Acadia Realty Trust (AKR) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Acadia Realty Trust First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Christian Compusano, Analyst and [indiscernible]. Please go ahead.

Good afternoon and thank you for joining us for the first quarter 2017 Acadia Realty Trust earnings conference call. Before we begin, please be aware that statements made during the call that are not historical 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 15, 2017 and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. President and Chief Executive Officer, Ken Bernstein, will kick off today's management remarks with a market overview and discussion of the company's portfolio followed by Amy Racanello, Senior Vice President, 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 the review of company's earnings, operating results and balance sheet. Once done, we can open the call open for questions. We ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by inserting yourself into the queue and we'll answer if time permits. Now, it is my pleasure to turn over the call to Ken.

Thank you, Christian, great job. Good afternoon. As is generally the case with first quarter calls, it's in in less than two months since our year-end earnings call so there's less to update than in the other quarters. That being said, there has been a flood of news about the – retailing and retail real estate and while there is reason for legitimate concern there is too much –going on. So before we dive into our first quarter result, I'd like to provide some thoughts as to what we're seeing and how we're positioning ourselves. We're currently experiencing a convergence of typical head-wins with the longer term secular shift as a result of technology. And I think it's important to separate these two different components; on the typical side and a strong tower, mild winter food deflation or changes in style are all contributors to a flood of negative results for our broad range of our retailers. Now some of these challenges are simply the result of once strong retailers losing their edge many over-extended that others just under-delivered. Others are being driven by short term financial issues. In some instances, the cyclical headwinds have been then accelerated further by continued growth of e-commerce but retailing has always been our winning and it always been cyclical and if we as landlords choose our locations wisely and structure our leases thoughtfully then we should be fairly well insulated from these cyclical shifts. In terms of the longer term secular trends there's no. I doubt that retailing and shopping patterns are evolving; technology is a critical factor driving these changes in my view in two important ways. First is the continued growth in e-commerce and then there's the increased price transparency as a result of technology. In terms of e-commerce, the convenience of home delivery and ease of selecting certain products online makes this channel compelling in many instances. Furthermore, e-commerce retailers and their investors are currently more focused on gaining market share then achieving traditional profit matrix which makes this channel a formidable competitor to traditional retailers. The apparel industry seems to have been hit earlier and more significantly than many of us expected but this disruption is likely to impact almost every type of retailing. The good news is that overtime the pricing subsidies in e-commerce will likely moderate and traditionally retailers will have competitive omni-channel capabilities that complement their bricks and mortar locations. Furthermore, it's also highly likely that virtually all successful online retailers today are going to have strong bricks and mortar presence in the future. They're going to do this to reduce their cost per acquisition of customer, they're going to do that to connect with their customer and finally to strengthen their margins. This spring to store evolution is playing out as we speak with retailers ranging from Warby Parker, to Bonobos and a host of others. And while these new retailers will view their use of Bricks and Mortar perhaps differently than conventional retailers we think Acadia is very well positioned for this shift. Then a second key change is increased price transparency. Today the shopper can price virtually any product, anytime, anywhere; thus a retailer, especially a reseller of broadly available products have to competitively price its merchandise or it's going to lose market share. When there were fewer channels this was less of an issue but today too many consumers are saying ‘why pay full price when our prices around the corner are quick away and this is true for a wide range of goods. From handbags to razor blades. And while there are qualitative differences between price and discount the consumer today appears adequately confused, perhaps a bit fatigue and frozen. Going forward, successful retailers are going to have to do better clarify their value proposition from pricing clarity to use of data to energize and inform sales staff; all of that's going to matter. Equally importantly, the brands themselves are likely going to take a more direct control of their relationship with their customer. Bricks and mortar real estate will be an important if not essential component of this. The best example is Apple, who does this extremely well. The consumer knows that the products available for sale at Apple cannot be found discounted either online or offline. So buy them in store, buy online, Apple doesn't care, Apple wins. And while Apple could have been a dominant brand without ever having a physical store there's little doubt that they have benefited tremendously. From their bricks and mortar presence, especially as they are now taking that in-store experience to yet another level. Lululemon is another retailer with similar pricing discipline in a very competitive market and there's a host of other brands that are using bricks and mortar to achieve these goals, whether it's Sonos with their store in SoHo's or Under Armor and even Dyson opening flagship stores on Fifth Avenue. Expect to see brands continue to connect with their customer directly using certain key flagship locations to execute this win-win omni channel execution. Acadia is well positioned for this shift as well. In our conversations with our retailers it's becoming clear that no product side is bulletproof, recession proof or Amazon proof but our retailers are very consistent in their focus on quality over quantity as they continue to transition their real estate demand. We're seeing this play out in terms of number of stores, size of the stores and most importantly in terms of location. And this is resulting in an ongoing separation between the haves locations and the have-nots. Retailers are setting stores in secondary locations and continue to focus on their best in fleet. To be clear retailers have been very disciplined in terms of the rent they're willing to pay and the cost to open. But we're also finding them almost always choosing the quality of the location over pure pricing. In SoHo we're beginning to see examples of existing retailers using current vacancies in that market as relocation upgrade opportunities and we expect to see that trend continue. So as we digest the impact of the cyclical and the secular shift we're thinking about both our existing inventory and as importantly our future inventory because the key for us to create long term shareholder value is to observe both short and long-term shifts and then use our team's skillset and our diverse capital base to adjust accordingly and profitably. And given how we see these trends played out we like how we're positioned, both from the perspective of our existing portfolio and our growth prospects for the future. In terms of our existing Core Portfolio it benefits from a strong defensive profile to address some of the current challenges that has a kind of locations that should outperform as some of these longer trends play out. It also has a solid long term embedded internal growth to ensure that we benefit as the market improves. 85% of our portfolio is in five key gateway City D.C., New York, Boston, Chicago, San Francisco. 70% consists of high third entry; supply constraints, street and urban retail with product focused on serving the daily needs dominated by necessity based and value retailers reaching their shoppers where they live, work and play. That's supermarkets, pharmacy, food, fitness. Our top tenants are dominated by retailers mentioned from Target to Trader Joe's Stop and Shop and Walgreen. And then on the apparel's side it's dominated by value focused off price and fast fashion retailers ranging from H&M to T.J. Maxx to Nordstrom Rack. The portfolio is also well positioned to benefit from the shift in retailing that I discussed. We're catching our fair share of screens to stores. Our real estate has attracted Bonobo and Warby Parker and will continue to do so. On the flagship front our expansion of Lululemon into a flagship store on Rush Street in Chicago is one example of the flagship portion of our portfolio. There is but one example of the flagship question about portfolio. Discount retailers are also continuing to gravitate to high quality dense urban location and T.J. Maxx coming to our Clark & Diversey property in Lincoln Park is another example of that. Our core portfolio is also positioned for long term strong embedded growth. As we discussed in detail on our last call, we're successfully recapturing sub-well, the low market spaces this year and while be some short term downtime the growth is going to down stack nicely in 2018 and beyond and then we have several other projects that will continue to drive growth further down the road. And as John will discuss we're making solid progress on all of these fronts. As we think about external growth of our core polio and the opportunities going forward we like how we're positioned as well. This year cap rates for high quality properties have not seen to move much although there those fewer better than less product on the market. And then given that downward movement in retail restock prices it will be interesting to see how this divergence is reconciled. The secondary market cap rates continue to move up in some instances over a 100 basis points with many of the more aggressive capital providers focused elsewhere. Over the last six years we've grown our core portfolio growth asset value by more than three times and looking ahead we're confidence that we can maintain this level of growth but not every quarter. Even though we're confident that over the long term high powered entry street and urban retail in key gateway markets is going to enjoy outside growth we will continue to avoid those lease packages those transactions will have outstripped the market because even though our retailers remain very enthusiastic after cub our high quality bricks and mortar real estate that doesn't mean that they can afford to pay rents growing at unsustainable rate. As we've said at several previous calls we've never believed that trees are going to grow out of the sky and there will be periods when landlords push too hard and tenants stretch too far. That's why we were on the sidelines as it relates to street retail acquisitions in 2015 and even in 2016our acquisitions were focused on downside protection while in the long term having stronger embedded growth. As a result we dodged many so what of the last couple years and that enabled us to avoid some of the exposures that others are experiencing. If we can avoid the difficult vintages and still create this growth, we win. So as it relates to core external growth while it's a bit early sellers are starting to be more realistic and hopefully a bit more motivated and when the capital markets solidify and given the strength of our balance sheet, we're confident that we're going to see some very creative opportunities as we had in the past. And our strong positioning goes beyond our core portfolio as Amy will discuss in a minute our buy-fix-sell fund platform is well positioned both in terms of existing investments as well as dry powder in Fund V and this enables us to create value at all parts of the cycle. In short, notwithstanding a lot of noise out there we continue to like our position. Our core portfolio remains in a strong position with both a strong defensive profile but also sufficient opportunities for growth. Our complimentary fund platform remains active on all fronts and our strong balance sheet is fully reloaded giving us transactional flexibility and most importantly we have a management team that's energized and has positioned us for a long term success. I'd like to thank the management team for their hard work over the past quarter and turn the call over to Amy.

Thanks, Ken. Today I'll review the study and important progress that we continue to make on our fund platforms V VI VII and VIII. Beginning with acquisitions: we continue to employ a barbell approach to investing our fund commitment. On one hand, we continue to pursue opportunities to acquire well located assets in key markets where our team can add value reset and redevelopment. A recent example is 717, North Michigan Avenue in Chicago which fund for acquired at the end of last year. On the other hand we are selectively acquiring high yielding stable shopping centers in non-primary market where we can do so at attractive pricing On the high yield front during the first quarter, fund IV acquired Lincoln place for thirty five million. This 272,000 square foot shopping center anchored by Kohl's, Marshalls and Ross Dress for Less is located within the St Louis MSA. The current lease rate exceeds 90% and was minimal reset and national leverage. This investment should generate attractive mid-teens cash-on-cash returns throughout the fund's hold period. Given in retailer in headwinds and headlines our high yield investments are certainly a contrarian call. However, you should know that we are selecting needles from a haystack carefully reviewing a long list of items including rents, co-tenancies and tenant sales and our team has a proven track record acquiring, redeveloping, operating and selling these types of Shopping Centers. The acquisition of Lincoln place successfully closes our Fund IV and looking ahead given last year's successful fund raise we have approximately 1.5 billion of dry powder available on a leverage basis in Fund V to deploy into new opportunistic and value add investment. We like having this much discretionary capital on call because it enables us to remain highly opportunistic especially now given ongoing disruption in both the capital markets and the retailing industry. Turning there to dispositions; during the first quarter we completed 48 million of dispositions across our fund platform. As discussed on our last call in January fund IV in partnership with M.T.V. Real estate sold 2819 Kennedy Boulevard in North Bergen, New Jersey for 19 million. This is a 40,000 square foot property that was previously owned an occupied by Toys R Us. We acquired the property in 2013 and completed a facade renovation then we released the Toys R Us stock to Aldi and Crunch Fitness. This sale generated a 21% internal rate of return and a 2.5x multiple on the fund equity investment. And in February Fund III also in partnership with MCB sold a Arundel Plaza in Glen Bernie MD for 29 million. This is a 265,000 square foot supermarket anchored property. During our four and a half year hold period our value add activities included increasing the grocer visibility by demolishing an AMS [ph] and executing a 20-year lease with existing tenant giant for an expanded 66,000 square foot supermarket. This sale generated a 16% internal rate of return and 1.7 multiple on the funds equity. Last week consisted with prior quarter, we continued to make important progress on our existing fund projects. For example, in Chicago and in Fund IV we are actively engaged in discussions with retailers to lease space at 717 North Michigan Avenue, the former Saks Fifth Avenue men's store that occupies a prime corner of the magnificent mile. And we are also beginning to start work at 938 West to North Avenue, another great corner in Lincoln Park. Additionally in Westchester County, New York, our site work is well underway at Fund III at Cortland Crossing, a 130,000 square foot development that has already been 50% pre-leased to shop rates and in Downtown Brooklyn at City Point development all our upper level anchors target Century 21 and Alamo House [ph] are open for business. Prince Street is activating with last week's grand opening of signed Tiger Copenhagen and our food centric tenants on the con-course level which include Trader Joe's and DeKalb Market are all expected to open within the next 60 days. So in conclusion we had another productive quarter in our Funds platform. We continue to execute on our barbell investment strategy, saw our stabilized assets at significant profits and create value within our existing fund portfolio. Now I'll turn the call over to John who will review our earnings, operating results and balance sheet metrics.

Thank you, Amy and good afternoon. I will first start-off by highlighting our quarterly operating metrics which performed solidly and in line with our expectations. Starting with our earnings; our portfolio continues to perform in-line with our expectations with FFO of $0.40 per share. The $0.40 included profits of approximately $0.03 from the anticipated monetization of one of our structured finance investments along with net promoting income that we earn from a profitable disposition in Fund III. We continue to reaffirm $10 million of remaining net promote income from Fund III which as previously discussed we expect to continue realizing in 2018 and beyond. Furthermore, as you just heard from Amy, we continue to recognize sizable gains in Fund IV which moves us closer to being in the promoted position within the next few years as we continue to profitably return capital to our Fund IV investors. Our earning guidance does not anticipate the recognition of any additional promoting come direct 2017. The impact to our quarterly earnings and annual guidance from the recently announced store closings and bankruptcies was nominal, at a few hundred thousand dollars which was in-line with our underlying assumptions and our quarterly and annual guidance. Our first quarter FFO reflected the full impact of our 2016 acquisitions. These acquisitions are continuing to perform in-line with the prior guidance of $0.06 of annual accretion which equates to roughly 5% of our in place core FFO. We continue to reaffirm our annual guidance of $1.44 to $1.54 for the full year 2017 which equates to $0.35 to $0.38 per quarter. This could vary based upon the timing and amount of acquisitions, dispositions and structured financing activities within our core and fund businesses. Lastly on earnings, as it relates to the balance of the year following the projected dip in occupancy over the course of the next few quarters, along with the projected repayment of some of our structured finance investments; all else being equal, we anticipate our quarterly FFO run rate to soften in the second half before continuing along our growth profile into 2018 following the profitable recapture and releasing of space. Leased occupancy remains strong and stable at March 31 at 95.7%. We are planning to recapture another 100 basis points or so in space which represents roughly 50,000 square feet throughout the balance of this year, the vast majority of this recapture occurring during the second quarter. Our occupancy is anticipated to begin leveling in the third quarter before trending back up into 2018 as we profitably release the phase. While this temporary dip in occupancy will create some noise in both our short-term same-store NOI and FFO, it is thesis [ph] consistent with our strategy of recapturing high demand space and profitably releasing it to create long-term NOI and value creation. Leasing activity on both our new and renewed leases was predominately within our suburban portfolio with a combined cash and GAAP spreads of 7% and 21% respectively on approximately 164,000 square feet of leasing activity. Now moving on to our same-store NOI. Our same-store NOI came in flat as we previously guided, which was driven by the dip in occupancy that we have previously discussed. While our overall core NOI, same-store NOI was flat; our street and urban same-store NOI grew by approximately 2.5% during the quarter which was offset by softness within our suburban portfolio which was driven primarily by one-time items. However after adjusting for the dip in occupancy that I just described, as well as the other one-time items within the suburban portfolio; our street and urban would have otherwise grown closer to 4% for the quarter which was again roughly 200 basis points stronger than our suburban portfolio on an equalized basis which continues to operate in line with our historical performance and overall thesis. Just to provide a bit of color on the difference between the actual street and urban same-store NOI of approximately 2.5% for the quarter and then nearly 4% after adjusting for the dip in occupancy. This delta was driven from the routine lease rollover of two leases in Chicago which have contributed roughly $150,000 of NOI on less than 10,000 square feet of space. We are projecting rent commencement on both of these leases within the next six to twelve months at solid lease spreads. In the aggregate, we are expecting to successfully recapture a total of 90,000 square feet of occupancy in 2017, a third of which has already occurred. We are continuing to project relatively flat same-store NOI growth of zero to 2% for the full year 2017 to reflect the anticipated downtime followed by 5% to 7% growth in 2018 as we profitably recapture this occupancy. While we continue to reaffirm our expectations please keep in mind a lot of small numbers and the outside impact whether those are positive or negative that even slight deviations rent commencement dates will have on quarterly percentage changes. As we think about 2018 at the risk of oversimplifying our current progression towards our projected growth of 5% to 7%; I want to provide some color around the key drivers of those assumptions and where we stand against those today. While there are numerous moving parts that ultimately drive the growth of our business we are roughly 50% of the way there towards achieving our 6% projected growth and our same-store NOI for 2018 through a combination of executed leases and renewals along with contractual rent bumps. Furthermore, the population of leases that make up the remainder of our projected growth is comprised of roughly 10 leases. Off these 10 leases nearly half of that growth is being driven from the lease-up of approximately 2,500 square feet on the retail portion of the Carlyle Hotel on Madison Avenue. As we think about this investment, more important than its impact on a periodic same store NOI; you may recall that our Madison Avenue investment was acquired in the structure that entitles us to a preferred return of 6% on our invested capital. So irrespective as to precisely which quarter we achieve the lease up in a reported same store NOI; our investment continues to be very well insulated given the preferred structure. As we think about 2018, I wanted to provide an update on our previously announced embedded value creation and our progression towards the 6% to 7% of NOI growth that we expect to harvest from a group of assets within our street and urban portfolio. This group of assets is comprised of eight properties which is expected to contribute an incremental $5 million to $6 million and annual NOI over the course of the next five years with a capital expenditure outlay of roughly $60 million. During the past few months our team has made significant progress towards achieving this growth with executed transactions on four of the eight identified properties including the execution of the Lulu Lemon [ph] expansion on Russia and Walton resulting in an 18% cash rent spread to retenanting of M. Street in Washington D.C. at a 50% spread both of which were completed with virtually no downtime and fairly nominal out of pocket costs. We have also executed a lease with T.J. Maxx on Clark & Diversey as part of that redevelopment. Furthermore, our team has made significant progress with the redevelopment and densification of City Center in San Francisco with the ongoing permitting with the city as well as securing the necessary tenant approvals including the recapture of 55,000 feet at the Best Buy space in the first half of 2018 which was critical to the overall project development plans. As we move through the balance of the year I will continue to provide updates as to where we stand against both our short-term goals and beyond. But we continue to reaffirm our expectation of our profitable recapture and releasing of space enabling us to achieve not only the projected 5% to 7% same-store NOI growth in 2018 but more importantly, the continued growth of our overall NOI which is integral to this, to our strategy of creating long-term NAV. Moving on to our balance sheet; our balance sheet has never been stronger. With our core debt-to-EBITDA at 4.4x along with our overall leverage and nominal debt maturities. We are well positioned to withstand any shops that could occur in the financial markets. Further, given our access to capital to the dry powder of $1.5 billion in our fund business, as well as through the quality of able to retain cash flow and liquidity from our available lines. We are uniquely positioned to capitalize on our opportunities that may arise. Our $150 million line is fully available to us with no amounts drawn in March 31 and a minor amount of scheduled debt maturities in 2017 which we will repay or refinance at rates well below our existing pricing. In summary our operating metrics remains strong and stable and our business is performing well in line with our expectations. We are excited about the opportunities that we believe will be available for continued growth of our business given our strong balance sheet and access to public and private capital through our dual platform. With that I will turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Paul [ph] from BMO Capital. Your question please?

Thanks. Ken you touched on very briefly on supermarkets and some of the challenges facing them. I was wondering if you could drilldown a little -- do you like supermarkets over the intermediate or longer term in terms of investment by AKR?

I fall like most of our investments, it's going be very location specific. I do not believe or more importantly when I talk to our supermarket, operators, as well as co-tenants. I don't think they believe that there is any specific safe haven that they are somehow immune to some of the challenges that other retailers are facing; the good news is many of them are very focused on how that's going to play out. So the bottom-line is if you have the right supermarket in the right location that is probably good real estate and your co-tenants things probably do well. If you have a diverse shopping center where supermarket is one of many tenants and we have several of those; especially in the fun. Those are probably fine but you know the 20 century thought that somehow every supermarket anchored shopping head center is safe. That's not what our retailers are telling us

And secondly I was wondering if you could give us some idea of how we should think about the urban street portfolio overtime in terms of market exposure, with the opportunistic cores or their you know kind of goals in terms of exposure to certain markets?

Well, for the near-term I think we should stick with the markets that we know well. There is as I said over the years a dump pack to enter any new market; that doesn't mean that you can't blow it around the corner five where in D.C., New York, Boston, Chicago, San Francisco and I think that we could easily double the size of our portfolio without adding a new market. If there are opportunities or changes in circumstances; then I would certainly welcome a handful of other opportunities but what you should expect just as we've doubled and tripled the size of our portfolio over the last five six years and you should expect if you look forward five six years from now you will see similar growth and similar profile with the focus that as retailing evolves. You're going to see retailers gravitating toward these critical markets and we should onus.

Okay, great. Thanks very much.

Thank you. Our next question comes from the line of Craig Schmidt from Bank of America. Your question please.

Good afternoon. Are you seeing growing vacancy surrounding your urban high street retail assets and how do you make sure that you give people trade enough your assets and that you use your assets to trade up into others?

And by the way everyone thinks their assets are perfect but there is always I suppose a slightly better corner etcetera. One of the keys Craig, counted diverse portfolio and that is in general high quality and if we do that we are more likely to be net winners than losers. But there are certainly examples where retailers has said to us, not that they're weaving necessarily us but you know what there's another corner or there's another spot that we would prefer to be in and I think we need to recognize that, and need to recognize as good as our portfolio is there may be those instances, but when you look at our portfolio, when you look at its concentration on key streets like Russia and Walton, we could not get past our neighbors did, that's okay, we expanded. When you look at what we're doing on quark [ph] in diversity in Chicago, we didn't get Nordstrom Rack that's okay, we've got TJ Maxx. So as long as we're winning more and as long as we continue to Curate a portfolio and that is position to win more of the discount there's more of the traditional successful retailers, as well as the screens to stores, as long as we have that kind of space that Warby Parker wants, that Bonobos wants, that the whole next generation of those type of retailers want, then we will win, and so far that's how it feels like it's playing out.

Okay, great. And then just is there any advantage here in waiting to acquire some of the more options to cash just given the retail head winds and the retail headline, is there might be -- maybe advantage in holding off when there's a little bit more blood in the water.

Maybe, even use as Amy reiterated, we recognize this is contrary and she also mentioned that we have yet to put any of fun sides to work, contrary and by definition means lonely. And we are catching falling knives, so we need to be careful about that, however, we also are small enough that we can pick up by asset and get this right I think what you will see is we're being cautious, we're being careful. But there are dislocations in the market right now that have nothing to do with the underlying fundamentals at the asset level, where you can buy profitable stores in good locations, where at best we can tell in our conversations with our retailers these stores are slated to be profitable for them years to come. And you have the opportunity to buy those because of that headline that you're reading or because none traded rethink yet to reload, or because the market issues. Then it's incumbent on us to do that, be a little early, our stakeholders understand that, be a little patient as long as we're disciplined, as long as we're talking about our underwriting, we've been at this for a couple decades and we will get it right.

Okay, thank you.

Thank you. Our next question comes from the line of Christine McElroy with Citi; your question please.

Hi. Good afternoon. I'm just a follow up on Craig's last questions, just for that higher yield opportunistic staff that you're buying in the funds, there's been a lot of talk about how much power center [indiscernible] diversion versus centers for the grocery component, the center you bought in March is more of a power center that you have another contract on it for earlier but are you seeing more opportunity in that category and do you think that maybe power centers are maybe being mispriced in an environment, or you don't -- you don't necessarily see grocers as a safe haven.

Yet so just because you don't want something doesn't mean you like something else more, but if and when can but what we have articulated is roughly a 400 basis points bred from our borrowing costs, and remember the benefit of the fund structure high risk, high return, more leverage about two-thirds leverage to achieve that return. Where we can borrow at 3.5 to 4 and by 7.5 to 8 and if you're borrowing at 4.5 then we need to raise it up and where that cash flow is clean meaning dividend-able. If we can get a mid-teens return because of a widening of the spread of power versus supermarket, we're frankly power versus other alternative debt instruments that mid-teens return strikes me as pretty compelling, the devil's in the detail though, so one bankruptcy takes a lot of fun out of that dividend. And we do struggle with where might this all settle out. If we believe that the underlying real estate and the retailers are fundamentally sound, and are not going to get this into mediated in their entirety and if the cash flow can hold, doesn't have to grow a lot, if we can hold then it's thesis consistent. What I would caution you is and we've mention needle in a haystack I have been disappointed with how many asset don't withstand that general scrutiny, so we're not going to do assets just because we have some forecast of volume, will buy them when they make sense, we recognize that there's been this dislocation. It's been more of a private market dislocation that strikes me than public, but if it's there will do it and if it's not will find other things.

Okay. And you've talked about a lot of sort of overgeneralization, have you seen a material change in how retailers are approaching leasing flagship given the balance of attention and costs and just that added pressure from shareholders to improve margins, there's been a lot of noise around sort of the total lease avenue which is an extreme example but its what's generating headlines around.

Yes, so there are a host of issues going on and I think we will only have a clear understanding of what made sense and what was silly, a year or two from now some of it is public shareholders, other instances it's private equity, and there are accounting reasons that in some instances it makes sense to close a store to get it out of your ongoing forward looking EBITDA. Even if it makes no economic sense so that's just silly. But in general retailers and when we say retailers it's a wide variety of occupants, more often than not what we're finding is that those who are the most aggressive today control their brand, they control their pricing, they control how they interact with their customer and they understand and know that having an exciting physical presence in certain key markets, not everywhere in the country, in certain key markets is critical if you look at Apple's most recent or what they're going to be announcing in doing, it's very exciting and it's absolutely about great physical presence. So we're seeing more and more of those and we are going to catch a fair share of them.

Thank you.

Thanks you, our next question comes from the line of Todd Thomas from KeyBanc Capital; your question please.

Hi, thanks. Ken, you mentioned that you know retailers are using some of the vacancy to make relocation upgrades and you use SoHo as an example, sounds like some shuffling around so does the vacancy market wide linger for a period of time before being absorbed, is that the expectation or are you starting to see a stabilization and some of sort of absorption taking place and then what is your read on rants as you know look ahead to next 6 to 12 months in some of these markets.

So if you opt out of Asians and the team we walk the whole last week. First observation is there's no lack of foot traffic and so we can blame it on the dollar and the weather but you can't blame it on foot traffic. The other observation is that secondary streets not Prince not Spring [ph] that aspired to get to primary ramp they're going to struggle for a while. But the key streets where it appears visually there's a lot of vacancy as we walk with the team we kept hearing someone say was moving from down the block there over here and there seems to be enough momentum, that while when you walk around it feels like there's plenty of stores closed, most of them are either spoken for, or secondary locations, or there is a subset of ownership that paid peak prices underwrote Peak-Peak [ph] grants can have very little near term motivation to do anything and so those may sit for a while. So let's see over the next 12 months how it shakes out but I think with confidence you're going to see a host of retailers reemerge either from existing locations or coming in, because this is creating an interesting opportunity in a market that today now is much more interesting for the retailers and then 2015 when rents across the board were just growing too fast.

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

So in two somewhat different conversations where in either case Sports [ph] Authority doesn't seem to be returning our phone calls for urban or suburban. And there are a bunch of retailers who are for a wide variety of reasons are sidelined. On That's suburban side thankfully, TJ Maxx is continuing to be disciplined but open new stores, and there's five or six other retailers behind them that also are doing a solid job on that front, we're getting our share of that. And then TJ showing up on the urban side I think is really important as well. The [46:57] space is going through some very difficult times and so there are fewer apparel retailers showing up from Acadia perspective I'm frankly fine with that, we have been more about live work play, we have been as much about Trader Joe's as we have been about any given apparel, but there are clearly fewer apparel. And let's -- let that shakeout occur over the next year or two and will be some exciting new concepts coming in at the right time. And then on the flagship front; I actually think we're starting to see some more new interesting ideas that are going to make 2017 probably if not 2018 a net positive.

Okay. Thank you.

Thank you, our next question comes from the line of Michael Mueller from J.P. Morgan. Your question please.

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

It's always been an interesting dynamic when you turn to the sellers of their brokers, and you say but my stock price has moved downwards and they say well, we don't care. So if there are other bidders showing up by the Sabran [ph] etcetera then the market clears. There has been enough of a slowdown and Acadia is not alone in the repricing on the public side, there's been enough of a slowdown and that sellers are saying don't run away so fast. Sellers are saying certainty execution matters and we'll be patient. Let's see how this plays out, I said in the past that the read market has correctly predicted nine of the last five real estate correction, I don't know how this shakes out I would keep your eye on the 10 year treasury, which compared to last July may feel high, and yet still below 2.5% for a lot of debt oriented buyers buying high quality iconic real estate at 100 to 200 basis points north of the 10 year or whatever other debt instruments they're choosing to think about especially on a global basis, there's still a fair amount of capital there from that perspective. Want some of the noise around where our cash flows going settle we'll see where this settles out.

And just one other one. For 9,000 square feet of recapture space you talked about for 2017, you said a third is done. So for the for the remaining two-thirds that it sounds like it's happening soon, can put a color on what sort of space that is and where.

This is John. So they're going to talk about the balance of that is going to happen in Q2. And it's -- it's kind of spread throughout our portfolio, but we're getting probably I'd say that it's on a [indiscernible] basis so it's exact numbers, but split pretty evenly between suburban and end street and urban obviously that street urbans are higher, but probably split in between those two.

Got it, okay that's helpful, thank you.

Thank you. Our next question comes a line of Floris van Dijkum from Boenning; your question please.

Great, thank you guys. In the seven projects you guys cited in your last call any sort of updates you can give people at this point or is it still too early in terms of your projections and your -- and who you might be getting for example in D.C or at the [indiscernible] space and Walton Street.

It is still just slightly early on some of those at the risk of repeating what we talked about on the last call the lululemon expansion is well underway, John mentioned the densification in San Francisco that's further out, that would be kind of a year away in terms of detail, in street I think on the next call we'll give you absolute clarity on lease assigned so it's just we want the tenants to get their ducks in a row. And then there's a handful of others John, I don't know if there are any others but we try to get as much color on the last call that was only a couple months ago so.

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

Okay. And in terms of the -- I guess the CapEx you mentioned something about a $60 million outlay is that -- can you relate back to how that relates to these seven projects and maybe where most of the book of capital we expect to see there.

Yes, absolutely Floris, so I think it's going to be a bit of bulk of that is going to be really between two projects which have been going to be city center as well Clarke & Diversey which is a complete -- in Chicago. So I would say they're comprised of all those folks at the dollars.

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

Thanks.

Our next question is a follow-up from the line a Paul [ph] from BMO Capital. Your question, please.

Thanks. Just briefly you mentioned a little bit about the City Point, I was wondering when we might hear a little bit more on the ground floor, a small shop of leasing and it's now a good time to be hitting the market given there is kind of had been slow of local market conditions.

Sure. The anchors are doing well, Alamo [ph] Jack House has become a great addition to this city's entertainment option. As we talked about we're real excited that [indiscernible] market will be opening shortly; that as you recall is about 40 vendors ranging from [indiscernible]. And then right now we have the high cost problem of lots of construction on Gold Street; so Gold Street we think will be a key frontage for our project right now including the third tower at City Point which is being developed by Estelle [ph], there is three residential buildings under construction and office building is planned and the upcoming will be at Square Park. So long-term, great; shorter term a little disruption on our key frontage but we do think this is a good time to be curating the right collection of retailers on Prince Street and you should expect to be hearing additional information on the next few calls.

Okay, great. Thank you.

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

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