Acadia Realty Trust (AKR) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter Acadia Realty Trust Earnings Call. At this time, all participants are a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call maybe recorded. I would now like to introduce your host for today's conference, Mr. Samantha Stapleton. Please go ahead, ma’am.

Good afternoon and thank you for joining us for the third quarter 2016 Acadia Realty Trust earnings conference call. My name is Samantha Stapleton and I am an Associate in our Development Department. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934 and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, October 26, 2016 and the Company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from 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. At this time, it is my pleasure to introduce Acadia's President and Chief Executive Officer, Ken Bernstein.

Thanks, Sam. Sam started as a summer intern with us three years ago and is doing a great job in our redevelopment and development team. Good afternoon. We had a busy and productive quarter with lots to cover so let me start with an overview of what we're seeing in the marketplace both in terms of our core portfolio as well as our fund platform. Then I will hand the call over to Amy to discuss the progress on our fund business and then John will wrap up with our operating results, our outlook and our balance sheet metrics. As an overview, in the third quarter, we saw continued crosscurrents both in terms of our real estate operating fundamentals as well as in the capital markets. On the operating side, these crosscurrents include a healthy consumer and improving economy albeit modestly counterbalanced by shifts in consumer spending a shakeout of some weaker retailers and the ongoing evolution of an impact of technology on bricks and mortar retail. Crosscurrents in the capital markets seem to be driven by a continued pursuit for yield especially high-quality cash flow with growth potential counterbalanced by investors being somewhat more selective and cautious and debt availability also being somewhat more constrained. What this has translated through for transactional activity in our retail sector is that cap rates for higher-quality core assets seem to be holding although there have been fewer bidders out there. And then cap rates for more generic or traditional retail has continued to edge up. As these crosscurrents relate to Acadia, we’ve been focused on successfully navigating around some of these issues and then opportunistically capitalizing on others. For our core portfolio, we see this in our solid operating performance in the third quarter as John will discuss in detail our same-store NOI for the quarter as well as our leasing spreads were consistent with our expectations and consistent with our thesis, which street retail driving the majority of the growth this quarter. The solid performance of the portfolio overall is likely driven by the fact that the majority of our properties are in high barrier to entry supply constraint locations providing both a defensive profile as well as embedded growth. This quality is reflected in the strength and diversification of the portfolio in terms of geography, over 85% of our assets are in the key gateway markets of Washington DC, New York, Boston, Chicago, San Francisco. In terms of diversification of product type, about half our portfolio is high-quality street retail, 20% urban and then about 30% suburban. In terms of diversification of tenancy, people often think of street and urban retail as being just flagship or luxury fashion, our portfolio is more about the key live, work, play locations. Our top 10 tenants include dominant necessity based retailers such as Target, Ahold Supermarkets, Walgreens, as well as value-based retailers ranging from H&M to T.J. Maxx to Nordstrom Rack. Finally, our portfolio is well-positioned as retailers continue to follow the ongoing demographic shifts and are utilizing these key gateway markets to drive their brands forward as the realities of omni-channel retailing continues to advance. This includes former online only retailers such as Bonobos and Warby Parker, but it also includes dominant traditional retailers who are also recognizing the importance of these key market locations. From an occupancy perspective, we’re making steady progress on our goals of periodically recapturing and then releasing space. This is reflected in our third-quarter spreads, but will be even more so in the value creation over the next several years. Earlier this year, we discussed eight properties contributing approximately $5 million of incremental NOI, which we expect to harvest over the next five years through recapturing space, retenanting and redeveloping. On that front, we are making steady progress with the near-term efforts on three of these properties substantially accomplished and now some midterm opportunities becoming actionable as well over the next year or two. This includes our Clark and Diversity property in Lincoln Park, Chicago, as well as our property on Spring Street in Soho and Main Street in Westport, Connecticut. So over the next 12 to 24 months, we will hopefully have the ability to capitalize on these opportunities as well as others to continue to actively and opportunistically recapture, release and in some case redevelop space to further drive growth and create value across our portfolio. If and when these happen there will be some downtime associated with this process, which would impact short-term occupancy and NOI, but this would then be followed by strong incremental growth down the line. In terms of acquisitions, again, there is plenty of crosscurrents. In the third quarter, we saw a continued increase in actionable investment opportunities both core and fund as some of the more levered players have been forced to exit the market and sellers seem to be more focused on certainty of execution. In our core portfolio, acquisitions year-to-date in aggregate should amount to $627 million of executed or under contract transactions. This is a nice blend of street and urban retail in all of our key gateway markets. After being on the sidelines in 2015 with respect to street retail acquisition due to unrealistic rental growth expectations by sellers as well as by winning bidders, the current pause and reset of expectations has created some opportunities for us. As a result, of a more realistic outlook by sellers and a bit of wound licking by some bidders, we’ve been able to return to street retail acquisitions in 2016, but still maintaining our disciplined approach. In the third quarter, we completed the closing of the Smithfield portfolio on State Street as well as on North Avenue in Chicago and we also announced and then closed on the retail component of the Sullivan Center on State Street in Chicago and that was an off market transaction. Sullivan Center with tenants such as Target and DSW serves as one of State Street’s anchors. Sullivan Center complements our other State Street assets. State Street is a dynamic location in the center of Chicago's Loop, it has a robust well-educated workforce, it’s densifying the population within a one mile radius of State Street has doubled since 2009, nearly 1,300 hotel rooms have been delivered in the Loop and even more than that are in the pipeline. Since 2007 attendance at Millennium Park has grown 50% to more than 4.5 million annual visitors and last year of the more than 37 million leisure visitors to Chicago, the highest concentration was in the Loop. In San Francisco, our 555 Ninth Street pending transaction is expected to close shortly and that is $141 million urban shopping center in San Francisco. Tenants there include Trader Joe's, Nordstrom Rack, Bed Bath & Beyond. So if you look at our 2016 acquisitions in the aggregate, Washington DC, New York, Boston, Chicago, San Francisco, what you will see is a strong defensive profile with over 60% of the income coming from necessity discount or value oriented tenants, but also embedded growth through a combination of contractual growth and lease sell. These acquisitions on a combined basis over the next five years should generate a compounded annual NOI growth of about 4% to 5% per year. And as John will discuss, these investments are fully match funded from an equity perspective. While there will be some short-term dilution this year associated with the equity, this is more than counterbalanced by the accretion going forward. In terms of our fund platform, as Amy will discuss, we had a very active third-quarter both in terms of our progress in a stabilization and modernization of existing fund assets as well as with respect to new deployment. In the past couple of years, we have been aggressive sellers at sizable returns and Amy will update you on our progress on this front. Then in terms of new investments, we have recently seen an uptick in investment activity. The third quarter marked the end of the investment period for Fund IV and prior to that we were able to solidify a series of transactions that we had been working on for several months such that we have allocated substantially all of Fund IV's capital. While that was more than we originally forecasted, more important than that is it speaks to certain shifts that we are seeing in the capital markets that should create future opportunities as well. And now with our successfully launched Fund V, it feels like a very good time to have reloaded our discretionary capital. As we look forward, we continue to like what we see. As it relates to our existing core assets, we like the quality, the profile plus the embedded upside. Our core acquisition opportunities remain robust. And then from the fund platform perspective as Amy will discuss buying, fixing, and selling that platform continues to perform very well. And we are well-positioned for Fund V. And then, finally, as John will discuss, our balance sheet, our leverage, our liquidity is right where we want it positioning us for whatever opportunities may present themselves. With that, I would like to thank the team for their hard work over the last quarter and turn the call over to Amy.

Thanks, Ken. Today, I will review the steady and important progress that we continue to make on our fund platforms by fixed cell mandate. Beginning with acquisitions, as Ken noted, in the final phase of Fund IV's investment period, a few of the larger transactions that we have been pursuing came together. As a result, we were able to allocate $530 million or about 98% of Fund IV's total capital commitments prior to the end of the investment period on August 9. This exceeded our expectations. In light of crosscurrents in both the capital markets and the retailing industry, we continue to employ a barbell approach to investing our fund commitments. On one hand we are selectively acquiring high-yielding stable shopping centers and non-primary markets when we can do so at attractive pricing. The high yield opportunities set is primarily the result of more limited debt availability which has led to an increase in cap rates for these types of properties. On the other hand, we continue to pursue opportunities to acquire well located assets in key markets where our team can add value to lease up and redevelopment. So far this year, Fund IV has acquired or has entered into contracts or letters of intent to acquire roughly $300 million of investments, of which $64 million has already closed. Both strategies the opportunistic high yield and value add lease up are represented among these transactions. On the high yield side, during the third quarter, Fund IV completed the acquisition of Wake Forest Crossing in North Carolina for $37 million. This is a 200,000 square foot supermarket anchored center that is about 98% leased. The grocer of the property is complemented by (15:22) retailers including TJ Maxx and Ross Dress for Less. With rational leverage, this investment should generate attractive mid-teens cash on cash returns throughout the funds for the period. Overall, we are beginning to see an increase in compelling risk reward investment opportunities for the funds and given our successful fund raising with plenty of dry powder available to deploy into new investments. To that point, as we previously reported, during the third quarter Acadia successfully raised $520 million of capital commitments for its Fund V. The fund was oversubscribed and has $450 million of third-party commitments from a diverse group of investors that includes university endowments, foundations and pension funds. Approximately 98% of these commitments came from existing investors and one or more of our prior funds. We greatly appreciate the tremendous support of our new and our many long-standing partners who have demonstrated strong confidence in our team and strategy. Turning now to dispositions, over the past two and a half years, our funds platform has been a net seller overall. In fact on the basis of value, we sold roughly two and a half times as many assets as we bought generating significant profits. Year to date, we have completed $154 million of dispositions within Fund III generating a blended 42% internal rate of return and a 3.4 equity multiple. Today, pricing for high-quality assets is holding steady. Accordingly, looking ahead, our disposition pipeline remains on track. Last week, consistent with prior quarters, we continued to make important progress on our existing fund redevelopment pipeline. For example, in our urban and street retail fund portfolio at City Point in Downtown Brooklyn, Century 21 held its grand opening earlier this month and Alamo Drafthouse is scheduled to open on Friday. Construction is also progressing well on the concourse level for several of our food centered tenants, Trader Joe's DeKalb Market Hall, Han Dynasty and Fortina, all of them are expected to open this spring. And looking ahead, we remain focused on the duration of an eclectic and dynamic merchandise mix on City Point Prince Street Passage which will connect the foot traffic on Fulton Street and Flatbush Avenue. As reported by the press, we look forward to welcoming Flying Tiger Copenhagen, the Danish design company to Prince Street in 2017. This will be their fifth store in the U.S. and their first in Brooklyn. Within our suburban fund portfolio at Cortlandt Crossing a development site in Westchester County New York, we executed a new 68,000 square-foot lease with ShopRite. The shopping center is now about 50% pre-leased and construction has commenced. We anticipate stabilization of that project in 2018. So in conclusion, we had another productive quarter in our fund platform. We allocated substantially all of Fund IV's remaining capital to a few high yield or lease up opportunities with attractive risk-adjusted returns. We reloaded our acquisition dry powder by successfully completing the capital raising for Fund V and we made continued progress creating and harvesting the significant value embedded within our existing fund portfolio. Now, I will turn the call over to John who will review our earnings, operating results and balance sheet metrics.

Thank you, Amy, and good afternoon. As you just heard from Ken and Amy, our core and fund businesses continue to perform strongly. Our balance sheet has never been stronger. Our operating results and key metrics are in line with our expectations and provide us with the catalyst for continued and measured growth. I’d like to first start off about talking about our earnings and the core drivers of our business. Earnings for our core business came in largely as we expected at $0.36 per share. In addition to the strong operating performance of our Phocas Real Estate and fund portfolios, we generated an incremental $0.02 a share from our structured finance portfolio this quarter. During the latter half of the third quarter, we successfully closed on the previously announced Smithfield and Sullivan Center portfolios which represented $300 million of the $630 million of 2016 acquisitions. Although these acquisitions will be accretive to our 2017 earnings, they were slightly dilutive in 2016 given our disciplined practice of match funding our equity upon execution of the contract. The gap and timing between the issuance of our equity in the ultimate closing of the investment as well as the overall timing of these acquisitions throughout the year will result in dilution of our annual personal earnings of roughly $0.03 to $0.04 which drove the tightening of guidance from our high end of $1.60 to $1.56. So while our match funding practice will often dilute short-term earnings, it is a consequence we are willing to accept as it eliminates our exposure to the capital markets between contract execution in closing, and provide certainty of our ability to close on a leverage neutral basis. Going forward, we anticipate accretion on our 2016 acquisitions of $0.05 to $0.07 beginning in 2017 with additional growth of another $0.02 to $0.03 over the next three to five years when factoring in the 45% annual NOI growth that we believe is embedded in these acquired assets that we expect to generate from a combination of lease up and bring expired leases to market within these acquisitions. Over the final quarter of the year, we project that our core operations will generate $0.34 to $0.36 prior to any net promote income. As we guided during the second quarter, we continue to anticipate the modernization of Fund III assets and other transactional activities during the fourth quarter this year and expect another $0.03 to $0.05 of net earnings from these transactions. While very confident in our pricing and ability to successfully execute, it is possible something moves into 2017 as we navigate to the closing process, hence the range of estimated outcomes for the balance of the year. We continue to reaffirm our remaining net promoter income of approximately $10 million that we expect to generate in the aggregate from Fund III which we anticipate earning over the next several years. More importantly, as an integral and recurring part of our overall business following the monetization of Fund III, we believe that Funds IV and V will provide the ongoing continuity of both fee and promote income from our fee management business. Now moving on to our same-store NOI, consistent with our second quarter guidance of a stronger second half, our same-store NOI growth for the three and nine months ended came in as we anticipated at 4.2% for the quarter and 3.3% year to date. Given the stability of our core portfolio as well as our continued high occupancy, our growth in our same-store NOI for the current period was driven primarily through contractual rent ups along with a handful of smaller items in both the revenue and expense side. We continue to project 3% to 4% of annual same-store NOI growth for 2016. Now turning back to our 2016 acquisitions, the NOI from the $630 million of acquisition we expect to complete in 2016 represents approximately 25% of our total NOI and we’ll begin to roll into our NOI pool starting in 2017 with the vast majority being included in our pool by the fourth quarter of 2017 after the assets are held for a full year. As these acquisitions come into our metrics, in addition to an overall larger pool that is less susceptible to relatively minor variances, it will also be more reflective of our actual in place portfolio. Over the past five years, we have grown our assets by 20% a year to reflect an overall mix of roughly 70% street and urban, and 30% suburban. Beginning in Q4 of next year and on into 2018, our same-store pool will catch up to our portfolio and provide what we believe is a more meaningful metric given the lagging nature of acquisitions in the same-store calculation. Lastly, as we look at the expected leases scheduled to mature or expire in 2017, we will incur routine downtime in connection with reconnecting the space. While we expect to report strong leasing spreads upon execution of these leases, the potential downtime could cause a drag on 2017 reported same-store metrics which will reverse itself along with incremental upside in 2018. Occupancy in our core portfolio remains high and stable at over 96%. As a continued indication of the embedded value within our portfolio, leasing spreads on new and renewed leases for the quarter were 48% on a GAAP basis and 23% on a cash basis based upon approximately 68,000 square feet of leasing activity, of which a significant portion of the increase was driven by two large renewals that were brought to market within our street portfolio. Our balance sheet has never been stronger when considering our overall debt, our key leverage ratios and our various avenues to access capital whether that be from our lenders, the public equity markets or capital commitments from our fund partners. As we have said each quarter, all of the equity that we needed to close on the $630 million of 2016 acquisitions on leverage neutral basis has already been raised. Included within the $480 million of equity that we raised during 2016 is $95 million raised in connection with the forward equity transaction we performed earlier this year. We will drawdown on that remaining balance in connection with the acquisition of 555 9th Street which is on track to close in the very near term. Our $150 million line of credit is fully available to us with no amounts drawn on September 30. Consistent with our strategy to stagger our debt maturities, we have no remaining core debt maturities for the balance of the year and roughly $80 million of core majorities in 2018. Our overall leverage and debt to equity ratios continue to be very low but keep in mind our current quarter EBITDA reflects less than a month of earnings for our Q3 acquisitions, however the full impact of the assumed debt of roughly $60 million is reflected in the debt balance. So in reality, our debt to pro forma EBITDA is much stronger than what we actually printed for the quarter. In summary, our business is performing in line with our expectations and our balance sheet has never been stronger with full capacity in our line of credit, numerous avenues to access capital, coupled with reloaded commitments from our partners in Fund V, we are well positioned to capitalize on opportunities as they arise in both the public and private markets as we continue to execute our prudent capital allocation growth strategy for both our REIT and fund investors. With that, I will turn it back over to the operator for questions.

Thank you. [Operator Instructions] Our first question is from the line of Jay Carlington of Green Street Advisors, please go ahead.

Good morning guys. Just wanted to circle back on the series of transactions, is there anything in the fund that you can tell us about whether specifically in terms of geographic location, property types, are they stabilized or development or any other color would be appreciated on that side.

So I think Amy described them as a barbell approach which I agree with meaning where we can buy strong locations that have lease up opportunities were going to do that and I think you should expect to see us do more of those as we have. And then what we are seeing also is for the more generic retail assets, cap rates continue to tick up and where we can buy assets that are certainly not core to what you would think of Acadia’s core portfolio but we're using the right amounts of leverage and the right attractive yield we can acquire assets that again may not be consistent with public market but that were just fine in our fund and I think you'll see more of those as well.

Okay. And maybe on just stick on the acquisition side, the Wake Forest deal it recently completed development, can you kind of walk through how you're getting to your mid-teens IRR and kind of a recently development there.

So obviously some of it has to do with going in yield, some of it has to do with where leverage is I'm not going to get into the specifics and I'm going to be very sensitive to the fact that the seller is a public company. I am very supportive of any of our peers who are saying, look these are assets that are not consistent with our long-term growth strategy and we are willing to sell them. And then for our funds that fits in just fine. So you’ve seen us do these before but we are at an inflection point where we think we will see more of these kind of assets that may not work for the public markets which are hyper focused on same-store NOI, positive lease spread, average base brand et cetera. I am more than happy for our funds to buy assets that have no NOI growth, that had no positive lease spread but that have an attractive yield, attractive leverage deal and as long as we can make sure we are managing any of the downside risk that is one of the great things that the fund is set up for.

Okay. And maybe a quick one related to that you mentioned acquiring kind of non-primary markets how do you think about this on a one-off basis given just the down tax in managing the downside risk when you're kind of limited in your presence and scaling those markets.

Yes. And we have used the term dominant (30:24) tax multiple times as you know so we are sensitive to it to the extent that these are retailers that we deal with day in, day out and they are. To the extent that this is a very well developed property, first class developer nicely stabilized and it is that helps mitigate some of it. Our team always has to work in these markets to make sure they understand any of the local nuances for the more traditional, more stabilized high-yielding assets we have had a nice twenty-year proven track record of being able to do that on a one-off basis in markets again that you might not want to see us do ground-up development or otherwise.

Okay. Thank you.

Sure.

Thank you. Our next question is from the line of Christy McElroy of Citi, your line is open.

Good afternoon guys. Ken, you made a comment about NOI growth longer-term 4% to 5%, was that related to the entire portfolio or just the street urban stuff? And then you also commented on contractual rent growth, what’s the difference between the contractual rent growth embedded in sort of your street retail stuff versus your urban and your suburban.

So just to clarify the 4% to 5% was the 2016 acquisitions. And it is worth pointing out only because of the strong defensive profile when we looked at it and we saw the lease up opportunities into 2016 acquisitions, they are pretty compelling over the next five years let me be clear it's not going to be every quarter. It will happen at different time periods but when we look at it over that five-year period that's where the growth should come without counting on getting back any space on long-term leases. I'm not expecting target to give us back the space in Sullivan Center, I'm not expecting Trader Joe's to give back a very valuable space in San Francisco. So that's just 2016 acquisitions. I'm rooting for the balance of our portfolio that's quite strong and has embedded growth as well but we haven't given that broken out forecast for that piece. And 2016 is all street and urban so there has not to be any suburban built into that component. I'm sorry.

Go ahead.

As it related to this quarter and please keep in mind that for our portfolio and I think it's true for many companies but every quarter things are somewhat anecdotal. When we look at our quarterly results in terms of our existing same-store pool, the vast majority of the growth happen to be from the street retail portfolio. Suburban this quarter was a little bit lighter than I would normally expect and what we have said in our thesis has been all along is we think that these valuable street and urban locations over any extended period of time should throw off about 200 basis points stronger same-store NOI growth combination of contractual plus mark-to-market then our suburban and we keep monitoring it quarter-to-quarter to see if that is – thesis consistent. This quarter it was thesis consistent plus but every quarter will differ.

So understanding that there is some volatility just given some of the (34:06) this quarter you had leasing in the street, is that 3% to 4% you are putting up this year is that a reasonable longer-term sort of growth rate for this portfolio to stand today.

So embedded into that question is one about just longer-term in terms of the economy and are we in a growth mode or in a slowdown mode. So just put that aside for a second. The contractual growth of our street portfolio contractual is between 2% to 3% a year and I think over time it will head further towards 3% and 2%. The contractual growth for our stabilized suburban is 1% to 2% so then the question is as you have lease terms, as you have mark-to-markets what does that look like? In the suburbs, what we have found is that suburban growth hopefully for a stabilized retail should be 1.5% to 2.5%, maybe a little bit stronger. And then on the street side, if you have 3% annual growth, the question is as you have mark to market, can you do a little bit better i.e., 4% growth. Over the last 5 to 10 years, you’ve seen double-digit growth, which was well in excess of anything we forecasted or alluding for. And now you are seeing some falloff on that, we are still way ahead of that 4% metric, if you will. So we do think that's achievable over the long-term after you take into account downtime for NOI, et cetera. So that 200 basis points justifies the thesis and so far that's consistent with what we are seeing.

Can I get one more question or should I re-queue?

Sure.

There was a Bloomberg article this morning on Fifth Avenue street retail just discussing higher vacancy and retailer pushback on rents. Can you sort of put that in the context of your New York street retail portfolio and what you are seeing sort of in terms of rent on new deals directionally both in terms of asking as well as executed?

Okay. So, first of all, we don't own anything on Fifth Avenue, so I can't speak specifically to that. But in general what we saw and I think this is worth pointing out is that retailer, short-term interest and investor interest in a bunch of different street retail markets got overcrowded and that's why in 2015, we said guys we cannot underwrite this. And we step to the sidelines and did not acquire any street retail in 2015 because rents were rising too fast too much. There is a bit of a pause. Now I would caution everyone a few new leases on Fifth Avenue and that so-called oversupply that Bloomberg was reporting on goes away quickly. And if you take another step backward and talk to the retailers in general and this speaks to our New York portfolio and our portfolio throughout the country, when I meet with our retailers and I say where do you want to be over the next three, five, 10 years, where are you going to put most of your capital most of your effort, it's going in these key markets. And I have never had a retailers say we’re not paying enough rents, so they're always going to be rent sensitive. But in general we’re talking to retailers, their comment is there is a lack of not a glut of a space, that’s true for my friends in the enclosed mall space and that's very true on the street retail side. So there were some overly ambitious buyers that have now translated into overly ambitious landlords that are holding space and that will clear through, it’s creating opportunities for us. But these periodic upticks and down is very short-term and we will get through it very successfully in the long run.

Thank you.

Thank you. Our next question is from the line of Craig Schmidt of Bank of America. Your line is open.

Thank you. I know you described the opportunistic portion of funds may be growing, I'm assuming the distressed retailers real estate, given your outlook for gradually improving retail environment is not a large area of opportunity or am I wrong?

We will see, Craig. There was a period of time when retailers owned a lot of real estate and most of the value creation for us is on that side not on leasehold interest. There are a handful and you could think of a few retailers who own space and might be willing to dispose of it and you might see us involved in that.

I’m just curious have you been given any amendments or restructuring for existing tenants to keep them in place.

No.

Okay. Thank you.

Sure.

Thank you. Our next question is from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.

Hi, thanks. Just first question about the renewal lease spreads, which were quite strong on the quarter. So we assume that the majority of the street lease expirations will be negotiated at market for renewals and can you just give us a sense of what we might expect for leasing spreads over the next several quarters as you work through the remainder of that bucket in 2017?

John, you want to pick that?

Yeah, so Todd, I think when you look into 2017 and 2018, I think, we are working through, I think, it's a bit premature to give too much input given that’s still a ways out. But what I will say is that we are seeing, we are expecting a positive spread throughout 2017, but we don't have a lot in the way of specific clarity, I want to provide a ton of guidance at this point. I think it's too early at the moment.

That’s a nice way of saying that. There are a host of negotiations going on for us to hopefully get back some of the space. So stay tuned.

All right. And then I guess following up on that, John, you mentioned that there will be some disruption during 2017, I mean can you sort of quantify what you're talking about a little bit?

Yeah, so probably one thing to keep in mind that I sort of just mentioned I think within the lease expirations, those are 100% meaning that we own as you know some of those are held in entities in which we own less than 50%, whereas in the expiration table we’re looking at is we have not done that on a pro rata short series, so just keep that point in mind. I think just naturally where we look at just in terms of just pure volume the dollars that expire this year versus last year, incrementally, it's a heavier dollar volume and you figure there's a few months of incremental downtime. We do think mathematically there will be – there will be a decline that will flip in in 2018 just, a, mathematically and, b, to the positive spread, but we think just given the dollar over dollar volume that there will be a dip in 2017 just on pure timing.

Okay, but I know in the past you’ve had a couple of street leases impact the number by a couple of hundred basis points initially and then sort of inflect higher on the back end when rent commences, I know the portfolio is a lot larger now, but is the magnitude of what you're anticipating something akin to that or do you think it will be a little more moderate?

Yeah, again to earlier comment, we do have several leases we are excited to take back and bring to market. There are not 100% of them, but there will be some in the portfolio that we believe will support the value that we believe is embedded in our real estate.

As the portfolio gets bigger, Todd, you are correct though the magnitude gets mitigated.

All right. Sure. One last one for you, Ken, if I could. Just it sounds like the investment pipeline is pretty full and attractive at this point. What you think is the cause of the higher level of deal flow, is there sort of a common thread among the owners or the sellers of these properties that you're talking to and sort of their motivation behind their decision to sell?

Yeah, and it varies depending on which area of our core competencies we are referring to. So the way we think of it is, our core competencies are purely open-air retail ranging from heavy lifting, redevelopment in key markets where we think we can get rewarded for that onto some of the more opportunistic high-yielding place that you’ve seen us do over the last 10, 15 years. On the heavy lifting side, what I would say is the overcrowded space of a few years ago for street redevelopments, et cetera, is less crowded on the equity side and lenders are being much more cautious about that. So the high levered competitors don't seem to be showing up as aggressively and sellers are saying you know what certainty of execution matters, we know Acadia has the capital, in the fund side, it's not subject to where the REIT market may or may not be and the decision-makers are in the room. Then when you turn to some of the more high-yielding plays, there is a steady step in the public markets for instance towards REIT shedding assets and I think that make sense. I think that the public market there is a place for assets in the public markets and there is the place in the private market. Simultaneously with that, the non-traded REITs are less active, you are seeing some news of them reloading, but they are not showing up nearly as aggressively as they were a year or two ago and many lenders are being less aggressive as well. So we are seeing cap rates that began to move up last January pause for a second, continue to move higher for more generic retail and we look at the spreads and the investing opportunity there and that also feels really strong. We will see which deals in fact happen. We will see how long the public markets pause. I would note that REIT seem to have predicted seven of the last three real estate corrections. So given where risk free rates are I have no point of view as to how active the public REITs get or how reactivated private REITs get, they could come back tomorrow, but right now there's enough of a pause that we’re seeing opportunities.

Okay thank you.

Sure.

Thank you. [Operator Instructions] Our next question is from the line of Michael Mueller of JPMorgan.

Hi. Good morning or I guess afternoon. So going back to the acquisition for a second, the core acquisitions, I missed the beginning of the call, so I apologize if you talked about this. Can you talk about what the average cap rate has been on the core acquisitions this year? And then also I'm sure you walked away from a lot of stuff, so can you just kind of walk through you know what you see in certain transactions that causes you to say this isn’t for us and just move on?

Absolutely. We don't give specific cap rates, Mike, so I'll sidestep that piece of it, but I do think it is important to explain how we think about our acquisition core portfolio. There is a couple of key criterias and you have to check the boxes otherwise we don't play. First of all, is the asset consistent with our portfolio and our long-term growth strategy. And if the answer is, no, then there is probably not a price that we place for that asset we have been pretty clear that we stay disciplined about how we grow our core portfolio that because we are relatively small, we can achieve this 20% plus or minus a year or we certainly have over the last several year growth without taking on growth for growth or assets that aren’t consistent. Once it’s checked that box, which today means street, urban and in a very few instances, suburban assets in our key markets of DC, New York, Boston, Chicago, San Francisco, if it checks those boxes then the question is, is there enough growth and in that asset or is there enough strength and resilience in the asset in terms of the tenancy that it complements our portfolio as well. If the answer is yes to that and then pricing comes into play. And the deal has to be accretive to our portfolio first and foremost from an NAV perspective. And then, finally, we look at it and say it will be accretive to earnings. Chances are it will if we financed it correctly. But the accretive to NAV on a leverage neutral basis requires that the REIT market be in a healthy and liquid perspective and requires that a seller is being realistic in terms of their timing, et cetera. The deal we just acquired in Sullivan Center, it was an off market transaction so the seller was cooperative in terms of our timing needs. John and his team did an excellent job of making sure that we match fund that exactly so that there was nice accretion to NAV. Our goal for core acquisition is checking those boxes, making sure the pricing works and when it doesn’t – and in 2015, as I was pointing out – and we took some heat for it not acquiring anything in 2015 on the street retail front when the growth isn’t there, when sellers expectations for pricing is too high, when there's other bidders willing to underwrite growth that we don't see and then we step to the sidelines. So it’s that balance overall. And so far that has worked well for our shareholders over the long run although we take heat when were not acquiring in 2015 and now there's going to be a certain amount of heat about street retailer recognize that. The good news is this current round of noise is going to create some good opportunities for us.

Got it. Okay, thank you.

Sure.

Thank you. Our next question is from the line of Floris van Dijkum of Boenning. Your line is open.

Great. Good morning. A question on – Ken, what are your biggest concerns both near-term and medium-term for your business right now?

So to pretend that we're not somewhat focused on where the -- and how the [50:09] acts and how the economy acts would be whistling in the dark. So what we hope is that the economy continues to improve and that the improving job market comforts the consumer the consumers continues to do well and that fed follows in lockstep. Conversely, there's a chance that you'll see tightening even though the economy is not improving and in the short run that could be disruptive to the economy and disruptive to the real estate industry. Then on the other side, just because we can worry about the 10 different ways is what if we go into a stronger growth in GDP than is currently anticipated and the Fed has to play catch-up and rate start going up faster. What I’d point out in that case is while it will be a short-term concern for real estate, we’re pretty comfortable given the quality of our portfolio and the modest amount of leverage we use on a relative basis is that interest rate increases will not impact cash flow, might create some noise in terms of multiples and cap rates, but in the long run a improving economy would and should be good for real estate and specifically to our portfolio. So it would more be if we saw tightening without economic growth would be concern number one. And then the other is just more micro to what we do. It would be nice to see our retailers take some giant steps forward in terms of their transition into 21st century retailing, which is omni-channel, which means picking these great locations, we understand retailers are going to do more with less, but it's important to see that next step kick in, I think you will over the next few years and again I think it works well for our portfolio because we have these critical locations that our retailers are going to want to locate in as their business as the omni-channel industry continues to evolve.

So, Ken, let me follow up with that, in terms of your unleveraged return expectations between street retail and suburban, is there a big difference there and how does that impact – how does your view on the economy impact where you allocate capital?

So there is a difference, if you're going in yield, is lower for these great locations, you better see stronger growth over the next 3, 5, 10, 15 years and we are in it for the long haul, but you better see that growth, we are not simply trophy hunting. So I would say if we can see, and I talked about it before, this 200 basis points of superior growth, it will translate through into superior returns for that portion of our portfolio. And so far we are seeing that validated. The concerns are if you have some of these cyclical issues translate through into permanent, so if the dollar remains strong forever, if tourism were to decline substantially, if the current move toward these major cities in terms of employment and in terms of where people want to live, work, play, if any of that were to shift substantially then you might see some falloff. So far we are not seeing that. Again I'm not particularly concerned when I see a little softness in residential occupancy rates in these gateway cities and extra month of free rent in Brooklyn just puts more money in our shoppers hands. So the next generation is moving to these markets, the retailers want to be there and so far that feels all very positive in the long run given everything we see, but there are definite crosscurrents like I discussed earlier and like I was just touching on now.

Thanks.

Sure.

Thank you. And I'm not showing any further questions. That concludes our Q&A session for today. I would like to turn the call back over to Mr. Ken Bernstein for any further remarks.

Thank you all for taking the time. We look forward to speaking with you again next quarter.