Acadia Realty Trust (AKR) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Q2 2017 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to turn the conference over to your host, Ms. Gabrielle Guzman. Ma'am you may begin.

Good afternoon and thank you for joining us for the second quarter 2017 Acadia Realty Trust earnings conference call. My name is Gabrielle Guzman and I am a summer intern in our acquisitions department. Before we begin, please be aware that statements made during the call that are not historical maybe deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934 and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risks and uncertainties, including those disclosed in the Company's most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, July 26, 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 Web site for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. President and Chief Executive Officer, Ken Bernstein, will being today's management remarks with a market overview and discussion of the Company's core portfolio, followed by Amy Racanello, Senior Vice President of Capital Markets and Investments, who will discuss the Company's fund platform. Then Chief Financial Officer, John Gottfried will conclude today's prepared remarks with the review of the Company's earnings, operating results and balance sheet. Now, it is my pleasure to turn over the call to Ken.

Thank you, Gabby. You did a great job. Thanks for joining us this summer. Good afternoon everyone. First, I'd like to discuss some of the macro trends we’re seeing. Then I'll discuss some of the key drivers of our business, both for the next several quarters and more importantly, over the next several years. I'll then turn the call over to Amy to update our Fund investments and John, who will discuss our portfolio performance as well as our balance sheet metrics. Since the last call, we've seen the retail industry continue to work through a host of transitions as it adapts to the reality to the 21st century retailing. These transitions are playing out in a fascinating, sometimes painful but often encouraging manner. And while these shifts are causing a great deal of noise and volatility at the retailer level, so far we continue to see solid fundamentals at the real-estate level and more importantly, real potentials for future growth. Here are few observations, first in terms of real-estate operating fundamentals. We see a continuing separation between have and have not locations in an omni-channel world where retailers are doing more with less in rightsizing their fleets. Retailers are choosing to retain their highest quality locations and then setting some of their secondary locations. And while rent and occupancy costs always have been always will be an issue, as we speak with our retailers, location quality seems to consistently trump low occupancy cost. And retailers, in select instances, are also using the current market environment to upgrade the quality of their locations. A good example of this is in connection with our redevelopment of a portion of our Clark & Diversey corridor in Lincoln Park, Chicago where TJ Maxx is relocating to the second level of our newly constructed building from their previous solid, but less desirable locations nearby. Bluemercury will occupy the space below them, and we’re now in discussions with another junior anchor to join T. J. in one of our adjacent buildings that we own. Given that we’re the largest single owner of the Clark & Diversey corridor with existing tenants already ranging from Trader Joe's to Starbucks. These additions will further enhance this corridor and on our ownership. And we’re seeing this momentum elsewhere in our portfolio, as well as especially in dense and urban locations. While many retailers are still being cautious, others are once again beginning to go on offense. This is the case where we’re identifying our City Center property in San Francisco where we're making progress in adding 30,000 square-feet to this target anchored property and retailer interest and this high barrier to entry market is very strong. While there are some segments where retailers are facing continued headwind, even here, good news is emerging. The screens to stores evolution is playing out as we hoped. Exciting new retailers that began online are starting to show up in places like our Hallstead Armitage corridor in Chicago where we’re in negotiations with formerly online-only concepts to join our Warby Parker and our Bonobo stores, who were early movers in this market. These retailers are recognizing that bricks-and-mortar is an impactful way to establish their brand, it's a critical part of connecting with their customers and most importantly, it's a pathway to profitability. Now, we understand that we're talking about a relatively select group of locations in a handful of markets. But fortunately, that's where our portfolio is located. Along the key streets in Chicago we’re seeing this translating out in our locations ranging from Fillmore Street in San Francisco to M Street in D.C. and New York in SoHo and in Brooklyn. Food and entertainment are also using this period of transition as an opportunity to increase their presence. As Amy will discuss in City Point in Brooklyn, Alamo Drafthouse, Trader Joe’s, DeKalb Market, are now bringing significant foot-traffic and energy, which is then translating into new exciting retailers interested in our street lower retail. Then there is the 800 pound gorilla in the room, which is Amazon's purchase of Whole Foods. While there is more we still don’t know than do, we view this more as an affirmation of high quality bricks-and-mortars than a diabolical plot. And while this transition may put further pressure on grocers, especially second tier grocers to up their game, a supermarket business has always bend or winning. This announcement has caused some investors to question whether supermarket anchored shopping centers are still safe heavens. Our view has always been location dependent. Grocery-anchored centers with no equally compelling alternative use have not been safe havens for years. The 20th century muscle memory that caused some investors and some lenders to view all supermarket anchored centers as safe, it's outdated. But high quality supermarket anchored centers are great investments, especially where there's multiple anchors or draws or where the supermarket is a dominant player in a given market and a supermarket is the right size and it has the right layout and its up-to-date and most importantly, where the rent-to-sales and rent-to-market ratios are solid. Where this is not the case we've never found that format to be uniquely compelling or safe. But keep in mind even where there is concern these shifts are going to play out over years, not month. And as John will discuss, as it relates to our core portfolio, we're very well insulated. In terms of asset values and transactional markets, what we've seen over the past few months is not much movement in core pricing; there're fewer bidders; lenders are somewhat more cautious; and transactional volume is down. So we'd expect that to eventually translate into higher cap rates, but we haven't seen much movement yet. This contrasts to the meaningful fell-off in restocks, which has created a disconnect that needs to be reconciled. Then in terms of secondary locations or more generic retail assets, pricing seems to have moved anywhere from 50 to 150 basis points over the past year and in select instances, this movement in cap rates is even higher and it's beginning to provide some compelling yield opportunities for our Fund platform. So with these observations, I'd like to discuss our portfolio, how we're positioned and how we're going to drive long term growth. In terms of our core portfolio, while the recapture and lease up of a handful of properties are weighing on this year's same-store and occupancy metrics, the key drivers of long term growth are in place. In fact as John will discuss as we look out over the next five years, our core portfolio is positioned to grow its NOI at approximately 4% per annum pace. The key drivers are going to be split about half of is going to come from contractual growth, the other half will be a combination of some lease up at our key locations in New York, D. C., Chicago and then a handful of urban and street redevelopments that we have previously discussed, or it's worth noting the costs are relatively modest. Most of the entitlements are already in place. And these are in key urban locations ranging from City Center in San Francisco to Clark & Diversey in Chicago. Consistent with our thesis, the majority of this growth is from our street and urban segment where the annual NOI growth is forecasted to be close to 5% per year over the next five years. And keep in mind this is after the roller coaster ride of ramps in certain cities and certain streets that has been in the press over the past year. The synthetic growth is due to a few factors; first of all, we step to the sideline for the most part with street and retail acquisitions a couple of years ago when the pricing and rent start making sense; New York City has probably had the most volatility, certainly the most pressed; we have less than 10% of our portfolio in street retail in Manhattan, and the majority of that is well insulated due to the vintage of leases, as the live-work-play nature of many of our New York assets, such that New York City in fact will likely contribute outsized growth for us. That being said, we do have a handful of important spaces in New York City that the team is working aggressively to lease up. Thankfully, these are high quality spaces and our rentals assumptions are realistic, so it's not a matter of if, but when. We're confident that with a diverse portfolio of high quality properties in the right markets with solid growth profile and the opportunity for further upside; this is a compelling base to work off of than beyond core internal growth; we’ll continue to further drive growth through disciplined accretive investments using our dual platforms; that means adding high quality urban and street retail assets to our core portfolio that are consistent with our long term growth strategy; and then continuing our opportunistic buy-pick-sale strategy through our fund platform. As it relates to our core portfolio acquisitions, while we're confident as to our ability to create value through accretive core acquisitions given the disconnect between stock prices and the price for high quality retail, we won't be doing it every quarter and we won't do it when it’s dilutive to NAV. We're certain that our shareholders will be best served when we step to the sidelines when things don't make sense and then step up when the stars align. We did this with respect to street retail and it began overheating in 2015, and we have never pursued growth for growth sake. But notwithstanding this, we're also able to double the size of our core portfolio over the last five years, and we should be able to do the same over the next five years. On the opportunistic buy-pick-sale fund side, we've been busy on all fronts in terms of new acquisitions, as Amy will discuss. Deal flow is starting to pick up on the higher yielding secondary market transactions where the more traditional buyers of these assets have been temporary sidelined we're seeing increasing opportunities to deploy fund-buy dry powder. What we found to-date is there's plenty of yields out there, but we're having to be very selective to make sure that the assets are stable enough and financeable, and at a sufficient discount to replacement cost to deal with the risks inherent in these types of properties. Then on the value add side of our fund investing, we're also looking at repositioning opportunity, but it's a little early. Some value-add opportunities will be in connection with retail that needs to be repurposed to alternative uses in our fund platform and our team skill-set is well positioned for this. In terms of asset sales, we’ve been busy the last couple of years and our stakeholders have created from these very profitable monetization. In short, the buy-pick-sell platform continues to be a profitable component of our business. And then finally, along with a solid core portfolio profitable fund platform, as John will discuss, our balance sheet metrics are right where we want them. Although, our industry periodically ignores it, balance sheet strength matters. In short, we like how we're positioned as the retail industry goes through a necessary and thought provoking transition. Our core portfolio, located in dense high demand gateway market, is well positioned to deliver solid growth and withstand much of the current headwinds. Our fund platform benefits from us having been aggressive net sellers over the past few years and now with plenty of dry powder to deploy, and our balance sheet strength enables us to play-offense without concerns as to the same powder or stability of our Company. With tha, I'd like to thank our team for their hard work last quarter and turn the call over to Amy.

Thanks, Ken. Today, I will review the steady and important progress that we’ve continued to make on our Fund platforms V, VI, VII and VIII. Beginning with acquisitions, as we discussed on several calls, our funds have been pursuing a barbell strategy, acquiring both high quality value-add properties and high yield or other opportunistic investments. On the high yield front, as Ken mentioned, cap rates for solid performing centers in second tier markets have backed up 50 basis points to 150 basis points. With the more aggressive capital providers focused elsewhere, there are fewer bidders, but there is still a lot of product. From our perspective, these can be profitable finite-wise fund investments. It all depends on our entry cap rates, borrowing costs and yield sustainability. On the debt side, today, sponsorship really matters. Over the past six months for new high yield acquisitions, we have been able to borrow two-thirds of our purchase price at spreads of between 160 basis points and 225 basis points. Factoring in the cost of five year swaps, our all-in financing cost has been roughly 4%. If we can buy profitable stores in good locations at 7.5% to 8.5% cap rates and using leverage generate mid-teens current return throughout our whole period then we should. To that point, during the second quarter, Fund V acquired its first investment, Plaza Santa Fe, in New Mexico for $35 million. This 230,000 square-foot shopping center anchored by TJ Maxx, Ross and PetSmart is fully leased and consistent with our high yield thesis. Year-to-date, our fund platform has acquired or entered into contracts to acquire $115 million of properties. And looking ahead, on a leverage basis, we still have about $1.5 billion of Fund V dry power available to deploy. Turning now dispositions, in June, Fund IV in partnership with MCB Real Estate sold 59,000 square foot property in Baltimore, Maryland for $6 million. About 4.5 years-ago, the Fund opportunistically acquired this property for $5 million. At the time, the property was fully leased to Best Buy. When that lease expires, this past January, it was clear that that’s in highest use was self storage. Given our experience with that property type, we indentified a buyer who will redevelop the box as a self storage location. During Best Buy’s four years of occupancy, 80% of the Fund’s purchase price was returned to operating cash flow. This sale, Fund IV's third sale to-date, generated a 29% internal rate of return and a 2.2 multiple on the Fund’s equity investment. Since inception, Fund IV has already returned 26% of accumulative contributions to its investors. Then in July, Fund III sold New Hyde Park shopping center, a 32,000 square-foot retail strip center in New Hyde Park, New York for $22 million. During our 5.5 year hold period, we recaptured and re-tenanted a 16,000 square-foot below market Annie Sez, completed a façade renovation and executed several new small shop leases. This sale generated 14% internal rate of return and 1.6 multiple on the Fund's equity. New Hyde Park was Fund III’s last fully stabilized investment. Today, the balance of Fund III’s portfolio is a mix of lease-up and development assets where we still have some value creation opportunities to execute over the next few years. Year-to-date, our Fund platform has sold or entered into contracts to sell $171 million of investments. And including the past three years of sales, our Fund disposition volume exceeds $1 billion. As such, we have largely accomplished our current disposition goals, but as additional Fund assets stabilize, we will look to monetize them on a measured basis, borrowing any significant disruption in the capital markets. Lastly, consistent with prior quarters, we continue to make important progress on our existing Fund's projects, most notably, in Downtown, Brooklyn, at Fund II City Point development. Our food anchors, DeKalb Market and Trader Joe's, are now open on the concourse level. As you recall, Dekalb market is a 26,000 square-foot food hall with a curated group of 40 vendors and that includes Katz's Deli, Pop Cake Shop, Pierogi Boys and Guss' Pickles. Experiential maybe one of the most overused words in retailing today, however, food and fitness are in fact replacing fashion as retail's critical traffic generating anchors. And with its authentically Brooklyn food, Dekalb market has infused energy into our already strong retail project. Besides the fact that there's still a high level of construction on Gold Street where City Point has critical frontage, our decisions remain disciplined in our curation of the right merchandize mix for Prince Street has been reaffirmed by the strong opening of the concourse level tenants. At City Point, we are committed to delivering an eclectic and relevant collection of retailers that will fulfill the expectations of Downtown Brooklyn with surrounding branch and communities and beyond. To-date, Flying Tiger Copenhagen, and Little Giants Giant Shorties, which is a kid’s street wear brand, have opened on Prince Street and we have several more exciting retailers that are slated to open over the next several months and that includes Torly Kid, which is a Tribeca based kid boutique. So in conclusion, we had another productive quarter in our Fund platform. We continued to execute on our barbell investment strategy, sell our stabilized assets at significant profits and create value within our existing Fund portfolio. And with that, I will turn the call over to John who will review earnings, operating results and balance sheet metrics.

Great. And thank you, Amy. Good afternoon, everyone. I will first start off by reviewing our second quarter results, followed by an outlook for the balance of the year. I will then take a deeper diver into our projected five year portfolio growth that Ken discussed earlier. We had a solid quarter with FFO coming in slightly above our expectations at $0.38 per share. This represents growth of nearly 9% over the comparable prior year quarter after adjusting for our Promote, and was largely fuelled by the continued accretion of our 2016 acquisitions. As occupancy is a key driver of our earnings, as well as our other quarterly metrics, I wanted to start off by talking about how the recapture space has impacted the most recent quarter, as well as our expectations over the balance of the year. The anticipated occupancy recapture has and will continue to create downward pressure in short-term. However, as we have discussed on our prior calls, it enables us to crate meaningful long-term value as we bring these expiring leases to market and what we believe are high demand locations in our key gateway markets, New York, Chicago, San Francisco, Boston and Washington DC. Throughout the full year 2017, we anticipate recapturing approximately 170 basis points of occupancy. This translates to roughly 100,000 square-feet and an expected full year NOI impact of approximately $4 million. Through June 30th, we have recaptured approximately 75% of this occupancy, which is equated to an NOI impact of roughly $1.5 million or 40% of the total anticipated impact in the first half of this year. We are expecting our occupancy to level off around 94.5% at year end before trending back up late in 2017 and into 2018, as we bring these expiring leases to market. Based upon these occupancy projections, we are anticipating approximately $32 million to $33 million of core quarterly NOI for the balance of the year from our in place portfolio. We are seeing solid leasing interest at rents consistent with our expectations. However, given that we have just recently taken back physical occupancy on the vast majority of these spaces, we are still in the very early stages of our re-leasing efforts. We will continue to provide updates throughout the balance of the year and into 2018 as we sign leases on these recently recaptured spaces, but anticipate executing leases on the bulk, bulk of this space within the next six to nine space. Moving on to another driver of our second quarter earnings was our structured finance portfolio, which continues to provides us with a profitable and recurring source of earnings. During the most recent quarter, we received proceeds of approximately $60 million, which over the course of the investment period, provided us a return of nearly 16%, including an incremental $1.3 million of earnings during the most recent quarter in connection with the final pay off. We anticipate the quarterly run rate of our interest income from our structured finance portfolio to be approximately $4.5 million to $5 million for the balance of the year. As it relates to our full year FFO guidance, I want to spend a moment providing an update on how we are thinking about the second half of the year. In addition to the growth of our core NOI, one of the important drivers of our earnings guidance is always our expectations of the timing, nature and amount of acquisitions in both our core and fund businesses. As you’ve heard from both Ken and Amy, we have and will continue to stick to our disciplined investment and capital allocation philosophies, along with maintaining our best-in-class leverage ratios. Even without realizing all of the accretion from the $800 million of projected acquisition in our core and fund businesses, we are continuing to reaffirm our initial guidance range. Although, it may cost us a few pennies off of FFO of our midpoint guidance in 2017 as we continue to maintain our disciplined capital allocation strategy. While our core acquisitions have and will continue to be depended on our cost of capital, it is important to keep in mind that our fund capital is fully raised and provides us with buying power in excess of $1.4 billion in an environment that we believe will enable us to create meaningful value for both our Fund the REIT investors. Moving on to our same store NOI. Our same store NOI came in just under 2% for the quarter. After equalizing for the recapture occupancies that I just discussed, our same store NOI would have otherwise grown 4% for the most recent quarter with our street and urban continuing to outperform our suburban portfolio by nearly 200 basis points. As I described earlier, we are expecting occupancy to impact our full year NOI by approximately $4 million, on a projected annual same store NOI pool of roughly $100 million. Therefore, all else being equal but for the anticipated loss from this occupancy which again we expect to profitably release, our same store NOI would have otherwise grown in excess of 4% this year, which is not only consistent with both our overall investment thesis and historical norms, but as I'll also discuss in a moment, our five year business plan. In terms of rent spreads, we saw solid growth on our new and renewed leases with GAAP and cash spreads of approximately 15% and 10% on executive leases. Moving on to our five year plan. As Ken mentioned, our acquisition and asset management efforts are focused on owning a core portfolio that provides us with what we believe is an attractive growth profile over an extended period; without ignoring the host of retail headwinds that Ken just described. For instance, as we thought about our five year growth and the supermarket exposure that exists within our core portfolio, we believe that we are well insulated. Given that, two-thirds of our portfolio is street and urban. So while daily needs are significant part of this live-work-play segment, traditional supermarket exposure is minimal. Secondly, with our remaining one-third suburban portfolio, approximately 27% or less than 10% of our total core is traditional supermarket anchored; the majority of these have multiple anchors within the center; and thus, are not particularly dependent upon the grocer; less than 5% of our core is comprised of a center with a supermarket as the dominant anchor. So as we look at our in-place portfolio and our expectations of this performance over the next five years using today's lenders and leasing assumptions, we believe that this provide a very meaningful data point as it equalizes a lot of what we believe is often non-indicative volatility within any given quarterly period. Based upon our most recent internal model update, we are projecting that our current core NOI of roughly $130 million grows in excess of $20 million over the next five years, which equates to a cumulative annual growth rate of approximately 4%. This growth will be accomplished with fairly nominal capital expenditures between of $50 million to $75 million. I would also suggest that our five year growth expectation is fairly conservative given how we've factored in our assumptions involving future leasing activities. In terms of the composition of this growth, nearly half of it is coming from in place contractual rent bumps. Our redevelopment projects, which as Ken mentioned, is principally comprised of City Center in San Francisco, Clarke & Diversey in Chicago, along with getting back a well below market K-Mart lease in Westchester, New York, comprised approximately 20% of our growth. The balance is being derived from the lease up of vacant space at prime locations in New York and Chicago, followed by positive lease spreads on expired leases. We continue to reaffirm our same store NOI metrics for the balance of 2017. However, we believe that our forward looking expectation of 4% annual growth, which not all of it will show up in same store NOI, is consistent with how we have and will continue to manage our business. Moving on to our balance sheet which continues to remain rock-solid with best-in-class leverage ratios appropriately stag of maturities and numerous avenues to access capital. As we have discussed earlier, we have not issued any equity in 2017 and had maintained our leverage ratios. Through capital recycling within our structured finance and fund portfolios, coupled with dry power remaining within the fund, we have ample liquidity available to make meaningful investments in both our core and fund businesses without impacting our best-in-class leverage ratios. In summary, we had a strong quarter and more importantly, a strong outlook on both our near-term performance and opportunity for meaningful value creation as we look forward over the next five years. With that, I will turn the call over to the operator for questions.

Thank you [Operator Instructions]. Our first question comes from Todd Thomas of KeyBanc Capital. Your line is open.

Ken, I was wondering if you could shed some lighter around recent leasing activity, maybe with an emphasis in New York where vacancy and availability is still elevated. I'm just curious whether the momentum that you cited last quarter has continued with the rent showing signs of stabilization, or if you think that there could be some more downside to rents as space is absorbed?

It varies space-by-space street-by-street, so I can't give one simple answer as to the supply chain and demand for New York City, overall. What our retailers are telling us what we are seeing is for certain retailers that are going through a very difficult time, they are having to downsize and frankly doesn’t matter how good the location is, how cheap the rent is, they’re probably not going to show up until they get their act together. But counter balancing that and what we are starting to see Todd, are either new retailers, the screen to stores or other national and global retailers, who want to reinforce their brand and then a handful of our traditional retailers that are in our top 10 and 20 list who are going back and playing-offense. Retailers have always been focused on rent so to the extent that supply and demand means that there may be further reductions from where the rents were a year-ago, I don’t know it's kind of hard to gage. But the good news and what's encouraging is watching retailers upgrade their locations in SoHo; for instance, where you are going to see some movement where retailers of secondary locations and are now going to more primary; where we’re seeing other retailers enter, because they are recognizing how important these streets are. And so I do you think we are at a interesting inflection point and we’ll see how it plays out over the next several quarters.

And John, in terms of the five year plan and the growth objectives that you laid-out for 2018, specifically in terms of the 5% to 7% same-store NOI growth forecast. Where you are today? How comfortable are you in hitting that target? And how much of a cushion is baked into that 5% to 7% range for unexpected move outs that might occur?

So I think, Todd, as I talked about in my remarks, good chunk of the space we have just gotten back. So I think now we’re going to be starting our re-leasing efforts. These are in strong locations. We still feel very good about what -- and we said in the first quarter, I mentioned we've accomplished half of what we needed to accomplish already. And I think the second half of the year is really going to drive whether or not we head these, but still feel comfortable with what we've guided towards 2018.

And let me just add the obvious, Todd, which is over the next five years which is what we really care about. I think there's a lot of cushion in there. I think the quality of our portfolio, the vintage of the leases, the diversification, both geographically and in terms of tenants, means that sooner or later we are going to a recession. And I think our portfolio is well insulated from that perspective. And then the flip side is as things get better sooner or later they will and I think we're seeing signs of that. I think we have good upside potential as well. So as you think about it over five years, I'm very confident to state the obvious any given month, any given quarter, impact short term and that we'll figure out which month certain leases get signed. But our redevelopment on Russian malls and our redevelopment in Clark & Diversey are adding square footage in San Francisco and a host of other projects that we're working on. And those are pretty well based and thus they will layer in over the next one, three and only the K-Mart that Sean referenced is kind of out there into year five.

And just then lastly, just shifting over to City Point, you moved that asset into operations this quarter. I see about $8.9 million of annualized base rent. What's the corresponding cost basis or I guess the expected total cost of that project relative to that base rent? And what kind of NOI margin is reasonable to assume for an asset like City Point so we can just start to maybe better understand the yield and yield potential of the asset?

Amy, why don't you shed some light on all of that?

So the cost would be similar to what we reported last quarter in terms of total project costs, that that rent that's in the schedule is only a portion of the rent and it's also the portion associated with our anchors on the upper level. City Point is interesting project where we've talked about on several calls, the street level of that project is disproportionately important in terms of overall base rent about 60% of the overall NOI will end up coming from the street level. So I wouldn't simply prorate that rent compared to the occupancy rate. And as we execute on some of these street level leases that I mentioned in the prepared remarks, we’ll continue to provide further updates.

How much of the annualized base rent that we see today is from street level tenants?

I believe none of it is.

Thank you. Our next question comes from Christine McElroy of Citi. Your line is open.

So Ken, just following up on your Amazon Whole Foods comment, you talked about grocers needing to step up their game. Can you maybe provide a little bit more color on what you think that means from a real estate perspective? And you said weather is concern it should play out over a number of years. Where do you see the greatest areas of concern? I found it interesting that John you were emphasizing the minimal exposure to traditional grocer anchored centers. So I just wanted to get a little bit more color on your thoughts?

We like grocery anchored centers and we have always have them as part of our mix, both in our core and in our fund. What we never particularly like and part of that is being here in the North East. There’s some segments of the countries that had been particularly Darwinian to supermarkets. And so we learned firsthand over the last 25 years that when you had a, what seems like driving Grand Union and then you had a, what was they can Grand Union is that the value differential and the risks were somewhat asymmetrical to the downside. So for those of us who have experienced that, you need to recognize and if you spend time talking to the retailers themselves and I spend a lot of time talking to a lot of very strong great grocers out there who have been keenly focused on the competitive nature. First, it was against Walmart, which was viewed as an existential go broke glass risk and now there are others as well. They have to up their game in a very difficult environment or go away. And so we, as landlords, needs to recognize that means that in some markets where there was room for three or four grocers, where there is room for AMP, Pathmark, grand union as well as ShopRite and Stop & Shop once upon a time, now there may be fewer. And that’s fine if you own the right real estate then you can repurpose that, because the square footage that once was a driving supermarket is now half the size and then things reverse. So Trader Joe’s, interestingly, is now as important a co-tenant to many of our junior anchors as the traditional supermarket. And multiple anchors give us a lot more flexibility than just having a supermarket and shops space. But if you have a very well located just the supermarket and shops space and it’s a dominant supermarket and if sales are strong and it got us entry, are strong then I think it's just fun. It's just that when some retailers were going through trouble over the past year or two, a lot of people rush to all supermarket anchors centers are safe and the supermarket operators themselves kind of chuckles about that because they’ve understood for years the important evolution that’s going through; think about what the shopping experience, who the shopper is, how often they are coming to a supermarket today versus five, 10, 15, 20 years ago; think about the amount of prepared foods; think about the amount of organics; think about a whole host of things; you’re seeing a business that’s evolving before we even get into the future of the delivery, the future of a host of other things. So the good to great news is there are some very strong supermarket operators out there that are going to drive notwithstanding any of the noise out there. They’ve been keenly focused on these issues with years and I think they’re going to get it right. From our prospective as real estate owners, though, we need to be aware that not every existing supermarket anchor shopping center will thrive in that environment. It’s incumbent on us to make sure thus that we own the right ones. And I think what John was pointing out was within our suburban portfolio, only a small number less than 5% are supermarket only anchor, because we went through Grand Union because we went through Pass Mark, because we went through A&P. We've seen that movie before.

My second question is just with regards to street retail, you talked about Manhattan. But you also have some exposures on Greenwich Avenue and Main Street and West Port. It seems like there has been some retailers closing stores in the market, just from a street perspective. Wondering if you could give us a sense for what's going on there and how retailers are viewing flagships in these types of suburban street retail market?

Yes, it's interesting and it’s evolving. Many of the traditional retailers that have or certainly on the apparel side that has found themselves going through a tough transition, then they need to make hard decisions whether it’s on Greenwich Avenue, Westport, North Michigan Avenue, or in malls or elsewhere. The good news is a bunch of retailers are recognizing they need to right-size their fleet, get their act together and then they will be able to protect those key assets. Others are just going away. So some of the closures you're seeing are retailers that are just meaningfully shrinking their fleet or going away. Good news is overtime and we're seeing this first in some of the more hip areas that's not to say Westport's not hip, but Hallstead Armitage where we have Warby Parker, we have Benobo's, we're close to signing another lease with a formerly online only. Retailers are stepping up, they're stepping up at fair rents and they're creating a level of excitement. And they're recognizing that these key streets are a way to connect with their shopper to get their brand out there. There's every reason to expect you'll see that transition, you'll see that evolution in some of these other markets Greenwich Avenue, Westport, as well as elsewhere in the country.

Thank you [Operator Instructions]. Our next question comes from Craig Schmidt of Bank of America. Your line is open.

Thank you. I expect that you're seeing a lot of potential product in the high yield of some section of your barbell. I just wondered if you could touch on what are some of the key characteristics you use to screen out the less worthy candidates.

So what we are doing, and I think it makes sense in what you're seeing as a trend towards. In many instances, its public companies or other holders who are no longer desirous of lower growth but stable assets in their ownership. And so where we can buy and it may have zero same store NOI growth for the next five years, it may have no positive lease spreads. But where we can buy it at an attractive yield what we’re screening for then Craig is, okay, we get that there's no growth, what's the downside look like. And for that, we look at rent to sales ratios, we look at rent to market, we look at supply within a given market. And if we can acquire those assets at a sufficient discount to replacement cost such that we have a competitive advantage over a theoretical new development, but more often than not new development is not a risk; where those tenants are currently profitable; where those tenants and those locations feel as though they're buyable. And then it comes down to co-tenancy, and I’ll get to that in a second. But then we can look at a cash flow stream, we can finance it 2:1, make our mid-teens returns, make total sense for these perhaps not to be in the public market. So I get why and it should be privatized but using fund level leverage for finite ownership that makes sense. Back to co-tenancy, we did screening issue we’re dealing with is notwithstanding everything I said. It is fair to expect a certain number of box retailers to be disintermediated over the next five years. And so it will be naïve of us to think just because the rent to market is good that we’re not in a loose certain retailers who may go away, hard to predict win. But what we need to know is when we look at a given shopping center, if one of the boxes was to go away, what does it do to the balance of the center. If the co-tenancy provision is finite, meaning for the period of time that retailer start certain tenants have a choice of paying partial rents or leaving, but it's a finite period of time we can deal with that we can underwrite that. Where we’re running into trouble is if it's a more permanent impairment on the asset and that's the main key stream that's going through that keeping deal flow a little bit lower than we'd like, but there is enough assets out there that I think things will start to ramp-up. So between rent to sales, rent to market, price relative to replacement cost and then co-tenancy provisions that cover the big chunk of it.

And then maybe just whether or not you’re your active or less active on the core and acquisitions. What is that dependent on is that dependent on price or something else?

The stars have to align. It's relatively straight forward and that's good news and it doesn’t require meaning to see around corners and we like to make it sound perhaps more of that than it is. We have a great portfolio, and as John articulated, we expect 4% growth from it. If we see another asset, whether it's on Price Street in SoHo, M-Street in George Town, North Michigan Avenue, Newbury Street, we have a lot of data on rents, growth, potential and as well what is our implied ownership cost. If adding another asset on M-Street is accretive to NAV based on our current stock price then it's incumbent on us, provided that we like that asset. It's incumbent on us to add it. If it's not accretive, either because the seller wants too much money or the stock market is not there, boy it's really hard to pound the table for adding assets that are dilutive to net asset value. We haven’t had to do it, partially because we have the fund platform is a release spell for that kind of animal sprit, but also because our goal is to create long-term net asset value. And the only way I can see how we do that is add assets that are accretive to it. So that's the thought process. What we have found, as I said over the last five years, there is plenty times where it doesn’t make sense and you shutdown the match funding mechanism, the stars that don’t align and then there is more often than not the stars do. And as long as we stay disciplined, we can create that value.

And then I just have a quick question for John. What’s your expectation for the annual interest income?

So I said, it's going to be, the annual will be -- for remaining quarters, it'll be $4.5 million to $5 million.

So between the two quarters...

Yes, between third quarter and fourth quarter, between $4.5 million and $5 million.

Thank you. Our next question comes from Vince Tibone of Green Street Advisors. Your line is open.

You mentioned lenders have become more cautious. Can you elaborate on the secure financing environment, especially for higher yielding assets? And then what are the key qualitative criteria lenders look at to determine whether an asset is financeable or not?

So I think and Amy mentioned this and sponsorship really matters. So I think that we have a deep pool of lenders that when we have -- again that go through the multiple screens that Ken just talked through that there's a big roaster of lenders that are willing to put out money to given our sponsorship. The caution is going to come around is it's going to be in terms of the length of the lease. So they’re going to look at what are -- how much duration is left on an individual lease, who are the tenants, et cetera. We're seeing some of the buyers having less ability to -- some of our competition, less ability to give, they able to get that financing that we're able to give it to. So we do -- just conversations we have with lenders, there's a tone of others still willing to lend. There's a tone of caution that the credit committees are asking more questions just generally about the retail and the strength of s tenant. But we have -- that's been -- that's what’s made the strategy for us make sense is our ability to have a strong lending pool that has come through on. What is just the select assets that we've been able to find to fit this model.

And then one more on bidding Ken, you indicated that traditional buyers have been sidelined. Is that due to the sponsorship aspect you touched on, or do you think institutional demand for retail is just weaker than it has many or three, six months ago?

It's a combination. So first of all, on the public side, the traditional bidders would include a number of REITs that are not particularly active right now in those assets. Then in private REIT world, there's a couple private lease ramping up, but they've not been particularly active and then some of the previous household names have been sidelined. So you're not seeing a lot on the private REIT side. And then in general as much as we all would like to ignore the headlines, no one likes to go into investment committee, whether you're public or private, a lender or an equity investor on the same day the CNBC is doing a piece on retail Armageddon or retail apocalypse, et cetera, it bleeds through and creates a tone of caution that has caused people to be perhaps more conservative than I think is appropriate. But we'll see how that plays out.

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

Good afternoon. This is Lizzie Li calling in for Floris. Thank you so much for the time today. Amy, you mentioned that the cap rates for solid performance secondary market properties have backed up 50 to 100 basis points. Could you just share some observations on the bid/ask spread that you've been seeing for the properties that you're looking to buy, especially for Fund V?

Sure. And let me chime in first. Unlike for high quality core for the reasons that I was just mentioning about a host of the traditional bidder who brokers were going through over the last couple of years. What the brokerage community has told us is a bunch of those traditional bidders aren’t showing up. And as a result, those seven caps now are looking more like 7.5 to 8.5 thus the 50 to 150 basis points. For some sellers and I totally get this, they’re saying, you know what, I'm just not in the sale. For others who are and I get it as well, making the decision that they want to upgrade the quality of their portfolio, upgrade the metrics, if they’re public and we all live by a series of metrics, some are very good and others less so. But we live by them and if they want to shed assets based on a host of those factors, they’re sellers, they can afford to be sellers and they will sell at where the market is clears. The benefit we have then is for those assets that are going to clear to the highest bidders, we have certainty of execution. Our deals are not conditioned on financing and we have the money in our funds. We're at some of the entrepreneur who historically would show up, can't put that financing together and if you decided you want to sell and you want to get out and you’re tired of the retail Armageddon headlines then now it’s a good time to transact. And so that’s the evolution that’s playing out. Where this goes from here, we shall see.

And then follow up, if I may. You guys have mentioned that a temporary occupancy dip due to space recapture. Where do you see some additional vacancy in the portfolio could come from and what expectations would you have for those leasing spreads?

So I think as we said on the call, we're expecting in aggregate roughly 170 basis point of occupancy, occupancy lots, which were about in terms of just aggregate space 75% of the way through that. So I think a good chunk of it we've already experienced. So I think in terms of where we look at it going forward not a option, although from an NOI impact, it is a bit disproportional give we capture a bunch that late in the second quarter. In terms of spreads, we're not ready to publish what those will be given we’re just in the market on the space. But as I talked about before, we expect to profitability release these as we bring on the market.

And the only thing I would add to that, as John mentioned in our five year forecast, we assume somewhere in the next five years we get back our below market K-Mart. In Westchester, that would impact if we were fortunate enough to get it back next week, it would impact this year's occupancy disproportionately, and I’ll be celebrating if that happens.

Thank you. I'm showing no further question, at this time. I would like to turn the call back over to Ken Bernstein for any closing remarks.

Thank you all for joining in today. Please enjoy your summer, and we’ll speak to you soon.