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Edited Transcript of AKR earnings conference call or presentation 25-Oct-18 4:00pm GMT

Q3 2018 Acadia Realty Trust Earnings Call

WHITE PLAINS Oct 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Acadia Realty Trust earnings conference call or presentation Thursday, October 25, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amy L. Racanello

Acadia Realty Trust - SVP of Capital Markets & Investments

* John Gottfried

Acadia Realty Trust - Senior VP & CFO

* Kenneth F. Bernstein

Acadia Realty Trust - President, CEO & Trustee

* Nishant Sheth

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Conference Call Participants

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* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

* Vince Tibone

Green Street Advisors, Inc. - Analyst of Retail

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Acadia Realty Trust's Third Quarter of 2018 Earnings Conference Call. (Operator Instructions)

I'd now like to turn the conference over to Nishant Sheth. Please go ahead.

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Nishant Sheth, [2]

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Good afternoon, and thank you for joining us for the Third Quarter 2018 Acadia Realty Trust Earnings Conference Call. My name is Nishant Sheth, and I'm a Senior Analyst in our Capital Markets department.

Before we begin, please be aware that statements made during this call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934, and actual results may differ materially from those indicated by such forward-looking statements.

Due to a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, October 25, 2018, and the company undertakes no duty to update them.

During this call, management may refer to certain non-GAAP financial measures, including funds from operation 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.

Now it's my pleasure to turn over the call to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [3]

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Thanks, Nishant. Good afternoon. As you saw in our release, we had a solid quarter where, most importantly, we're seeing continued momentum in leasing fundamentals, especially in our higher barrier-to-entry street and urban assets. So today, I'll discuss some of the relevant leasing and retailing trends we're seeing and how we've positioned ourselves to benefit from them, then John will drill further into our operating metrics and balance sheet strength, and finally, Amy will discuss the progress we're making in our Fund platform.

In terms of our Core portfolio and retail leasing environment, we're seeing further confirmation of the separation between the haves and have-nots, both amongst retailers as well as retail real estate. As it relates to the retailers in the have category, sales growth has been significantly more robust than had been either feared or forecasted as recently as a year ago.

We're seeing this in retailer categories, ranging from discount department stores to off-price retailers, from specialty grocers to new up-and-coming screens-to-stores retailers. We're seeing this from tenants ranging from Target to T.J. Maxx, from Aritzia to Allbirds. What we are consistently hearing from all of these retailers is that great real estate is going to be a key component and a critical area of differentiation for their growth, especially in an omni-channel world.

So if retailers in the have category can post same-store growth of 3%, 4%, 5%, in some instances even higher. It's worth asking, "What might rental growth look like in the future for locations that can drive this level of profitable growth?" What we're hearing so far from many of our retailers is that we're thankfully passed the concern of perpetually declining sales and store profitability, and we're now heading back to the age-old battle of supply and demand.

In other words, retailers with strong sales can once again pay more rent for mission-critical locations. But they won't unless they have to. Where there is abundant supply, that could take a while and might feel like pushing on a string. But where that supply is more constrained or where the growth is more robust, then longer-term rental growth feels more achievable.

Even the best REITs in SoHo or Georgetown, Lincoln Park, Chicago have enough vacancy to make this a tenant's market for now. But the right retailers are showing up. And aggressively enough that it's becoming clearer to us that these tides will turn.

This does not ignore the fact that the U.S. is over-retailed, that much of the secondary or have-not retail real estates may become functionally obsolete and they have to be repurposed as nonretail. Nor does this negate the fact that have-not retailers are still hanging around, overstaying their welcome and grabbing a disproportionate amount of the headlines. This, too, will pass.

So what does this mean for our Core leasing efforts? As John will discuss in connection with our quarterly results after a quiet 2017, we are seeing significantly improved tenant interest, especially for the high-quality, high barrier-to-entry retail in key gateway markets that defines the majority of our Core portfolio. Thus, we are well on our way to achieving our leasing goals for the year, and as importantly, our goals for longer-term growth.

This growth is coming from a variety of retailers, in Georgetown, D.C., a market where young brands are enthusiastically reentering. We recently signed leases with Aritzia, Reformation, Outdoor Voices. Similarly, in Lincoln Park, Chicago, newcomers such as Allbirds and Outdoor Voices are joining Serena & Lily, Bonobos and Warby Parker in our Armitage Ave. property.

We're also seeing positive signs from solid, long-term veteran retailers like T.J. Maxx, who last month, opened in our Clark and Diversey redevelopment as our second core anchor. With construction of that project now complete, T.J. Maxx and Bluemercury are both now open, and we're in a position to lease up the balance of the ground floor space.

All of these openings are going to help drive our performance in 2018 and 2019. Then as we think about longer-term growth in our Core portfolio, the combination of this current lease-up with additions from our 2 key redevelopment, and the contractual and mark-to-market growth that we expect over the next several years, all of this should provide us with the 4% annual NOI growth over the next 5 years that we have outlined on prior calls.

Then as we look out, we see encouraging signs for additional long-term upside for a couple of reasons. First of all, as I mentioned earlier, for the key gateway locations that we own, tenant demand and tenant sales growth will likely cause a supply/demand imbalance to swing in our favor and enable more aggressive growth than is currently in our forecast.

Hopefully, that growth won't be as aggressive as the 2010 to 2015 period, that level of outsized rental growth had too many unintended consequences. But the thought that market rental growth is somehow limited to 2% or even 3% in key locations seems too conservative, especially if tenant sales growth can continue and omnichannel execution becomes increasingly more important.

The second reason for optimism is the fact that our current forecast does not include additional redevelopment opportunities, such as the recapture of our Kmart in Westchester. We discussed the potential profit from the recapture of this box since we went public 20 years ago.

And then quieter about it in the past couple of years, but now given the recent bankruptcy of Sears and given that there is limited term left on the lease, we are reengaged on the possibility toward this very profitable redevelopment. John will discuss the potential short-term impact of the few Kmart departures to our FFO, but the upside far outweighs the downside.

In terms of adding properties to our Core portfolio, it's still a bit premature. While rents in key streets seems to have stabilized after some steep declines, sellers have been reluctant to face this reality, thus making the pricing of high-quality assets in our core markets more difficult even for cash buyers. And then for those of us reliant on the public markets, we also have some more progress to make before we can compete with even cash buyers and find investments that are accretive to our existing portfolio. While it's been a while, sooner or later, accretive acquisition opportunities will present themselves and we'll be there.

In terms of our Fund platform, while Amy will discuss it in further detail as it relates to the trends I just discussed and their impact on our Fund investing, a few things to note. For new Fund V investments, the volume has been slower than we might like. On one hand, the opportunistic purchase of high-yielding suburban centers are still compelling, but we're having to be surprisingly selective. We're willing to go to many varied markets, but the cash flow must be either stable or fixable. And in too many cases, we're just having a pass.

Then on the value-add front, still a bit early. Ground-up redevelopment and mixed-use projects can certainly be compelling, but we need to carefully watch construction costs. And as it relates to adding other asset classes, we need to recognize the reality that we are late cycle for many other types of real estate.

We've been in the fund investment business for longer than the 20 years that we've been public. It's a cyclical business, and patience, discipline and aggressive execution seem to be the only way to create long-term value for stakeholders. So we'll continue to invest with that focus knowing that, in the short run, being disciplined may be less accretive to short-term earning growth; but in the long run, it's the only way to go.

So in conclusion, after many quarters of uncertainty in the marketplace, we now see increased stability and increased momentum, and we like how we are positioned. Our Core portfolio is poised for solid growth with very manageable redevelopment activity and CapEx spend. Our balance sheet is right where we want it. And our Fund has plenty of dry powder to drive growth as it makes sense. This growth will require hard work. It will require focus and discipline, but our team's ready for that. In fact, that's what we're here to do.

So I'd like to thank the team for their hard work, their focus and their discipline, and I will turn the call over to John.

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John Gottfried, Acadia Realty Trust - Senior VP & CFO [4]

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Thank you, Ken, and good afternoon. I will spend a few minutes talking about an overview of our third quarter performance and key metrics, followed by an update on our 2018 guidance and then closing with our balance sheet.

Starting with our same-store NOI. As Ken discussed, our third quarter same-store NOI was strong, with results that exceeded our expectations. Our growth of 3.4% was driven by the profitable lease-up in our street portfolio, along with lower-than-anticipated credit loss.

During the past quarter, our leasing team has continued to make strong progress on 2 key objectives. First off, notwithstanding the typical summer slowdown on leasing velocity, we are now over 85% leased against our 2018 goal. As Ken mentioned, we continue to see the haves showing up to fill our remaining inventory, with the most recent leases executed in New York, Chicago and Washington, D.C.

Secondly, our team has made great progress over the past few months on the blocking and tackling that is required to get our tenants open and paying rent, which they successfully accomplished on several key street locations, again, in New York City, Chicago and Washington, D.C.

In terms of lease economics, we are continuing to execute leases at rates aligned with and increasingly above our initial plan. In fact, we're starting to feel an increased level of optimism about exceeding our $8 million leasing goal. We have some of our best street locations remaining in inventory, including SoHo and Madison Avenue in New York, as well as a few spaces in the Gold Coast of Chicago.

As outlined in our release, we are seeing this growth continuing, with an expectation of 3% to 5% for the final quarter of the year. More importantly, as we look out the next several years, we see this quarter as an inflection point with us returning back to 3% to 4% of NOI growth that we expect from our portfolio at a fairly nominal cost to our shareholders.

Now keep in mind that not every year and certainly not every quarter will be identical. While the 4% of long-term NOI growth feels pretty good given the strong progress we've made over the past year and the key drivers of our plan, in any given quarter, we will inevitably experience a temporary but typically profitable dips in short-term NOI from retailer distress, such as we are now dealing with on Mattress Firm and Kmart.

We currently have 7 Mattress Firm and 3 Kmart locations in our Core portfolio. While the short-term impact is still fluid as the retailers navigate the bankruptcy process, we currently anticipate a same-store impact of roughly 100 basis points to the fourth quarter, along with $0.01 or $0.02 of FFO in 2019. So while we can avoid the quarterly choppiness that these bankruptcies create, this necessary retail evolution expedites our ability to unlock embedded value in our portfolio.

Now moving on to spreads. Consistent with our expectations, comparable leases were approximately 8% and 15% on a GAAP and cash basis. Approximately 95% of the reported new and renewed lease spreads occurred within our suburban portfolio, representing 21 leases on approximately 160,000 square feet at an all-in cost of just under $2 a foot.

I also want to continue to highlight that a fair amount of the spaces that we have leased over the past year are nonconforming for reporting spreads as they're -- we are either combining or splitting spaces. Consistent with our policy, we only report lease spreads on same-sized base.

That being said, I wanted to reaffirm that of the $8 million of annual NOI that we have established as our leasing goal, we continue to see an incremental $1.5 million, if not potentially more, of NOI above what we were previously collecting on this space. Further, of this $8 million goal, we continue to anticipate $3 million of that NOI showing up at our 2018 results, with the balance in 2019 and beyond.

While we're still finalizing our budgets for 2019, we have a few known lease expirations. The vast majority of these locations are already spoken for with exciting retailers at attractive spreads. However, it will result in a bit of downtime and few cents of FFO as we turn this space.

Now moving on to FFO. Our third quarter came in strong at $0.35 a share. As outlined in our release, we have updated our 2018 guidance to $1.36 to $1.40 per share. So notwithstanding the light year in terms of Core and Fund acquisitions, our earnings are expected to come in pretty much on top of our initial midpoint driven by the strength of our Core portfolio. In fact, this strength is highlighted when stripping out the transactional income and other potential nonrecurring items. This results in baseline FFO of $1.33 to $1.34 per share, which exceeds our original expectation of $1.29 to $1.34.

I'd like to highlight a couple of other points on our 2018 guidance. In terms of the 2018 promote, we continue to see $10 million remaining in Fund III. However, we could see some of this slip into 2019 as we work through the monetization process. Additionally, we have updated our guidance for straight-line rent and above and below market lease adjustments for the balance of the year.

This is driven by a couple of items. The first item is simply a result of the timing differential between the rent commencement date for GAAP purposes and cash collection. This was driven by the strength of leasing in our Core portfolio. Secondly, the accounting rules also require that we update our estimate of the amortization period for below market leases on a quarterly basis. Based on this analysis, along with potentially recapturing below-market leases, we are anticipating a nonrecurring adjustment of $0.01 to $0.03 of FFO in the fourth quarter.

Looking into 2019, we would expect that these GAAP adjustments revert back to historical norms. Also, as a reminder, we are required to adopt a new accounting standard in 2019 for lease accounting. We anticipate that this will have an impact of approximately $0.02 of FFO upon adoption.

Now moving on to our balance sheet. Our balance sheet is exactly where we want it in terms of overall leverage, borrowing cost, our maturity profile and no unfunded capital commitments. As of the third quarter, we have fixed substantially all of our debt at an all-in interest rate of 3.6% with virtually no maturities through 2023. Further, through the use of long-dated interest rate swaps, we have fixed a significant portion of our interest rate exposure for the next 10 years.

In summary, we had a strong quarter with an increasingly positive outlook as we look forward. Further, although a few quarters beyond what we had originally expected, we believe that we have finally hit the point in the cycle where we'll return back to the performance you should expect from us and our best-in-class portfolio.

With that, I will turn the call over to Amy to discuss our Fund business.

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Amy L. Racanello, Acadia Realty Trust - SVP of Capital Markets & Investments [5]

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Thanks, John. Today, I'll review the steady and important progress that we continue to make on our Fund platforms' buy-fix-sell mandate.

Beginning with acquisitions. As discussed on several calls, our funds have been pursuing a barbell strategy, acquiring both high-quality, value-add properties and higher-yielding or other opportunistic investments. To date, we've allocated nearly 30% of Fund V's capital commitments. So far, all the Fund's investments have been higher-yielding or a hybrid of the 2 strategies.

Year-to-date, we've completed $105 million of acquisitions. This includes a previously discussed $59 million acquisition in the Sacramento MSA during the third quarter. We also have another high-yield investment under contract, and this acquisition would bring our total 2018 volume to approximately $150 million.

Today, we still have $1.1 billion of dry powder available in Fund V to deploy through the summer of 2021. Although our Fund V acquisition volume has been greater than we expected, we are clipping a mid-teens leverage return on our existing investments, which we find compelling as long as we remain selective. After all, our high-yield thesis is not predicated on strong NOI growth, but it does require NOI stability.

As an added benefit, we've generally have been able to buy these assets at a discount to replacement cost. In fact, we have acquired our Fund V investment at a weighted price per square foot of approximately $150. In comparison, to build a suburban shopping center, it costs approximately $200 to $250 per square foot on average if someone gives you the land for free.

Since the beginning of the year, we've seen material improvement in retailer interest in higher-quality real estate. As previously discussed in July, Fund IV executed a lease with lululemon at 938 West North Avenue in Lincoln Park, Chicago. Lululemon has leased 26,000 square feet on 3 levels, and will introduce exciting new elements into this supersized store.

And at City Point in Downtown Brooklyn, we've recently welcomed Joybird and HiO to Prince Street. Joybird is a digitally native furniture retailer, and this is their first brick-and-mortar store. HiO, on the other hand, is a market hall of stores for young, primarily international brands. This is their fourth pop-up location and second in the U.S.

Regarding our lease-up strategy for City Point street-level availabilities. We remain focused on continuing to cultivate an eclectic and experiential merchandise mix to complement our food, entertainment and value-oriented anchors.

Turning now to dispositions. Year-to-date, we've completed $65 million of Fund dispositions, including $31 million completed by Fund IV during the third quarter. To that point, in August, Fund IV sold Lake Montclair Center, a 106,000 square foot supermarket-anchored center in Virginia for $23 million. Lake Montclair is a 2013 high-yield investment. During our 5-year hold period, we extended the supermarket's lease term which increased the center's long-term stability and we also maintained strong occupancy. This sale generated a 26% internal rate of return and a 2.0 multiple on the Fund's equity.

On the other end of the barbell, Fund IV also sold 1861 Union Street, a 5,000 square foot street-retail property in San Francisco, California for $6 million. This compares to all-in cost basis of $3.7 million. The property was sold vacant for occupancy by the buyer, and this sale generated a 24% internal rate of return and a 1.7 multiple on the Fund's equity.

Fund IV also sold another Broughton Street property for $2 million, and looking ahead, we will continue to selectively sell our stabilized properties. Given our aggressive disposition efforts over the past few years, we are not sitting with a lot of inventory.

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

Now we are happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Christy McElroy with Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [2]

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John, just looking at same-store NOI growth sort of trajectory heading into 2019. I'm just trying to put all the different pieces together that you talked about in your opening remarks. Q4, you're looking at 3% to 5%. You've got the -- you'll have the full impact of the leasing that you've done in 2018 coming on. You also talked about 100 basis points potential impact from Kmart and Mattress Firm, and then another additional impact from lease expiration downtime. If I put all of that together, what are we looking at in terms of sort of total impact? Are you willing to offer sort of a glimpse into how you're thinking about growth into next year?

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John Gottfried, Acadia Realty Trust - Senior VP & CFO [3]

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Yes, sure. And we're in the middle of doing our budgeting currently as we speak, locking in 2019. What I will say is as we look out over the next several years, the 4% still feels incredibly good. There are some other things offsetting the points you raised there below. We have Clark and Diversey that you'll see has opened this year. And every year, we have lease rollover that comes and goes. So don't have a specific number for 2019, but continue to feel that what we've done this -- to date is going to be indicative of getting back to a more sense of normalcy than we experienced the past couple of quarters. So don't have a precise number, but I would say that we're in -- we're set up good for '19.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [4]

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Okay. And then Ken and Amy, you both made some comments about sort of being more selective on the Fund V investments. Is the issue that sort of cap rates aren't high enough to get to your tight -- your targeted levered IRR or you're just seeing sort of too much risk in the assets there? And then, I guess, does the Sears filing sort of act as a catalyst to open things up and potentially add some more clarity to some of these potential investments?

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [5]

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Let me take the first cut, and then Amy can jump in as well. I would say, we have found ourselves being selective the whole way through. So it's not necessarily being more selective, but more selective than we thought a couple of years ago when we saw cap rates back up and it looked to us as if there would be a significant amount of volume that would meet these needs. It is -- the volume has been less for a couple of reasons. Well, one is this is a levered return play and rates have gone up some. So while cap rates have stayed in the 7.5% to 8.5% range, the levered yields have come down a bit, so we have to be cognizant of that. More significantly, and to your question and point, is we have found it harder and we are having to be more selective to find stable cash flow. We don't need a lot of growth, but we either need stability, meaning if we're buying a 7.5% or an 8% or 8.25%, depending on the specifics of that deal, if we are levering it 2:1, which is what we usually do, we need to make sure that that cash flow is there or replaceable. And for reasons that would take far too much time on an earnings call, but issues of cotenancy, rent to sales, rent to market, there's too many deals we had to pass on. That being said, to your point of Kmart-Sears or the fact that now there is enough price transparency and retailer transparency, we are seeing volume pick up. We have found sellers to be realistic, and it's just a matter of culling through the relatively large volume that our team looks at and figuring out which ones have stability. So I remain optimistic about the business, it just may not be the multibillion-dollar of acquisitions that we once thought.

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Operator [6]

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Our next question comes from Todd Thomas with KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [7]

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So first question, I guess sticking with investments a little bit. Ken, 2018 you mentioned, it's obviously a little bit of a slower year in the Core and in the Funds business for investments. What are you seeing as the year wraps up a little bit and sort of what signpost are you looking for? What should we look for, really, before we start to see Acadia get a little bit more active in this environment?

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [8]

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Yes. And too often, Todd, by the time I know it's 3 days before, we're actually moving on something. So it's not as though there's months and months of advanced notice. Let's start with the Core because -- and I think most people understand this, but there's very different capital structures to our Core investment and the Funds. On the Core side, in order of us -- in order for us to be able to compete in the markets that we are most excited about, which are the key gateway markets of D.C., New York, Boston, Chicago, San Francisco, maybe 1 or 2 others, in order for us to compete with cash buyers, we have to have a currency that enables us to at least get to par. And we are not there yet. We are getting closer, but we are not there yet. Thankfully, or of some comfort should be the fact that sellers have not yet gotten there in any significant way. So there's not a lot of transactions that I could point to and say, if we had the cash, we would've done it. And in fact, if it was really compelling, you would've seen us do it because we do have cash in the Funds. But I'll get to the Funds in a second. The reason that there has been a lag in these key gateway markets is rents grew too fast, they fell significantly and sellers were hesitant to mark-to-market acknowledge where rents are today. 2018 has been a turning point because there's now enough leasing activity that sellers can get comfortable with where stabilization might look. And I actually am getting pretty bullish on the fact that 2018 very well may be a low point, and now, going forward, we could start seeing some growth. So with sellers more realistic about where rents might be, then it's an issue of cap rates. The volatility in the bond market certainly has some impact. But I am hopeful that the stars align sooner rather than later so that we can be acquiring in these key markets within our core competencies sooner rather than later, but we are not there yet. As it relates to the Funds side, unlike being beholden to the public markets, we have the money on call. So if there is a compelling investment opportunity, we'll take them. So far, what you have heard us say is the high-yield investments have been worthwhile, clipping a mid-teens return in this environment feels pretty darn good, but we are having to do less volume than we wanted. Could that volume increase for that type of product? I hope so, but we're not going to force it. Then on the value-add side, which is a big chunk of what we enjoy doing, whether it's buying vacant Sears and Kmarts, whether it's buying and redeveloping urban mixed-use, whether it's buying distressed debt, we can do any of those things as long as the deals pencil out. We are dealing with a unique time period where we are very late cycle in some respects including the economy, and you need to be careful about that, a rising interest rate environment and a lot of distress on retail. How that all mixes is I am looking forward to 2019 being a very active investment time period, but I can't tell you exactly when it all ends.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [9]

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Okay, that's helpful. John, a couple of questions for you. The $3 million of annualized NOI from that $8 million NOI opportunity that you've talked about, you expect the $3 million to be realized in '18, the balance of it in '19 and beyond. How much of that NOI on an annualized basis was recognized during the third quarter?

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John Gottfried, Acadia Realty Trust - Senior VP & CFO [10]

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It's hard to give a precise number, but I think it's come in partially throughout the year. So it wasn't all crashing through in the quarter. So I'd have to get back to you on the specific number. I would point you, if you look at, just as a data point, our same-store occupancy Q3 '18 to Q3 '17, it was pretty flat. So I think some of that is -- a good portion of that is just the rental growth, the $1.5 million incremental value from the $8 million we've leased. So it's blended in throughout the year on a lease-by-lease basis. But don't have the exact number off the top of my head.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [11]

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Okay. And then the 100 basis points of potential impact, the same-store NOI growth from the Mattress Firms and Sears or Kmart, is that the impact to the same-store if you recapture all of the spaces?

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John Gottfried, Acadia Realty Trust - Senior VP & CFO [12]

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No. So I think it's -- as I've mentioned in my remarks, it's incredibly fluid. And none of our Mattress Firms were on the initial 200 list that went out, but as process unwinds, there's various negotiations that I have assumed a portion of that we do get back. So that is truly an estimate given that it's still, as we speak, in process of navigating. So when I throw out the 100 basis point impact, that's based off of the up-to-the-minute information I have today.

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Operator [13]

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(Operator Instructions) Our next question comes from Craig Schmidt with Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [14]

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When we look at the store location choices on the first wave of the emerging Internet retailers, it was clear that they had a much higher level of high street and urban locations in their location strategy. Do you know if the next wave of emerging retailers shares that same perspective?

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [15]

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For the most part, yes, Craig. There will be exceptions, and some retailers who want to have stores in every important market in the country could, very likely, end up in other alternatives. And we're -- you're reading some about that and there are conversations with retailers, they will test other styles of real estate, whether it's lifestyle centers or malls. But for the most part, what retailers in the digitally native or screens-to-stores category is looking for is how to enhance their direct-to-consumer, DTC, relationship. And that doesn't mean, most likely, that they need to have stores everywhere. They've gone from the point of view of a couple of years ago where they said we never need to have a store to recognizing how important stores are, but it's only going to be one component of how they're going to drive growth. And what these retailers have recognized is that their cost per acquisition of a customer is significantly reduced when they have a certain number of stores. So I do think, and what our retailers are telling us, is they want to be on M Street and Georgetown. They are clustering with us in Lincoln Park, Chicago on Armitage Avenue. But that's not to say in other markets where -- it may not be a city, that there won't be other means for them of having stores. Warby Parker, who was an early mover, seems to be opening a lot of stores in a variety of cases, and there's other retailers who say we only want and envision 10 to 20 stores for the next several years. Either way, what they are telling us is the most profitable locations are those where there's dense foot traffic, where there's high conversion rates and where there's a halo effect that really can drive their online sales as well, and that tends to cause them to want to be in the kind of locations we own.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [16]

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And -- great. And then just what are you hearing from, let's say, the more traditional established retailers? Are they opening more -- they're open to buy to high-street urban locations? Or are they sticking with the previous strategy?

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [17]

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We may never hear the term open to buy again or not for many years, but what we are hearing -- look at what Target is doing. I think they're opening another 4 stores in Manhattan. And their level of confidence as to their execution and their success so far is very impressive and speaks to the more dense, more urban street and mixed-use locations that we own, and so we are excited about that. T.J. Maxx opening on our Clark and Diversey, a strong, veteran retailer who's done quite well on suburbia and is stepping up to key locations. And then in the food/supermarket segment, which is changing dramatically and will change dramatically over the next 5 or 10 years, we're seeing similar responses from those retailers. So in general, every retailer needs to, wants to, get close to, were closer to where the consumer is. Most of them are enhancing their in-store sales with some type of online connection, and that seems to cause them to gravitate towards those kind of locations.

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Operator [18]

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Our next question comes from Vince Tibone with Green Street Advisors.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [19]

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Since the acquisition, the market seems a little more challenging, is there a scenario where Acadia -- could the capital work within the structured finance business in the near term?

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [20]

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We have a fairly wide mandate within our Fund business and have bought, distressed that and other types of structured finance. What we don't do -- so, well, Vince, tell me what is your definition of structured finance?

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [21]

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I mean, kind of the similar stuff you're doing before. I mean, maybe a little mezzanine, secured debt or just really higher-yielding debt increments.

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [22]

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Absolutely. The one thing we wouldn't do is, as we're set up now, trade REIT stocks and one thing we certainly couldn't do is buy our own stock, so just -- so that there was no confusion around that. But otherwise with our core competency, so if the real estate is in an asset class and style that we're comfortable with, we have done a variety of transactions. A part of the group that bought Mervyns and Albertsons both were very successful transactions in a more structured finance way, and absolutely would continue to consider that.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [23]

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Okay. I understand. And can you maybe just discuss trends in the financing market more broadly both for the higher quality urban and street type assets and then the Fund -- the high-yielding Fund type scenarios?

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [24]

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Sure. So as LIBOR was shooting up, it certainly caused us some levels of concern on the high-yield play because a big chunk of our thesis was borrowing at, let's say, 300 to 400 basis points inside of the cap rate. If you could borrow at 4, you can buy at 7 to 8. And if you're having to borrow closer to 5, either cap rates had to give up or spreads had to come in. In fact, it was the latter. So what we have seen, for the most part, especially for stable cash flow, is that financing spreads have tightened over the last year. There's a fair amount of debt in the markets, and lenders are being fairly aggressive. As you move to higher risk or lower yield, then perhaps spreads have not tightened as much or lenders are being careful. So to be more specific, I still think it's difficult financing a secondary shopping center that has a lot of moving pieces, and I'm not sure spreads have really come in demonstrably on that. And if you're buying an asset at a 3 cap, it could be a great location, but you're going to have coverage issues. So with those 2 polar extremes aside, spreads that have come in, in the financing market feel healthy, feel robust. I don't want to say late cycle, but everyone's actively participating in putting dollars to work.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [25]

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That's helpful color. I mean, so did the increase in the all-in rate resulted in any more retrade activity in your point of view?

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [26]

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I don't think so. If anything, what we are seeing, and we welcome it, is there are probably more legitimate entrants coming back into buying secondary shopping centers than a year or 2 ago. So I would say people -- if people are retrading, they're doing so at their own risk of losing a deal, because it's not as though there's only one bidder on deals these days.

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Operator [27]

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Our next question comes from Michael Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [28]

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My question was actually on the structured investments that was just asked, and I tried to get out of the queue. So I'm good. Thanks.

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Operator [29]

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Then our next question comes from Todd Thomas with KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [30]

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Just a couple of follow-ups here. First, I was -- back to the Kmarts, I was wondering if you could provide a little more detail there and update in general. I think you mentioned 3 in the core portfolio. So Westchester, which is Crossroads, and maybe you could just talk a little bit more about the other 2 spaces and maybe discuss where rents are versus market, or how you're thinking about retenanting opportunities and maybe capital spend on those 3 spaces to the extent you get them back?

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [31]

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Sure. So let me go first on the exciting part, which is -- and I think Todd, I may even have been joking with you, is my fantasy is when we get this back, we can do our quarterly earnings call from Crossroads in Westchester because we've been waiting a couple of decades to get this store back. When we do, the rent will double, triple, quadruple, depending on who we split it for, why do we split it, what it looks like. But you're talking about jogging distance from Scarsdale, and while this was always one of and remains one of Kmart's best stores, time has passed it by and we look forward to that redevelopment. We need to be prepared that this may be one of the last stores to go. We need to be prepared to be active enough in terms of if we had to bid for it or whatever else we had to do. Given the relatively short remaining lease and option terms, we're fairly to very confident that we are the best and highest user for that. And I look forward to seeing what Chris Conlon and his team come up with in terms of what you can do in that 100,000 square foot footprint, which has a variety of uses above and beyond just ground-floor retail. So that's pretty exciting. But then, John, between now and then, we have 3 Kmarts and the potential exposure from that?

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John Gottfried, Acadia Realty Trust - Senior VP & CFO [32]

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Yes. So Todd, the other 2 are in our suburban portfolio. So we have Mark -- both in PA, Mark Plaza and Route 6, similar size to a Crossroads in the 100,000 square foot space. In terms of rents, we have that lined out in our supplemental as well, but between $2 to $5 a foot for those. And Mark is -- is still working through various redevelopment plans on those. But from a total exposure on both of those remaining pieces, that's about $0.01 if both of those went out. One of those, Route 6, is one that the bankruptcy court has affirmed. So one of those, Route 6 in PA, is currently gone out.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [33]

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Got it. And then just one more here. I wanted to maybe take another cut at Christy's question about '19, maybe ask in slightly different way. But if we look through the street and urban retail portfolio, right, the high-rent paying properties that you own. Some of those properties, a lot of these properties you acquired in '12, '13, '14. The 2 North Michigan Avenue assets, 664 and 840, the West Diversey assets, a bunch of the New York assets, and I believe there were some lease expirations 5, 6 or 7 years out from when a lot of those properties were acquired. Are there any expirations or sort of known move-outs that you know about that maybe could impact 2019 at this point?

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John Gottfried, Acadia Realty Trust - Senior VP & CFO [34]

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Yes. So in my remarks, Todd, I did point to we do have a handful of known move-outs. And biggest one is -- we're not in a position to name names, but it's on the state of Washington and in Chicago. That is the lease is maturing. We have a very good backfill on that. So it'd be, I'd say, in terms of biggest on the street, that's one that we do have. So there will be a period of downtime as we tenant that given the size and the space, but I would say that's our largest. .

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [35]

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And overall, I think what you heard John say, although again, who wants to be pinned down by anything, is we feel very good about this 4% trajectory over the next several years, and I think 2019 falls into that category. If we choose to call it 3% to 5%, so be it, and that gives us the latitude. Because on any given quarter, there could be movement, but I don't expect to be talking about any significant departures from our current thesis as it stands right now. A couple of moving pieces is, and John hinted at one, but we feel good about the replacements on those and we feel good about the trajectory prospectively.

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Operator [36]

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As there are no further questions in queue, I'd like to turn the conference back over to Ken Bernstein for closing remarks.

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [37]

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Great. Thanks, everyone, for joining us, and we look forward to speaking with you next quarter.

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Operator [38]

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Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may now disconnect. Have a wonderful day.

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Kenneth F. Bernstein, Acadia Realty Trust - President, CEO & Trustee [39]

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Thanks.