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Acadia Realty Trust (NYSE:AKR)

2Q 2013 Results - Earnings Call Transcript

July 30, 2013 02:00 PM ET

Executives

Amy Rancanello - VP, Capital Markets and Investments

Kenneth Bernstein - President and CEO

Jon Grisham - Chief Financial Officer

Analysts

Todd Thomas - KeyBanc Capital Markets

Craig Schmidt - Bank of America

Christy McElroy - UBS

Paul Adornato - BMO Capital Markets

Jason White - Green Street

Michael Mueller – JPMorgan

Quentin Velleley - Citigroup

Rich Moore - RBC Capital Markets

Michael Bilerman - Citigroup

Operator

Welcome to the Second Quarter 2013 Acadia Realty Trust Earnings Conference Call. As a reminder, this conference is being recorded. At this time, all audience lines have been placed on mute. We will conduct a question-and-answer session following the formal presentation. (Operator Instructions)

I will now turn the call over to Amy Rancanello, Vice President of Capital Markets and Investments. Please proceed.

Amy Rancanello

Good afternoon and thank you for joining us for the second quarter 2013 Acadia Realty Trust earnings conference call. Participating in today's call will be Kenneth Bernstein, President and Chief Executive Officer; and Jon Grisham, Chief Financial Officer.

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 30, 2013 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.

With that, I will now turn the call over to Ken Bernstein.

Kenneth Bernstein

Thank you, Amy, good afternoon. Today I'll start with a brief overview of some of the trends and key drivers in our business and then Jon will review our operating metrics, our earnings and our forecast.

In the second quarter notwithstanding a great deal of noise in the capital markets, our business remained on track with our earnings coming in at the higher end of our forecast and our operating fundamentals showing solid growth. And as distracting as the volatility in the bond and the REIT markets can be, thankfully, given how our company is structured with high quality, high barrier to entry properties, strong [embedded] growth opportunities in our portfolio, conservative leverage as well as plenty of dry powder in both of our dual platforms. We feel we're well positioned for a wide range of future opportunities and investments. So with that in mind, let's look at the different component of our business first. First our core portfolio and our operating fundamentals.

Our second quarter same store results were solid and then Jon will discuss in more detail later. They were at the high end of our expectation. Even after stripping out the contributions from our previously discussed re-anchorings, our same store NOI growth for the quarter was still a very solid 5% and while the drivers this quarter were fairly broad across both our suburban and our and our street retail components of our business. We continue to see better long term growth opportunities in our street retail portion of our portfolio.

In terms of our core acquisition activity recently, we made two core investments as street retail properties totaling $34 million; one was in Georgetown, Washington D.C. and the other in the Gold Coast in Chicago. In Georgetown, the properties on the corner of M Street and Wisconsin, where we've added it to our existing collection of properties and this acquisition is arguably the best corner in Georgetown and is occupied by Banana Republic.

In Chicago, we added two building that are contiguous to our Lululemon on Rush Street, we now own six of the nine buildings on the intersection of (Inaudible) and Rush Streets with tenants ranging from (inaudible). Both of these acquisitions are consistent with our theme of adding to our existing street week, the portfolio in those markets that we're active in and these acquisitions along with being attractive on their own right are also strategic. We believe that as we continue to add these properties, whether they be contiguous or approximate to other street retail property that we own.

We're going to create a powerful collection of retail assets that will have strong long term growth potential. So far this year, we've added $120 million of these acquisitions and we seem to be on track to meet our goals for the year.

Turning now to our Fund platform, complementing our core growth initiative is the second major component of our business which is the value creation generated from our Fund Platform. We're currently making investments on behalf of Fund IV. In the second, quarter we close on two deals for $47 million, one was a high yielding opportunity in the Manassas, Virginia where we will restructure the anchor lease and then the other falls into our retailer category, where we acquired (Inaudible), a retail building that they're currently occupying in densely populated North Bergen, New Jersey, they'll leave that property at the end of the year and we intend to re-anchor it and we already have strong tenant interest.

Now along with adding new investments to our funds equally important is maximizing the value of our existing investments there, and from that perspective we also made strong climate last quarter, with respect to our fund asset they break out into four currently fairly equal components as follows.

About 25% of the roughly $1 billion of assets is now what we consider stabilized, these are primarily our urban redevelopments and they were primarily falling into our Fund II. Last year you may recall, we sold $500 million of fund asset and we will continue to monetize these remaining properties. So far investor interest in these assets that we're bringing to market, it appears to be strong and it's not so far been impacted by the bond market volatility.

Another 25% our projects in several of our funds that are what we consider lease up mode, there the current occupancy is in the low 80, the NOI is projected to double over the next few years, it includes two portfolios that we own on Lincoln Road in Miami as well as our Lincoln Park Center in Chicago and several New York area properties as well.

Since the majority of these properties our street retail properties where there is any more diverse and growing tenant bases compared to on the suburban side, the list of tenants looking to get into these markets is very strong and we're very confident about the lease up of these assets. Then 25% is our current high yielding projects we are going in unlevered yield has been strong and we're currently clipping high teens levered yield on properties ranging from Cortlandt Town Center to our Heritage Shops in Chicago. And then finally the final quartile are developments and redevelopments.

City Point is certainly the highest profile but collectively we have over a million square feet of redevelopment opportunities in our funds primarily in New York Area but also in Washington DC and Miami and while our exposure to new development is appropriately mitigated as demand in these key markets grow we feel we're well positioned to benefit from this.

In terms of City Point, it's worth a brief overview as you probably recall, it's a 1.9 million square foot development that will be done in three phases. Phase one and two will be 675,000 square feet of retail and approximately 625,000 square feet of residential. And then phase three will be a 600,000 square foot residential tower.

Phase one is complete and construction on phase two is well underway in terms of the retail in phase one and two we're finalizing over the next several weeks an anchor for the second floor, phase two and assuming that we're successful that will then we've 100% preleased on floors 5, 4, 3 and 2 bring our overall preleased occupancy to 65% and leaving us with a street-retail and concourse of approximately 240,000 square feet left to lease.

In Phase 1 the retail is fully leased and we are completing at least for 10,000 square feet of office space on the fourth floor. Interestingly, what would have a few years ago been secondary office spaces going to a global marketing firm that's relocating this division from Soho in Manhattan to our downtown Brooklyn building.

In phase 2 the steel is going up, constructions in full swing and in terms of retail on Fulton Street, H&M just recently opened American Eagle Nordstrom Rack, (inaudible) on the way and there's a long list of retailers looking to get into downtown Brooklyn in general and Fulton Street specifically. Rents for the retail on Fulton Street have almost doubled over the past 24 months. This certainly bodes well for our remaining lease up.

And then finally in Phase 3 as I mentioned that will be a 600,000 square foot residential tower, the residential market in downtown Brooklyn continues to strengthen both in terms of market rents as well as the value that they are. Now that Phase 2 is well underway we've been receiving strong interest from residential developers for the purchase of Phase 3 and we will keep you posted on that.

So in conclusion in the second quarter we continued to make steady progress with both our core portfolio and our fund platform and looking forward both platforms are well positioned. Before I turn the call over to Jon I would be remiss if I did not note that 15 years ago this summer we entered the public markets through the reverse merger of a troubled shopping center REIT called Mark Centers Trust. We did that just in time for the REIT market to enter into a significant meltdown in the face of Russian debt crisis, the collapse of the hedge fund long-term capital and a host of other reasons.

Since then, we've went through plenty of ups and downs but throughout it our team has tried to learn from these trends and has tried to capitalize on them. This experience is what informs us as to the decisions we make today and it's what guides us as to how we are going to operate our business in the future.

It's why we focus on real estate locations that are not driven by short-term tenant demand but driven by long-term intrinsic value. It's why we operate with conservative leverage why we have focus on growth only where it makes sense for our stakeholders not growth for growth sake but when we find growth that makes sense, we've made sure that we have both the capital and the ability to execute.

Over the past 15 years, our senior management team has developed a strong and deep bench, not because we no longer have the passion to do the work ourselves but precisely because we have that passion and we want to see that passed on.

So I'd like to thank all of our stakeholders for their support over the past decade and half. I'd like to thank all of our team members those who have joined us over the past several years but especially those who were with us 15 years ago. I'd like to thank them for their hard work and their commitment to our success.

Over the past 15 years, we've delivered 1000% total return to our shareholders as compared to a 300% for our peer group and while that track record is certainly something we are proud of, I truly believe that our best years are still in front of us.

So now with that, I'll turn the call over to Jon.

Jon Grisham

Good afternoon. Second quarter results were solid both in terms of our core portfolio performance and earnings. First an overview with the portfolio. Same store NOI was up 7.4% for the quarter and majority of this growth about 5% was generated across the portfolio and consistent with the first quarter this was driven by positive rent spreads and better tenant performance in terms of credit loss. The remaining 240 basis points from was last year's reanchoring at the Branch Plaza.

Year-to-date same store NOI was up 9.3% again about 5% was experienced throughout the portfolio. And along with those factors I just mentioned for the quarter year-to-date results were also boosted by higher CAM recovery in 2013 net of an increase in winter-related expenses relative to 2012.

4.3% of the year-to-date result was from both the Branch Plaza and Bloomfield reanchorings. As Bloomfield came online first quarter 2012, it was not a factor for second quarter 2013 same store NOI comparison. For the remainder of 2013, the incremental NOI contribution from these re-anchorings burns off. And growth from the remaining portfolio may potentially moderate some to be more consistent with long term expectations for a high quality but stable portfolio.

Accordingly, we expect full year same store NOI growth will range from 6 to 6.5% for the full year. Our core portfolio occupancy was 93.7% at June 30, which is up 10 basis points from the first quarter. Given that our current lease occupancy is 95%, we expect, all else being equal that we will end up 94% or better by year end.

Across the core portfolio small store occupancy was 86.7%. Breaking this out between the street and suburban components of our portfolio and as in the side we now do this in our quarterly earnings supplement, street shop occupancy was 92.3% this is suburban shop occupancy of 85%.

The additional least but not yet occupied space that gets us to the 95% that I mentioned in discussing occupancy represents about 57,000 square feet, of this almost half is suburban shops space which equates to roughly 200 basis points of suburban shop occupancy. Again presuming all else equal, these additional leases put us at a suburban shop occupancy level of around 87%, this compares favorably with 82% at the end of 2011, and 86% at the end of 2012.

Leasing spreads for the quarter were 13% on a cash basis and 23% on a GAAP basis. And year-to-date were 9% cash and 23% GAAP. This 2013 year-to-date result compares favorably with full year 2012 spreads of minus 1% cash and plus 6% GAAP.

Boosting the second quarter result was the releasing a part of former A&P space in our Crossroad Shopping Center at a rent over double that former A&P. Along with core portfolio, we are pleased with second quarter earnings as reported FFO was $0.31 for the quarter and this included $600,000 or about a penny of acquisition expense that should be added back in comparing actual to guidance. Which as we discussed at the beginning of the year guidance was before any acquisition expenses.

Adjusting for the $1.5 million or $0.03 of acquisition expense year-to-date FFO was $0.65 which clearly puts us on track to achieve the high end of our guidance and potentially a penny or two above this. We will revisit our guidance in the second half of the year and keep you posted.

Last, but of no less importance, is our balance sheet and capital management. We continue to maintain a low risk, low cost capital structure. Our ATM has been an effective vehicle for match funding acquisitions on a leverage neutral basis while maintaining our conservative overall capital cost structure of two-thirds equity and one-third debt.

Since we launched our initial ATM in 2012, we have expanded our core portfolio by almost 30%. And we've raised the majority of the $304 million of equity through the ATM which has in turn funded the equity component of the $467 million of core and fund investments on a prorata basis.

And although leverage has very quite a bit deal by deal, on an overall basis, the capital mix for funding these acquisitions was right at our two-thirds equity target.

In late May, we stopped issuance under the ATM as REIT share prices dipped. So for the second we raised a total of about $23 million which is about half of what we have been averaging since starting the program in early 2012. In terms of sourcing capital going forward we will continue to adjust the current mix of equity versus debt based on pricing while this may vary over any given quarter or two, over any extended period we will maintain our target leverage of between five and six times net debt to EBITDA.

Our current net debt to EBITDA including our funds is slightly end of five times. With a $150 million of availability under our unsecured line we have the ability to draw on this facility while still maintaining very low leverage. We're currently 100% fixed rate in the core and 90% fixed including our pro rata share of fund debt. And we continue to selectively lock in attractive long term debt on certain assets.

[Case in point] during the quarter we closed on $52 million of long term secured mortgage financing on our recent acquisition of 664 North Michigan and although we have optionality as to when we actually fund this loan we've locked rate for 10 years on a substantial component of this at a sub-4% all in rate.

Since May base rates are up 90 to 100 basis points but anecdotally spreads have compressed 25 to 50 basis points buffering about half this rising in rates. The results for the costs hovering around 4% which is still relatively low on a historic basis. As we previously discussed we will also continue to development our ability to borrow on an unsecured basis and we'll keep you posted as to our progress in this area.

In our fund platform we have $466 million of remaining committed equity in our Fund IV which gives us up to $1.5 billion of buying power in the platform. So in conclusion, our core portfolio is performing well, earnings are trending to the high end of our original expectations. We continue to maintain a low risk, low cost capital structure and have core and fund capital available to continue to execute on our strategic plans.

With that, we will be happy to take any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) From KeyBanc Capital Markets, we have Todd Thomas on line. Please go ahead.

Todd Thomas - KeyBanc Capital Markets

Good afternoon. I am on with Jordan Saddler as well. First question, just seems like investment activity was steady in the quarter but Ken you mentioned that the volatility in the capital markets and interest rates were volatile a couple of times in your prepared remarks and I was just curious if you could elaborate a little bit on the deal environment as we think about both in the core investments and the four different types of fund deals that you are targeting. Is there any evidence that the rising rates with the volatilities being disruptive on either of the buy or sell side?

Kenneth Bernstein

A few different things I think that's worth noting. If it's not disruptive, it's certainly distracting and so what we have seen from sellers of high-quality real estate is for the most part, they've held to their pricing and in unless they needed to capitulate and sell, they've been patient and what's been surprising to me is watching secured lending spreads which when the volatility first hit those spreads widened and then the lenders who clearly have to put a fair amount of debt to work, they've come in and as Jon pointed out absorbed about half of that spread.

So that for a high quality assets, our sense is that pricing is holding up, now fortunately as it relates to our core portfolio, acquisition goals, we're talking about a relatively modest on our acquisitions and I like the pipeline that we have and we're capped into enough of these markets and I don't think it has any real impact to us and our goals.

It's just interesting to watch 100 basis points move in the tenure treasury and not see much shift in terms of pricing for high quality assets. Now to shift over to the more opportunistic side, people seem to be waiting out the summer to see where everything settles. And there's a fair amount of leverage available in the system. But it's our expectation and some of the conversations we're having that they are enough different sellers of real estate who are going to have to do something over the next 12 months that if there is a re-mark-to-market, we may see some opportunities there.

Still little early and the summer is probably the worst time to gauge this, but I think we will all be watching closely as we see where the tenure treasury settles, where spreads settle in as sellers of real estate as people who are looking to recapitalize opportunistic or more trouble portfolio need to figure out what to do.

Todd Thomas - KeyBanc Capital Markets

How about for Acadia for the stabilized properties that you're looking to monetize, you mentioned 25% of the billion dollar towards the property on the management, I mean do you reassess the timing of selling those assets?

Kenneth Bernstein

Not really, I think it would fall into that category of we're watching it more closely so far for those assets that we have been bringing to market, we have not seen a shift in pricing, I think it's partially because of the density of the location, they're somewhat unique assets, so I was concerned as we would go to market and test expectations but we've been very pleased with what we're seeing so far there has not been any fall off there.

Todd Thomas - KeyBanc Capital Markets

Okay, and then I was wondering on A&P there were some news reports that they were exploring strategic options and Acadia and your partners in the Funds you didn't participate in the super value transaction but A&P is different to a ethic footprint that is little more concentrated in the north east, it will be little bit more familiar sense of things any thoughts on A&P?

Kenneth Bernstein

Lots of thoughts but in terms of what we want to discuss here, first of all I think it's worth pointing out, for the most part A&P has sold off most of their real estate out, so I think that's worth taking into account. The other trend that you are seeing of the consolidation in the super market industry, I think we'll continue and we have a very nice super market anchored portfolio, we like that segment of the business but we also need to recognize that there are challenges to the super market and the supermarket anchored centers, and we're adjusting to those challenges, those challenges range from the wholesale clubs like Costco, to the higher end like Whole Foods to the more boutiques like Trader Joe's it impacts both the supermarket chains and their responding, I think correctly by some of the consolidation you've seen throughout the U.S.

And then it impacts our supermarket anchored center in terms of the number of shops per week we should expect from our visitors and how it impacts our satellites [staff]. So, interesting trend to watch overall no comment on our involvement in any future acquisitions, because that wouldn't be appropriate.

Todd Thomas - KeyBanc Capital Markets

Okay, great. Thank you

Kenneth Bernstein

Sure.

Operator

From Bank of America, we have Craig Schmidt on the line. Please go ahead.

Craig Schmidt - Bank of America

Given the flux in the market, is there an expectation that you maybe more involved opportunistic in the second half of the year than you were in the first half.

Kenneth Bernstein

That would be our hope Craig. Those type of deals the nice thing about having fully discretionary capital on call is we can move very fast irrespective of where the REIT market multiples might be and in fact, more often than not it's when there is volatility in the REIT market that we seen the best opportunities. But they happen quickly our team is working hard on a wide variety of opportunities, if they hit they'll will be real exciting and then volume goes up and we've proven in the past where it doesn't make sense that we sit on the sidelines.

Craig Schmidt - Bank of America

Okay. And then maybe a little discussion on the scalability of the street-retail portfolio. Is there a advantage let's say in your let's say five different markets in Chicago benefiting each other or just the benefit within just [Russian] (Inaudible) by itself.

Kenneth Bernstein

I think they are definitely scalable for a lot of different reasons. First, before scalability we are finding that just on a standalone basis these retail investments are more compelling to us from a risk adjusted return than a host of other of the more traditional more generic retail opportunities. But as we can add to the key markets that we are involved with and you pointed out Chicago and that's certainly a very important market. New York we continue to penetrate and add assets to, Washington D.C. M Street, Lincoln Road in Miami and then there's a host of others that we're involved with.

As we have an increased presence in any of these given submarkets we afford to the fairly fragmented retailer group who is looking to penetrate these markets a opportunity to sit down and deal with multiple markets at once. And that's the big benefit when a retailer is recognizing that one of their many channel needs to be street retail and we're working very hard to make sure that our profile on those markets is high enough that we're certainly in front of the right retailer.

So there's a scalability from the retailer side. There also is just the fact that whether we like it or not when we make the papers for our acquisitions whereon people's radar screens for the next acquisitions and several of our deals have been offered to us off market because we've proven ourselves to be aggressive bidders and excited owners of real estate in Chicago for instance in Washington D.C. for instance. So a host of those transactions have been off market and I would expect them to continue to be so there's scalability from that perspective.

Operationally, there's some scale but fortunately with street retail we don't have parking lots to suite. We don't have roofs to speak of and some of the more traditional suburban operational component but that's never really what driven that business. So from a scalability perspective, I think the keys are going to be our leasing presence in those markets and then also just deal flow.

Craig Schmidt - Bank of America

Okay, and the just it struck me that the fact that the high-quality stuff does not seem to grow your pricing and while the other stuff is waiting out the summer, it could be repriced later in the year. I just wondered if this might be the period of cycle where you see more spread between the high-quality assets and let's say the remainder of the real estate universe. That understands or?

Kenneth Bernstein

It could be well, the way I like to think about it is our investment team should come to work every day absolutely agnostic, because we have capital that can play in just everything that we're good at and we ought to remind ourselves, we have no capital to play in things that we're not good at. I mean you've seen in the fund side, us take down some pretty opportunistic assets recently that wouldn't fall in to the highest quality street retail, wouldn't be consistent with the upper quartile of our portfolio. But we're getting attractive yields. If we see more of that great we'll take it.

If we don't see core acquisition activity, we don't have to do that we can play any of the different triggers between the two platforms and when we touching unless before, we can also be sellers and we can accelerate the selling of asset depending what we want to do. So I am hoping that when we show up every day, we stay agnostic is to where our book is, and we put the dollars to work, or repatriate those dollars as we think it make sense as we look at those difference spreads, that being said, when you strip aside the 20 or 30 basis points that we all focused on day-in and day-out in terms of our borrowing cost, in terms of our acquisition yields, and you sit down and you talk to our retailers.

There is just no doubt that their long term growth strategies are much more focused in the higher barrier to entry assets in these key streets where they can not only do strong sales but also provide them, branding provides order fulfillment. So we ought not get too caught up in last week's bond pricing and make sure we continue to add these kind of assets that we think in over the long term, we have a much better chance for outside rental growth, as that will make a lot of the summer's noise, seem somewhat irrelevant.

Craig Schmidt - Bank of America

Thank you.

Kenneth Bernstein

Sure.

Operator

From UBS we have Christy McElroy on line. Please go ahead.

Christy McElroy - UBS

Hey guys good afternoon. Just while you're talking about acquisitions did you guys bid on, or did you look at 830 North Michigan and then also on your guidance, I think you talked about $150 million to $300 million of core acquisitions this year, you had $121 million today so how is that looking from the balance of the year standpoint?

Kenneth Bernstein

We're very confident that we'll achieve that guidance within that range and I don't mean to be -- well I did mean to be able to (Inaudible) on that. Our expectation and our goal last year we did about $225 million of volume and our goal and my expectation is industry somewhere in that similar range, with the huge caveat that it's all very dependent on the specifics in the marketplace. And as to 830 north Michigan Avenue we have look at almost every deal that trades, we love North Michigan Avenue, we're always pissed when we're not the winning bidder but that's life.

Christy McElroy - UBS

Okay, and Jon I appreciate the new breakout of your core portfolio between street retail and suburban, definitely highlights the prominence of your street retail portfolio in terms of rent contribution, it also highlights that there are several one of properties with the only suburban so now you own in the state, to what extent would you look to and I guess this the question for both of you to what extent would you look to monetize some of that over time?

Jon Grisham

So we've talked about this before we do have a bottom fifth quartile we call it and it is handful of assets and certainly over extended period of time and you shouldn't be surprised as we probably get rid of those so, the answer, the short answer is yes and it'll be over some period of time now.

Christy McElroy - UBS

Okay. On the development pipeline, can you update us on your recent thoughts around 723 North Lincoln Lane and the potential opportunity there. And then also can you just remind me why there is such a wide range for development spend of City Point?

Kenneth Bernstein

So, in terms of Lincoln Lane and for those you Western lane with Lincoln Road in Miami in general over the past few years, Lincoln road has transitioned from being a pretty mixed bag in terms of retailer interest to now the location where most of the aspirational retailers want to locate. Though we saw earlier of this year flagships opened for H&M for over 21, Zara is slated to open their flagship later this year and with that Lincoln Lane which is one block North but truly contiguous on Meridian to Lincoln road provides a real compelling flagship opportunity. However, we will probably not try to pre-develop it and guess exactly how and which retailer wants it.

So we're talking to a wide variety of retailers that belong on Lincoln road, that need and want the kind of footprint that we could afford and we can do multiple levels. So, we're certainly exploring that as well, as soon as we have something concrete to announce we'll talk about that. Thankfully, you may recall we purchased the portfolio a few years ago, rents on the street level have probably increased 50%, maybe more since that acquisition. So our patience is being very well rewarded as we make sure we get best execution on that.

The second question was then on City Point, Jon why don't you?

Jon Grisham

So factors that go into the range in terms of ultimate cost for City Point include for example TIs for the first floor in concourse leasing. Obviously until we do those leases there's an unknown there. Also the value that we monetize the air rights for Phase 3, there's variability there as well. So as we start to nail down these pieces, we will narrow down this range, but right now there still is some variability there.

Operator

From BMO Capital Markets we have Paul Adornato online.

Paul Adornato - BMO Capital Markets

Just looking at retail and very large rent increases that you are seeing there, I was wondering if you could talk about how the retailers look at their occupancy costs or do they follow the same metrics as operating in other locations or are these flagships, you know do they have different economics for a flagship?

Kenneth Bernstein

So what our retailers tell us is that while they are different economics we ought never fool ourselves. They expect to need these stores to be profitable. And as you push up into the high-teens occupancy costs in terms of rent to sale, many of the retailers depending again where the price points are, where their margins are, that starts pushing the needle. However, street retail does afford them a host of opportunities they believe and so far they are seeing that they don’t get in some of their other channels or a compliment of other channels. So it does act in a very positive way from a branding perspective and they can’t put a sales amount on that because they don’t know where the sales get executed. They just know that it is helping their brand identification.

And secondly, it also helps them from a order fulfillment perspective. It's a great way to present your goods to the shopper even if they then choose to subsequently shop online. Our retailers are getting better at identifying the source of the inspiration, but technology isn’t there yet and they also remain somewhat indifferent as to where you initially saw that product that then caused you to shop it. And so it’s still a moving needle but most of the retailers we're talking with are well represented in the other channels. So they are well represented in the malls they want to be in and they are not building a lot more of those. They are well represented in the outlet, great business for some of our retailers, but as we have read and as you see, the retailers need to be really careful that they are not becoming simply a retailer in to the outlet. They need to maintain that brand and maintain a certain elite level of that brand and street retail affords that.

So those are some of the less quantifiable components, Paul. Then ultimately, they look at market rent and they say can we make a profit within four wall EBITDA to justify that occupancy. If they can’t, they cannot to show up and when they think they can, they have. And I think based on the renewal rates, based on the traction that you see on M street, the success you see in so how, the successfully see in Lincoln road, it seems to be working.

Paul Adornato - BMO Capital Markets

Okay. Thanks for the color on that. And switching to the shops based discussion, where should we expect occupancy to settle out over the long term both on the street shop space and suburban shop space?

Kenneth Bernstein

Yeah. So the street shop space, which is currently at about 92 plus percent, we have signed leases that’s going to take that up closer to 95% plus, and we think that is an appropriate level for the street retail. In terms of the suburban shops space, we are currently at give or take 85%. We think that ultimately, probably high-80s, almost 90% is probably the stabilized level as it relates to that portion of portfolio.

So keep in mind now, though, we are not talking in the case of the suburban portfolio, we are not talking that much square footage, so every 10,000 square feet represents a percent. So you’re only talking about doing another give or take 50,000 square feet to go from 85% to 90% in the suburban portfolio.

Operator

From Green Street we have Jason White online. Please go ahead.

Jason White - Green Street

Question on your [Marble] re-anchoring you talked about in the past being kind of mid ‘13 event, can you give us a more detail around that? We didn’t see occupancy drop in, so we assume it’s still to come?

Kenneth Bernstein

So it turns out that and kudos to our leasing team that we are able to retenant that with virtually really no downtime, it was all done in the quarter and we didn’t have that dip that I was originally talking about beginning of the year.

Jason White - Green Street

Okay, great, who was the retenant?

Kenneth Bernstein

On local, it’s local furniture.

Jason White - Green Street

Okay.

Kenneth Bernstein

Regional operation.

Jason White - Green Street

Okay. Then in terms of the (inaudible), is there any timing on that, I mean do you guys have any visibility on the one quarter or three quarter type event?

Kenneth Bernstein

It depends who on our team you ask and my guess is that the general ballpark. I have been hesitative to entertain serious offers until we nail them Phase II. So they are physically adjacent, Phase II will include Century 21, will include the second core anchor that I was preparing to and hopefully will finish up in the next couple week. Once that all nail down, so we are certain to exactly the footprint, then our need to continue to own the Phase III residential is greatly diminished. Given the high, high level of interest in residential development both rental and otherwise in Brooklyn, we are prepared now to start entertaining those kind of offers, so whether it takes a quarter or three quarters I don’t care that much other than I want to make sure our team gets it done right.

Jason White - Green Street

Okay. And then final question on your street retail, how competitive are the individual markets getting, you are seeing tough more competition entering the space or it is just the GDP entering the Chicago, it was just kind of a one-off, it seemed like it was getting a lot more competitive?

Kenneth Bernstein

Thankfully, the business is fragmented enough that the entry of any one buyer, no matter how strong or otherwise it doesn't seem to really move that needle, it's always been a competitive business, it's always been very focused by a host of local entrepreneurs in each of the segment. Where we have found that we fit in nicely is we have a lot of discretionary capital, but we're also small enough that we can afford to do this 10, 20, 30, 40, million deals where the multibillion dollar guy can't or probably don't.

So there seems to be a nice niche that takes us above the very local entrepreneur who is running around to try to raise capital keeps us below some of the larger guys. And then we'll just have to see where the spreads play out, I have said several times today and other time our retailers remain so enthusiastic about these opportunities is that we need to make sure we're not being too conservative in our long term rental assumption, but we also need to make sure we buy it right and there is plenty of competition out there. So we pick and choose our stocks.

Operator

From JPMorgan, we have Michael Mueller on line. Please go ahead.

Michael Mueller – JPMorgan

I guess Ken when you are talking about at the beginning seeing better growth at a street retail, were you specifically talking about core growth or is that kind of spilling over to the investment pipeline to. So it's make me up a pretty big chunk of what you are looking at?

Kenneth Bernstein

A little of both, although I was mainly referring to as we look at our street rents today, the increase in market rents. So where were the rents a year ago, where were they two years ago, where do we expect them to be over the next 12 months, we are continuing to see stronger market rent growth in those markets. Now that doesn't mean that we immediately get to capture it. We just acquired as I mentioned on M Street a building that's occupied by a banana republic there probably going to be there for a long time. They certainly have the right to. But what's good is that as these leases roll, we I think are afforded a better mark-to-market opportunity and then contractually what we said on past calls and appears to be the case is we seem to be able to get about a 100 basis points better contractual rental growth from our retailers on street retail rather than on a blended basis in our suburban side whether it’s on a discount or anchor centers or in the supermarket anchored centers. So if that growth that I was referring to overall in terms of deal flow it really runs again.

Michael Mueller – JPMorgan

And then I guess you know thinking the opposite of acquisitions on the asset sale side, you know self storage portfolios virtually gone, you've had some other stuff, can you talk about what we could see monetized in the funds over the next few quarters, next year or so?

Kenneth Bernstein

Yeah, within the 25% that we referred to as stabilized embedded into that is Pelham Manor which we have stabilized is substantially fully leased, Fordham Road in Bronx. There are two or three smaller assets in New York City that also could trade as well, but those are the two largest, talk about a couple 100 million right there.

Michael Mueller – JPMorgan

Got it. And does that, do you think some of that or all of it gets done in 2013?

Kenneth Bernstein

Don’t want to make any predictions, but what I will say is we've been very encouraged by investor interest.

Operator

From Citigroup, we have Quentin Velleley online. Please go ahead.

Quentin Velleley - Citigroup

Can you spoke about your preference to buy street retail close to some of the existing street retail assets you on? Can you talk a little bit more about the opportunities that you are seeing in that [SoHo] Bowery area of Manhattan?

Kenneth Bernstein

Yes. The Boweries are (inaudible) and I should always be careful because my team has always comes and screams at me after this call saying I may enjoy talking about it but I make their life more difficult. That being said, the Bowery is no secret as to what's going on in terms of hotel interest, in terms of residential interest and there is no doubt and our retailers are telling us that at the right time is that area is going to transition and is going to be a very hot area for retail. So if we can get our hands on more assets and maybe I should keep my mouth shut, then we see that area continuing to be strong. New York City overall has just been incredible. The sales performance, the rental growth has been very strong. Every deal we did not do three years ago, we probably regret. We need to be careful that just because it was compelling over the past few years doesn’t mean it’s going to continue to grow at that level and our guess is that, with those markets that are already established, it would be overly optimistic for us to assume that same growth trajectory. So when you go into some of these, what we call more emerging markets like the Bowering, there is really an outsized opportunity to see real rental growth. So we will try to capture some of that as we can.

Quentin Velleley - Citigroup

Was that I believe sort of channels are building is on the corner of [Halveston Barryway], there is pulling at a bunch of other tenants there. I believe that those assets, was that something that you look closely at, and if so, would have been something more suitable for the co or the funds?

Kenneth Bernstein

It is very specific, those were definitely assets that we looked at. You need to be careful in New York City is as you go above the first store second level, you will know alternative uses and then when it’s residential, we are not afraid of residential, we shown our willingness to take those down, but you do need to be careful what kind of residential is it, is it right for condominium, is it at market or is it rent regulated, what kind of rent regulation. And all of those different decisions then would determine whether or not these are stable assets with long-term growth consistent with our core portfolio or asset that really require a lot of heavy lifting, vacating and redevelopment, in which case it would belong more in our funds and I’m not going to comment specifically on those but there is a host of different moving pieces that kind of drive that decision making.

Operator

And our last question from RBC Capital Markets we have Rich Moore online. Please go ahead.

Rich Moore - RBC Capital Markets

It sounded this morning Ken when I listen to the GGP call is one of the previous questions which was asking, their intent is to push more industry retail acquisition, did you run into their money or are you thinking kind of indicating the best sort of size is too small for them to see them on a transaction like that?

Kenneth Bernstein

Our recent acquisitions I think happen to be off market. I don’t like to make too much of on market versus off versus market. I am assuming the seller is extracting the top price. I didn’t listen to GGPs call, I am very fond of [Sandeep’s] brilliant, I can’t imagine that this business plan is to one or two buildings at a time at that level. I welcome his enthusiasm for the space and I think it’s a very good positive reinforcement. As to the theses there is plenty of room for both of us.

Rich Moore - RBC Capital Markets

Okay. So even in Chicago he’s obviously got a big presence should not really running into, and you did, it sounds like at 830, but outside of that not really?

Kenneth Bernstein

Yeah, we all cross pass a little bit, I have found more often than not and this is true over the past 15 years as much as we all like to believe and rework that where at the center of the real estate universal or not. And so almost always there is a very viable private competitor whether it's pension fund backed, sovereign wealth backed, debt backed is that focusing simply on the other REITs that are active in any given market that we're competing on, you're missing a wide slot of very legitimate, very credible buyers and competitors. If there were no other REIT competitors we still have to work our tails off to get our deal done.

And if one or two decide they want to reemphasize into a given space, we've not found that that's changed our business plan at all. So we welcome all of it and in fact anything that brings the high quality institutional, high integrity type of buyer into the marketplace with transparency in a way that a GGP does, that's good for our industry, it's good for our retailers and I think ultimately it's good for asset values.

Rich Moore - RBC Capital Markets

And then on tenants using some of their space for distribution, we've talked about that before. Are you seeing any furthering I guess of that trend for retailers to take space and do that?

Kenneth Bernstein

Yes, and it is absolutely not caused the celebration whatsoever because distribution space does warrant productivity or the rents that we like to receive. But retailers have pointed out where they have stores that are larger in size and they have not been able to rationalize that size, they are considering utilization of that portion of that space or some portion of it. It's still. These are going to be long term trends in terms of how order fulfillment is best executed. What we know is that when a retailer is calling us for utilization of our space at storage assuming it’s not in our self storage portfolio that we've already sold, that's probably not a good day for us. So we will try not to own too much of that.

Rich Moore - RBC Capital Markets

Right, and so these are the big box guys mostly that are thinking along these lines?

Kenneth Bernstein

Well, it’s not just the big box, there's a lot of retailers out there who had been very candid, they need to downsize and that has not occurred yet and it probably won't occur until there's the appropriate catalyst, that catalyst could be their lease expiration, it could be and I hope not but their bankruptcy. But so far we've not seen a wide variety of downsizings and so some of those retailers are thinking about how they use space as distribution, but while that's a trend that I think is early and maybe a positive compared to returning some of that space to permanent vacancy or farmland, that's not where we should be spending our time and resources.

Rich Moore - RBC Capital Markets

Okay, then a couple of quickies, on G&A, that was up in the quarter, what do you guys see as far as the rest of the year goes?

Jon Grisham

Yeah, so a little bit of seasonality there. Our expectation for the year is $24.5 million to $25 million, so that's again what you should assume isn't guidance and that's what we expect to see.

Rich Moore - RBC Capital Markets

And then the transactional income from RCP any thoughts there?

Jon Grisham

There is nothing baked in right now. We do have some in our guidance. Let's see what happens in the second half of the year.

Operator

We have a follow-up from Todd Thomas. Please go ahead.

Todd Thomas - KeyBanc Capital Markets

Just wanted a follow up on some of the leasing in the quarter. The 10 new leases that resulted in the 16% cash rent spread, the 40% gap rent spread. Was Crossroads lease, was that lease with A&P in that bucket and then can you give us a breakout of what those, those 10 new leases were in terms of suburban versus street retail?

Jon Grisham

So the answer to the first question is yes, the re-tenating of a portion of the A&P space is in that new lease metric. In terms of the breakout between suburban and street, most of it is suburban. I don’t have an exact number for you, but the majority is suburban in terms of what's driving that new lease metric. Same thing with the renewal leases. The majority at this point is suburban leasing.

Todd Thomas - KeyBanc Capital Markets

Okay. If we look ahead then to 2014, the expirations in the core represent little more than 12% of base rent. I mean what kind of opportunity is there to mark up those expiring rents just based on the direction of the market rents and sort of what's rolling. Are there any near-term street expirations or would you say that they are mostly longer dated?

Jon Grisham

Yes, I think the street explorations in general are longer dated. And in terms of opportunities there are opportunities throughout that. My expectation is when we look at 2013 leasing results, you take out Crossroads, that property puts us for new leases in the single high digit cash or mid-to-single high digit cash, mid-teens gap that’s probably a reasonable expectation for 2014.

Kenneth Bernstein

Jon, I think Todd was trying to get you to give guidance for 2014 this summer, which would be very unusual for you to do.

Todd Thomas - KeyBanc Capital Markets

And I mean the breakout of the portfolio, is that fully helpful, as the street retail, (inaudible) gets larger, any thoughts about breaking out the lease expirations in terms of suburban versus street?

Kenneth Bernstein

We certainly are looking at that. The thing we need to be careful about is, there is still relatively small portfolios and small events can have from a percentage perspective a big impact. So we just want to make sure that it’s relevant and that it’s useful, but certainly are looking at how best to present that going forward. So stay tuned and it’s an evolving process, but certainly do want to be able to capture and reflect the performance of the street component of the portfolio. As we talked about before, we think it will over the long run outperform the rest of the portfolio. So stay tuned.

Operator

We have a follow-up from Quentin Velleley. Please go ahead.

Michael Bilerman - Citigroup

Ken, it’s Michael Bilerman. Just a quick question on the answers to your marketing and fund too, I guess you are marketing 100% of the assets, are you talking to potential investors step into maybe just the 80% stake that you don’t own and then how would you evaluate potentially consolidating those assets if you are the buyer?

Kenneth Bernstein

We have in the past once gone ahead with a recap that like you are discussing where the fund, business fund one was bought out and we stayed in place because that was at the time. What we determine on our fund and investors determine to be a best execution. There is enough interest rate now that I wouldn’t count on that been best execution, these are strong assets. So I am sure there will be a wide variety of interest. If that turns out to be the case, then we shown in the past we are going to step up, these are good assets that we like and we certainly could do it and then those would be consolidated, look everything is consolidated onto our balance sheet and we would been deal with it.

Quentin Velleley - Citigroup

That is right. Something more from the capital perspective, do you want to hold a, you could sell 100% of the assets and go home and you could sell to fund 80% stake in the assets and you keep 20, or you can buy 100%, those seem to be three options, I didn’t know which way you are leaning, so I am putting these assets to our platform and your strategy and each have different outcomes?

Kenneth Bernstein

Well, door one, door two and door three are always tough that we need to be open mind to considering. none of these assets are so linked to our growth strategy that it should move the needle materially one way or the other. And on this call given where we are in the marketplace, it would be inappropriate to comment on which I think is the best way to do this. (Inaudible) we have the responsibility to make sure we get best execution for our fund investors and so that comes first and foremost. And if we do that right as we have in the past, we will make money for our shareholders.

Operator

Thank you. I'll now turn it back to Mr. Ken Bernstein fo closing remarks.

Kenneth Bernstein

Great. I thank everyone for taking time to listen today. I'm grateful that no one made any comments about the 15 years that we've been doing this, but it has been a pleasure, look forward to speaking to everyone again in the call.

Operator

That does conclude today's conference. Thank you for joining. You may now disconnect.

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