But that has caused a delay in the kind of retailer. So in short, the leasing team is talking to a bunch of really interesting -- primarily newer concepts, which we find exciting. We're seeing the foot traffic, whether it's Alamo Drafthouse or Target, we're seeing the shoppers in the food hall and in Century 21, so this final piece will fill in. It's just taking longer than we'd like.

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

First question, just back to the same-store growth forecast, John. In terms of the 2% to 7% growth, it's the low end of that, essentially, that nothing gets done, that there are no additional rent commencements beyond what's already planned. And the high-end that all the remaining leases are signed today. I guess, I'm just trying to figure out how we should think about the potential range of outcomes within that 2% to 7% range?

That's a pretty fair way to think about it, right? So I think we look back to what we talked about in third quarter, there were roughly an aggregate of 30 -- 30-some leases and of those 30 we highlighted about 10 of them, which were the biggest drivers -- biggest drivers of those. So I think, that's the pool we're talking about, some of those have since been signed, others are in very active negotiations. So I would say when you look at what to get to that 2% to 7%, assuming we don't get to a rent commencement date, we'll be much closer to the 2%, but based off of our current guidance and expectations, we do have a level of optimism, we're going to be above that.

And let me just chime in, Todd, to remind everyone, and we touched on this before. It is so rent commencement date sensitive, and I appreciate why it's really important. And of the all different metrics out there, same-store NOI growth is as good as the next one. But what I don't want anyone to do is lose sight of that difference between 2% and 7% in the second half is couple of million dollars of NOI. It's a few pennies of NAV. We care desperately about this. Hopefully, no one on our leasing team is listening right now, because I want them out there leasing. But we care desperately about this, but I don't want to over emphasize or put too much pressure on a rent commencement date when our focus, long term, is creating this above average growth, and there will be periodic downturns. Unfortunately, this one occurred simultaneously with the retail Armageddon and apocalypse that has scared the heck out of everybody.

Okay. It's helpful. And Ken, you commented that a collection or portfolio of street retail properties, which is hard to assemble, would command the premium in the market today. Do you have any indications around what that premium would be? Any sense there?

Yes. There has been enough discussions of high 3 caps going to low 4 caps, I get that. There is enough transactional activity out there for high-quality portfolios. But -- while I don't want to put a specific number on it, keep in mind of our street and urban, which is 70% of our overall portfolio and we walk through those top 10 corridors. And roughly 40% of our street and urban is North Michigan Avenue, State Street, Clark and Diversey, Rush/Walton corridor; 20% is 2 urban shopping centers in San Francisco; 10% is Manhattan Street retail with all of the volatility that we've been talking about. And then, roughly 5% is in Georgetown. That $2 billion plus portfolio, our view, is worth a lot of money, should be -- should [swaddle] off superior growth, that's why we're in this business. And there will be in almost any period, even difficult periods in the capital markets like right now, there should be strong institutional interest for that kind of portfolio.

Okay. And just lastly, was just curious, in terms of the retailers sort of stepping up a little bit after the holidays after the tax plan was passed. Are conversations for spacing in your portfolio, changing at all in regard to CapEx spend? Who is going to handle what just given sort of the bonus depreciation?

It has not translated to that. It's a big difference, I think, as a bunch of our retailers as a result of corporate tax reform are feeling better. I would also then say, even if it's not just because of that, because at the real estate negotiation level, they don't say as a result of tax changes now we can do more, pay more, but they are more enthusiastic, but it also is because the consumer is feeling good. And it is also because the shakeout is occurring, it's been blurry for a while. The have-not retailers continue to have not, and I don't see that changing. But those that are figuring it out, that are appreciating the fact that having a bricks-and-mortar location is somewhere between preferential and essential, to having a profitable business is working to our benefit. So we are seeing a range of retailers from the predictable and strong T.J. Maxxes of the world to the Trader Joe's to the Target who is doing a very good job of focusing on urban markets and is going to succeed in that. To some of the new, what we call, screams to stores, but formerly online, and you're seeing them populate, Amy touched on that as it relates to our Armitage. So there is a level of confidence and conviction out there that we saw or seeing now in January that we didn't see in September, October, November, and that's very reassuring.

Our next question comes from the line of [Han Xin] from JPMorgan.

Just digging into the properties. I was wondering if you could talk a little bit about how leasing is going in the Madison Avenue property? And how much of NOI is still expected to come online for City Point?

John, why don't you take the Madison Avenue first? And then Amy you can talk.

Yes, sure. So on Madison Avenue, similar to what Ken was talking about, that here is another quarter we are seeing interest in, that is one of the -- when Ken mentioned, the pool of leases that are in negotiations and discussions, that is one we are having active interest in and seeing the right type of retailers that we expected to show up, show up there. Other thing I want to -- we've talked about this before with Madison is from a -- was very impactful given the size of the rents on our quarterly metrics. Our dollar investment in Madison the way that was structured with product from equity in ground rent was under $10 million. So it's a small NAV perspective. But I am going to appreciate that it is a big, big NAV driver, so I wanted to highlight that. But also just from a leasing perspective, we're seeing attracted interest from the type of retailers that, when we went into this, we were hoping to capture.

And let me just add a couple of things, so that people don't confuse. Those assets on Madison Avenue that are in our Fund platform that don't show up in our NOI, same-store NOI, et cetera, although often I wish they did because by fix we lease it up and then we sell it and usually the growth is obviously significant. We have -- I believe, it's in the core, only the Carlyle, and John just touched on it, and the structure being preferred is a relatively small amount of NAV, we have 4 spaces, and we are currently in active discussion on 3 of the 4, so to be very specific about it. Hopefully, it happens. It's very rent commencement date sensitive. But for those of us who walk up and down Madison Avenue, and we see Acadia has a bunch of stores, most of those were in our Funds, and thankfully, we've structured those deals correctly. They should be fine, but that's not what is in our same-store NOI, as it relates to City Point.

Sure. As we've discussed on previous calls, on a square-footage basis, we're roughly 70% leased. But on a revenue basis, we're roughly half. And so we still see a lot of revenue that is yet to come online. We're seeing the right kind of retailers express interest, as Ken discussed. We're really thinking of this property not just in the first ground-up lease-up, but also over the next 5 years and 10 years, where do these rents go. Ken mentioned Fulton Street, today rents on Fulton Street are in the $300 a foot range. And we like to think of our property as -- is there a discount to Fulton Street? Or it's actually a premium to Fulton Street given the quality of our City Point location, the co-tenancy, and just the incredible amount of density that's going up right around our project with roughly 8 million square feet that has been completed over the past several years in a 3-block radius and another 3 million square feet in that same 3 blocks radius that is either in process or in design. That doesn't include our own 2 million square feet project. So that's how we think of the project in long runway ahead of it.

And, I guess, one last question. It looks like you guys have been making a lot of Fund acquisitions in Michigan and more recently in Alabama, not to speak of the 2 states, but do you think -- what makes you think those are good investment opportunities?

Don't be a snope now. So here is what's playing out in suburban shopping center world. The capital markets on the private -- on the public side have clearly retreated, and we see that. So there is no bid, there is no competitive bidding from the public REITs with the exception for a handful of supermarket anchor. And on the private side, the nontraded REITs for all intents and purposes have been sidelined. And for those bidders again, on the institutional private side, they've been chasing supermarket anchor with the view of safe haven, and there's pros and cons to that. But once you get into secondary markets, nonsupermarket anchor, the cap rates have moved up significantly, and gapped out to about as wide a level as I've seen in the 20-plus years I've been doing this. The problem has been, in some cases that's justified because the net operating income in place today may not be there 3, 5 or 10 years from now. The co-tenancy provisions are too risky, and so, as Amy mentioned, while we've been active, we've been far less active than we thought a year or 2 ago about this. But if you selectively pick the assets, and given that last year's sellers were still reconciling with these new normal in terms of cap rates, but this year we are seeing a lot of sellers saying, they will sell at market. If you look at the spread from the 10-year treasury, if you look at the spread to our borrowing cost, if you assume we are carefully picking assets where the retailers rent-to-sales ratios are strong, where the retailers are fundamentally sound, although there will always be some turnover there, where the rent-to-market is sound. Then I would argue that it makes sense for us to acquire assets in markets that other companies may say, you know, we don't want to be in that state. We don't want to be in that town. If they are strong assets, there should be a place for them in the private markets, which is our Fund business. We're not suggesting that we would pivot and quip those into the REIT. We're not suggesting that these are ideal long-term assets. We're simply saying, on a 2:1 levered basis, where you can borrow between today 4%, 4.5%, and buy in the 8s percent. As long as the net operating income remains sound, as long as we think there's more chance for upside than down, we'll deal with the realities that us New Yorkers may not go there often, there's still plenty of shoppers around.

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

Quick question for you, Ken. Number one, I -- obviously, the detailed disclosure on the guidance is very helpful. Would you consider sharing with the markets more information on your view of cap rates for your core portfolio? Or maybe even a range of NAV, presumably you share this information with your board members every quarter as well, right?

Yes. If I showed you everything that I showed my board, well, that would be interesting. I have been hesitant in the past to do 2 things that we ponder. One is marking-to-market every single lease, which is volatile and subjective. And during the good times, I hesitated to do that because rents were growing significantly, but we knew we weren't getting that space back in the case of a Target or a T.J. Maxx for years, if not decades. And so why constantly mark up and down and create all that confusion when stability is the norm. Similarly, on cap rates, now when we're trading at a discount to NAV, when we have just announced the stock buyback program, I do need to be a little more sensitive to make sure we're being adequately transparent, and that we're not indicating something that is misleading in one form or another. There is a fair amount of data out there and trades out there on the smaller side, which is what the majority of our assets are. We're talking about $20 billion of malls. We're talking about assets that even in the quietest of months are trading in with a sufficient volume that you should be able to figure that out and determine it. So we're hesitant on that level. But here is the final piece of it, Floris, that we're really good at predicting where our assets might sell in our Funds. But I'm amazed how often we're wrong in either direction, thankfully, more often than not wrong to the upside. So our guesstimate is probably only as good as anyone else's, and I'll let you guys figure that out. We're going to make sure we show you a clear guide pass to over the next 5 years, here's where our NOI will grow. We're going to make it clear that half of those assets are the 10 investments I just talked about, and the other half are pretty darn good as well, in some cases, just as good. And whether you ascribe a 3.75% or 4.25%, I really don't want to get into that conversation. I will differ to you guys on that.

Okay. A follow-up question maybe on City Point. Presumably, you've got 2 quarters of sales data. Is there anything that you can share in terms of the sales volumes from the existing tenant?

I'm not allowed to, other than to say, again, we're very pleased, and they are with what they're seeing.

And I'm showing no further questions at this time I'd like to hand the call back over to Mr. Ken Bernstein for any closing remarks.

I appreciate everyone joining us, and we look forward to speaking to you next quarter.

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