Q3 2019 Earnings Call
Thank you for standing by welcome to the third quarter Acadia Realty Trust earnings Conference call. At this time, all participants are no listen only mode.
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Good afternoon, and thank you for joining us for the third quarter 2019, Acadia Realty Trust earnings Conference call. My name is Garrett I like men and I'm, a leasing representative in our leasing department.
Before we begin please be aware that statements made during the call that are not historical maybe deemed forward looking statements, but then 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 FTC.
Forward looking statements speak only as of the date of this call October 24, 2019, 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.
The Acadias earnings press release.
Website for reconciliations of these non-GAAP financial measures, but the most directly comparable GAAP financial measure.
No. It's my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer will begin today's management remarks.
Thanks, Jeremy Great job.
Good afternoon, everybody, we had a another solid quarter and made important progress with respect to both our existing portfolio as well as new investments. So I'd like to start with an overview of some of the current trends we're seeing.
And then discuss the key drivers of growth for our business.
Next I'll turn the call over to John will discuss our quarterly result in more detail and our balance sheet metrics and finally, Amy will discuss our son platform.
And the progress we've made on that front.
First in terms Oh.
Macroeconomic trends and their potential impact on our business since our last quarterly call. There has been plenty of attention and concern around trade.
Around the slowdown in growth both in the global as well as the U.S. economy.
From our perspective, well components of the U.S. economy seem to be decelerating the job market the consumer there's still on solid footing.
But almost irrespective of when we might think that the next recession could occur.
We do think it prudent supersede under the assumption.
We are late cycle.
And that means at least for retail focused companies like ours.
First and foremost is to focus on growing cash flow rather than increasing our exposure to needed to new development.
Second is to make sure that our leverage and liquidity is where we want it.
Not eventually but today.
And then finally used to make sure that we have access to dry powder for new investment opportunities.
Whether there are rising today from the recent so called retail Apocalypse.
We're opportunities arising down the road.
So with these factors in mind.
Here's how we think about the key drivers of growth for our business.
First in terms of our core portfolio as we've discussed in the past there's the three key drivers.
Of internal growth.
First is through the successful lease up of some key vacancies.
Then second does the contractual growth that's embedded in our portfolio.
And third and finally as the completion of a few key redevelopment.
In our portfolio.
Now these three drivers of internal growth are proceeding nicely to enable us to deliver the long term, 4% N.Y. growth that we are forecasting and as John will discuss in further detail our third quarter results.
Our consistent with this thesis.
Then complementing our core internal growth.
Is the ability to add properties to our core portfolio.
When the stars aligned.
Requirements.
And our goals are pretty straight forward the acquisitions have to be accretive to our any v. as well as to our long term earnings growth and they need to be consistent with our focus on street and urban properties in the key must have markets.
In other words.
The acquisition should have the ability to drive long term rental growth that is in excess of the current 4% growth embedded in our existing portfolio.
And what we said in our last call.
Is that we are at what we described as a bumpy Bob.
Our acquisitions are not ignoring the fact.
That the retail real estate market is still facing challenges that the highly disruptive separation of the hasn't have nots amongst retailers, it's still playing out.
And that this has caused an increase in vacancy even in some of the best in class locations and then the corresponding drop in rents in many instances has been significant.
For some more.
Markets, where rents grew too aggressively in 2000 attempt to 2015 parent the false been dramatic and we were clear during the run up that we saw rents were growing at an unsustainable level and we did our best to make sure that we navigated around this volatility thankfully well. It has not meant that we were immune to the current.
Actions taken place, we've still been able to drive growth even through this period and now that we're a few years into the correction. We are seeing some compelling opportunities arise from this roller coaster ride.
Many institutional investors.
Our still sideline from the whiplash of tenant occupancy and sellers are finally, beginning to transact at realistic valuations.
And at the same time.
In terms of leasing demand the certain street retail locations. The recovery that we saw beginning a year ago is continuing.
Every day, it's becoming clearer that our retailers whether they are merging.
We're reemerging are recognizing at appreciating the necessity of certain key physical locations for reduction and customer acquisition cost.
Reinforcement other brand and then most importantly, more profitable omni channel execution.
So with tenant demand improving.
With rents, having honest elective basis bottomed out with sellers beginning to be motivated to transact.
These factors are combining for the first time in several years to create some exciting acquisition opportunities on the key streets that we're focused on.
Year to date, we have announced $180 million a core acquisitions that are closed.
Or under contract.
Last quarter, we continue to add to our acquisition pipeline with sellers, who for a variety of reasons.
Our ready to move on.
So we added another building contiguous to our previously announced Green Street assets. This property occupied by theory is similar in economics and growth to our other Soho acquisitions and upon closing on the balance of our Green Street assets, we will own five contiguous buildings at Green Street.
Then in Chicago on Armitage Avenue, we added two buildings to our army did revenue portfolio, one contiguous with our existing properties one across the street.
And as you may recall, we already own eight buildings with tenants ranging from Warby Parker to Albert.
In fact, the streets now dominated by exciting and unique retailers.
Most of the prior vacancies being successfully occupied and rents now growing significantly over the past two years.
What we found here.
And elsewhere.
Is where.
Where we can aggregate no buildings in the right locations.
Where we can connect the dots and the right markets.
And then use our teams capabilities to cure rate these streets with the right mix attendance.
This creates a powerful portfolio.
Additionally, we have found that when vacancies dry up.
When scarcity and the rules of supply and demand kick in well rent growth.
Well with executing this strategy in Soho and Lincoln Park.
We recently agreed to acquire portfolio of five contiguous storefronts on Melrose placed in Los Angeles.
This supply constrained market.
Not only has strong surrounding local demographics, but for many retailers on the street Melrose place represents their key L.A. presence.
The unique smaller format store fronts.
That compliment the mix of food service soft goods has enabled key retailers to created presence on a luxury L.A. retail corridor that is highly differentiated from rodeo drive or even other shopping cars.
And given the strong retailer performance.
Given the strong retailer demand this supply constrained market should provide strong growth opportunities driven by contractual growth.
So mark to market opportunities and then longer term value creation opportunities over time.
In terms of our fund business complementing the growth potential of our core portfolio. The other driver of growth.
And they further differentiator for us is through our fund platform.
In the third quarter, we continued to grow our fund five portfolio and these acquisitions continue to be primarily out of favor but stable.
Suburban shopping centers.
Year to date, we've acquired $330 million or property and fund five is now 60% invested Amy will discuss our recent transactions in further detail, but in short the driver of this thesis is acquiring stable properties at an attractive yield.
Further enhanced with non recourse secured financing, where we can create mid teens levered yields on our investment.
So far a few years and we have acquired about $650 million of shopping centers at a blended unlevered yield of 8%.
With approximately two thirds leveraged at a fixed rate blending to 3.7%, resulting in mid teens plus current levered yield.
Now we recognize that the U.S. is over retail.
And whether in primary.
Or secondary markets, many shopping centers will not be able to hold onto their current yields.
That's why we've had to be selective in the assets were choosing that's why we've avoided portfolio acquisitions.
But by carefully screening these investments for the right locations rent to sales rental market discount to replacement costs the right co tenancy provisions.
We have created a pool of stable cash flow.
Now we appreciate why these type of assets with limited growth might not make sense in the public market portfolios, but for a private fund like ours that can use more aggressive leverage. We think these investments are quite compelling in fact, it is rare to see the spread between borrowing costs.
An unlevered yield be as wide as it is now such that we can achieve our return goals from existing cash flow without material growth for capital appreciation.
Since institutional capital still seems to be hesitant to reenter the market for most retail we expect this contrary investment opportunity likely to continue.
On the other side of the fund investments spectrum, while we are continuing to look at value add opportunities given that we are late cycle given that construction cost are still growing faster than rental growth.
The risk adjusted returns for undertaking new developments.
Our just not there yet.
So in conclusion.
As supported by our strong performance in the third quarter, we see enough opportunities for growth that we continue to drive solid same store growth in our core portfolio.
Begin to carefully and accretively add assets to our core.
And then utilize our fund platform for opportunistic Roe.
With that I'd like to thank the team for another solid quarter and turn the call over to John .
Thanks, Ken and good afternoon, everyone as outlined in our release, our third quarter results and key metrics came in strong and in line with our expectations.
Before diving into the details of the quarter I want to spend a moment reaffirm a few key messages.
Our core NOI, which comprises the vast majority of our underlying I Navy remains on track to grow in excess of 4% over $20 million incremental NOI over the next several years.
As we've discussed this 4% growth consists of 3% embedded growth and another 1% from a handful of profitable redevelopment.
Secondly in terms of the cost to fund this growth we remain on track to spend $80 million to $100 million inclusive of the redevelopment spend as well as we recurring capex and tenant in cost and as of the third quarter. We have funded over 50% of these amounts as we're nearing substantial completion of our two key redevelopment and last.
In terms of balance sheet strength.
During the year, we further strengthened already rock solid balance sheet, raising approximately $140 million of equity to proactively fund or accretive acquisition pipeline.
As well as increasing our liquidity through an additional $100 million of revolver capacity.
Hi, diving into the quarter and starting with same store NOI, our third quarter same store NOI was in line with our expectations at 3.1% with our street and urban portfolio continuing to drive our results growing 4.8% for the quarter or roughly 500 basis points over our suburban portfolio.
Year to date, our same store portfolio grew 4.1% with street and urban quick contributing 6.6%, which is at the upper end of our initial range of 5% to 7% and suburban coming in around one person.
It's also worth pointing out that this growth is coming off a strong prior year comp in the mid threes and consistent with our past practice it excludes the incremental NOI from our two accretive redevelopment projects.
And I want to spend a moment on our occupancy.
Our in place occupancy is currently at 93.5% with street and urban and 91.7%.
Both of which are fairly flat, if not slightly down from prior comps, which demonstrates that our NOI growth is largely coming from the operations of our portfolio, which consist of contractual rental growth positively spreads and efficiently operating our business.
We view our full occupancy at 96%. So this gives us a few hundred basis points of occupancy gains primarily within our higher value Street, and urban portfolio, which we expect will drive our future growth above and beyond our existing contractual rent bumps and positively spreads.
Now moving onto our quarterly credit loss.
The bankruptcy or forever 21 had an approximately 30 basis point impact during the quarter.
As we have discussed we have one forever 21, and or Corp. In our core portfolio.
Consisting of approximately 16000 square feet and a prime location Lincoln Park Chicago.
Adjacent to the recently opened experiential lululemons concept that it will discuss in a moment.
Well, we don't yet have the certainty on the recapture and thus timing we have strong an active tenant interest in the space and are also exploring various profitable redevelopment alternatives.
The full year and apply impact of Forever 21 is roughly 100 basis points when factoring in annual rent them recoveries.
And I want to spend a moment on lease activity, including those new leases that we have signed along with a handful of spaces that we expect to get back over the next few quarters.
As Ken highlighted we're continuing to see active tenant interest across all of our markets in our street and urban portfolio as well as suburban with new deals being executed at rents at or above our expectations.
During the third quarter, we signed approximately $2.3 million and over 80000 square feet, a new leases, including conforming and nonconforming leases.
This volume is up over 20% from the prior quarter.
Year to date, we have executed approximately $8 million a number of new leases.
So notwithstanding the retail roller coaster that kind of discussed our nine month leasing activity exceeds what we accomplished and all of 2018, which as you may recall was a very strong year for us in terms of deal by.
Oh, the 2.3 million a new leases that we signed this quarter.
We're continuing to execute leases in line with our expectations throughout our street and urban markets, including the bought the final vacancy at Madison Avenue with oral by Brown.
ATM Ci at our redevelopment at City Center in San Francisco, Alright on Spring Street in Soho and seven for all mankind on Westport, Connecticut.
In terms of rent spreads, including our in our reported spreads is one of the very few top of the market leases we signed the.
The lease involved our final space at Madison Avenue and consists of approximately 400 square feet.
It was initially execute in 2016 at approximately $100000 a foot and reset in line with our expectations about 40% lower.
Excluding the impact of the single lease the cash spread on the other conforming space was approximately 30%.
Now moving on to tenant rollover, what we don't yet have a solid read on 2020 as we are in the midst of our annual budgeting process I did want to highlight a few up a few items.
Over the next few quarters, we expect to get back a few prime street locations upon their natural lease expiration.
Consisting of approximately 12000 square feet in high demand locations, including Soho Wall Street in Chicago, and on Greenwich Avenue, with emplace rents ranging from 150 to over $450 a foot.
We're in active discussions on each of these spaces and while we don't get have a precise estimate of the 2020 downtime. We are optimistic that we should have the vast majority of these high quality space has spoken for at profitable runs prior to or shortly after lease expiration.
Within our suburban portfolio, we have to grocers comprised of approximately 100000 square feet with leases that expire over the next few quarters.
These leases reside in our Elmwood Park and pay set of properties with average rents in the low twentys.
We have already signed new leases on approximately 80% of this expiring space with anticipated downtime of approximately 12 to 18 months as we turn the spaces.
So while tenant rollover inevitably creates variability in short term metrics, particularly given the diversity of rents that exist in our portfolio ranging from $5 to over $800 uplift.
Thankfully our portfolio consistent high quality high dumb applications and this profitable rollover is an integral part of our plan to grow our analyzed 4% over the next few years as we bring expiring rents to market.
Now moving onto our earnings our third quarter came in strong and ahead of our expectations at 34 cents a share driven by the strength of our core portfolio.
In terms of annual guidance, we have maintained the midpoint tightened our range to $1.40 to $1.42 as we're not guiding towards any additional transactional income for the balance of the here.
As highlighted in our release, we have raised approximately $140 million of equity during the year to Prefund our investment pipeline.
Based upon expect to closing dates we anticipate a penny or so of short term dilution in 2019.
As Amy will discuss in addition to the strength of our core portfolio. We're also seeing strengthen our funds.
During 2019, we have closed on over $300 million of investments in fund five which are generating a 15% Levered hey, AFFO yield.
Well the vast majority of our FFO and even higher percentage of our NV comes from our real estate operating business.
Definitely 10% of our FFO routinely shows up from profitable transactional income.
Whether it be from leasing construction and development fees promotes within our fund business or other value cats, creating transactions across our dual platform.
During 2019, we expect to earn approximately 10 cents from transactional income again, well too early to permit to provide 2020 expectations.
Given our shift toward stabilized high yield assets with less leasing turnover along with expected dispositions a fun for assets I would anticipate a few sent decline on fund transactional and asset management fees in 2020.
Keeping in mind and is evident in our Q3 results. These fees are being supplemented by high quality recurring analyze stream from our fund five investments.
Before moving onto our recent acquisitions I also wanted to highlight a decline in the quarter about a penny related to noncash straight line rent and below market lease adjustments.
As we look forward I would expect on a pro rata basis that these quarterly non cash adjustments to be in the $1.5 million to $2 million range, beginning in the fourth quarter and continuing throughout 2020.
In terms of core investments can hit the key points in his remarks, but as we've discussed last quarter, we're anticipating a penny of FFO accretion for every $100 million as core acquisitions that we do.
Further the assets that we acquired as well as those that are under contract are expected to be accretive to our existing in place and alike with the 4%.
And lastly, as a segue into our balance sheet, we have prefunded, our investment pipeline raising approximately $140 million of equity at an issuance price in excess of $28 in 60 cents a share.
While our balance sheet has always been best in class over the past few months, we have made further strides to strengthen it with core debt to EBITDA under 5% no, but you know maturities for the next several years and expanding our revolver capacity by another $100 million.
Our balance sheet, along with a significant dry powder, we're meeting an orphan business is poised to aggressively capitalize on the opportunities that we have and will continue to pursue in the marketplace.
So as we finish another strong quarter and start looking into 2020 and beyond.
Our outlook both in terms of internal and external growth remained strong and with that I will turn the call over to aiming to discuss our fund business.
Thanks, John .
Today I'll review, the steady and important progress that we continue to make on our fund platforms by fixed sell mandate.
Beginning with acquisitions.
The third quarter of 2018, we completed approximately 320 million of acquisition.
This compares to approximately 150 million a fund acquisition volume for all of 2018.
During the third quarter fund size acquired a total of three properties for $142 million of which 55 million was acquired in partnership with DLC.
We consider two of the three properties to be the CLO best game in town that is we view these properties as top among a handful of competitive properties in their respective submarkets due to their strong positioning and tenant lineup.
To that point tenants at these properties include Ross dress for less best buy dollar tree an OTA.
The third property is a well located kmart anchored shopping center here, the 95000 square foot Kmart pays rent of less than $3 per square foot, which we've identified as an accretive value add opportunity over the next few years.
In the interim at our acquisition cap rate the property continues to generate strong leveraged yield.
As Ken mentioned over the past few years, we have successfully aggregated and approximately 650 million dollar 14 property portfolio on behalf of fund size.
And we've done so at an unleveraged yield of approximately 8%.
With leverage we are currently clipping a high teens yield on our invested equity.
On the downside perspective at this rate, we could have a zero cost basis in only six years that more realistically, we're thinking about how much more quickly we can achieve our equity multiple gold equity multiple goals at the approximately 150 basis points of cap rate expansion that we've seen over the past few years for.
These types of not supermarket anchored centers begins to reverse.
In general with 100 basis points of exit cap compression, we can achieve roughly the same equity multiple in three years instead of size.
And the positive impact on the IR given the compressed hold period is generally north of 500 basis points.
As previously discussed cashless stability is key to our strategy to that point. We're pleased to report that these carefully selected assets continued to perform consistent with our underwritten expectations.
And in the few instances, where we have unexpectedly lost attendant for example, a babies R us in Hickory North Carolina.
We've been able to backfill the box in that instance become goods on a generally yield neutral basis.
Turning now to dispositions.
In September fund for sold 930, West North Avenue, and Lincoln Park Chicago.
We acquired this property in November 2013.
As previously discussed during our hold period, we re tenanted this building with a super sized lululemons.
There are new flagship includes new elements beyond shopping such as a restaurant workout studios and meditation space.
You may recall that this property is down the block from another Acadia redevelopment known as Lincoln Park Center.
Formerly a borders books that property is now anchored by design within reach.
After completing that we anchoring we sold at Lincoln Park Center in January 2015, achieving a nearly 60% IR and 2.7 multiple uninvested equity.
In comparison, the realized returns for our neighboring little them and reflect the reality post retail Armageddon that assets are taking longer to lease up and when that happens there's downward pressure on returns.
That said keep in mind that both funds three and four have benefited from very profitable investment on Lincoln Road in Miami Beach, and with respect to fund three which is further along in its monetization period.
On a gross basis, we've already achieved at 21% IR and north of a two X on invested equity on our sold investments to last quarter.
Looking ahead, we are focused on stabilizing that funds final four investments most notably in new Shoprite directly across the street from Cortlandt Town Center in Westchester County, New York.
Although it's still too early to predict the exact timing of these sales we look forward to the successful winding down a fund three over the next couple of years.
Especially since our prior sales have put us in a profitable position.
Finally, a brief update on Citypoint, our urban retail property in downtown Brooklyn.
We were pleased to welcome Casper Prince Street at the end of the summer.
Store openings for camp and begun Alley, Jackson will follow and Prince Street in short order.
And on the fourth floor. We are also in the process of expanding Alamo Drafthouse are incredibly successful movie theaters.
Citypoint benefits from its strong location at the epicenter of growth in downtown Brooklyn, and its critical mass of compelling food entertainment and soft good he says.
Which continues to drive strong foot traffic and incur sales.
Looking ahead, we believe that rents at this property has a lot of runway, especially once the construction on gold Street is completed and then Newpark at Willoughby Square open.
In conclusion, we had another productive quarter in our fund platform.
We continue to execute on our opportunistic and value add investment strategy monetize our stabilized properties and create value within our existing FID portfolio now we're happy to answer your question.
Thank you.
As a reminder to ask the question you will need to press star one on your telephone to withdraw your question press. The pound key please standby will be compiled the county roster.
My first question comes from Christine Mcelroy of Citi. Your line open.
Hi, Good afternoon, everyone I'm, John I, just wanted to reconcile some of the items that you discussed around expectations for same store NOI growth you talked about the occupancy runway in getting ultimately to 96% you have the unique well leave a unico lease commencing and other leases executed.
But you also talked about these high value Street speech Recaptures next year, how should we be thinking about all of those moving parts in the context of same store NOI growth. It isn't the the three to have to 4.5% that you've seen this year sustainable into 2020 or should we expect something closer to that 3% kind of law.
Longer term embedded growth rate that you also talked about.
Yeah, Chris and I think you sort of highlighted that there are a lot of moving pieces and I think we will as we always do give more definitive guidance in February but.
But I think we reaffirmed that the 4% which is 3% same store through the next several years is intact, but until we have some certainty around the moving pieces I could just a little bit little bit too early at this point us to give anything for.
So just on the on the Uniqlo leads can you talk about the PML impact there in the context of sort of the timing around when they took the space and when the rent commences and how that impacted how that's impacted straight line rents versus the timing of when that starts to get booked as cash rent.
So when they sort of took over the space versus when they actually start.
Right.
Yes, so I think for GAAP purposes, we wouldn't be turnover second generation space, where we're not doing significant work, we will start straight lining as of the turnover days, which began this this quarter. So there's a few hundred thousand dollars of straight line adjustments related to uniqlo, but given that the rent doesn't commence until they open.
And.
That's going to be in late late Q4 that that we that it will start showing it'd be reflected in our and our same store results.
Okay. Thank you.
Thanks, Yeah, and our next question comes from Craig Schmidt of Bank of America Hang Your line is now open.
Thank you.
I was wondering if you could give the total square foot of the five contiguous store fronts on Melrose. Please.
As soon as we close Craig will give more detail and we're pretty close to getting this closed and we have a firm contract, but there's a lot we want to talk about there as soon as that happens.
Okay, and then maybe.
This might limit this as well, but I was wondering if maybe you could contrast.
Street, and urban market, Natalie versus let's say, a new Yorker, San Francisco and.
How you want to take advantage of that.
Sure and.
And each market is different.
But all of the markets.
The first stop this conversations with our retailers, where do you want to be what's working.
Whats affordable whats profitable how do you think about your businesses and so while it's certainly different on Armitage Avenue, then on Green Street, and certainly different and Union square San Francisco versus.
In L.A. and on Melrose place, here's what our retailers have been telling US you had a three block stretch that's really quite unique for them, where combination of social media and Instagram bubble moments, but also for these retailers to drive their omni channel sales it's.
At the epicenter of it so whether its glossy a or the ROE.
They're looking at the streets is being powerful above and beyond the fact that they are profitable on a rent to self basis, which they are they are affordable relative to other alternatives, which they are but because they are unique because especially in L.A. where.
The shopping experiences are very different lets say then strolling in Soho <unk>. This is providing what our retailers are telling us is a unique opportunity for them to really get their brand out there in a positive way.
Were they can drive both four wall EBITDA <unk>, but then as importantly, omni channel.
And your into see that continue because it is such a unique stretch and then from our perspective than we've been pretty clear about this we want to own.
Clusters, where we can connect the dots, where we can control enough different spaces, because already in conversations with retailers someone to expand.
Others want to consider other alternatives.
In Armitage, we're going through this right now in a positive way, so where we can move tenants around where we own enough contiguous or near spaces and that has been a proven success for us and so we think about the different markets in the United States, when we sit down with retailers and ask them where are they excited and that's what.
Leads us their first and foremost and then secondly, because just because retailers want to be there and just because we like the location we need realistic sellers.
If we don't see realistic sellers, there's nothing we can do so we have a situation here, where we think.
There is long term value add opportunities.
We have a seller that we have enjoyed doing business with so we're looking forward to it.
Well, thanks for the color sure.
Thanks, Yeah, and our next question comes from Todd Thomas of Keybanc Capital markets. Your line is now open.
Hi, Thanks.
Just first question in terms of.
Operations here, so John the Forever 21 that you discussed you said there was a 30 basis point impact in the quarter and the annual impact is expected to be roughly 100 basis points, but you haven't recaptured that space yet. So what was the 30 basis points attributable to specifically in the quarter and is the retina NOI run rate.
Already accounting for downtime or the recapture of that of that's of that space. Yes told the pre petition bankruptcy rents or would have been september's rent wasn't wasn't paid so that was we put a four reserve on on the one month, so Brad recoveries in any open receivable. So thats one month of.
The third quarter.
Okay got it.
And then so a couple of quick questions on investments here. So first you know we've seen the pace.
You know if investments pickup some particularly in the core and I'm. Just wondering if we should expect to see investment activity accelerate further as we think about 2020 I'm just based on what's in the pipeline and then I'm curious, whether you're seeing some some larger portfolios come to market as it's.
Patient seem to have reset some maybe something a little more sizable than what you've seen this year, so far in Soho and in la and hour or should we should still be mostly thinking about smaller one austin and some small portfolios or or collections of assets like this.
So it's a great question, Todd and the short answer is I don't know and so people are not.
Read too much into what im about to say because the last time I talked about a pathway to growth that was both.
Aspiration, all and I would argue observation on meaning when I look around now.
And I see who is active and who is not who sidelined in terms, especially of high quality Street and urban assets, we feel really good about our position both in terms of what we understand our dialogue with the retailers, where we can pick locations.
So that seem to over the next 135 10 plus years work, there's not a lot of bidding competition.
And there are more and more larger portfolios coming to market.
And to your point sellers I think are.
Not all of them, but sellers are beginning to become more realistic.
So there's nothing that would cause me to think that we couldn't see more investment activity and ramp up but the reality is we don't have to do any deals in order to drive strong internal growth in order to drive strong core growth. So if so.
Others change their mind, if there are shifts in the economy that caused us to pause shifts in the stock market there caused us to par plus we'll pause, but right now I like what we're seeing.
And we're still in the early stages of the shake out of the hasn't have not so as more and more clarity comes in as retailers.
Become.
More adamant that their rethinking their business models and you're seeing this not just from digitally native but from an iconic brand, saying you know what we're going to reduce the amount we're selling through the wholesale channel will try to grow DTC, but while we do grow direct to consumer we need to acknowledge that.
Stores are an important piece of the way we do business.
Well when we hear retailers talking like that we say where do you want to be.
And to the extent, we can get our.
Foot in the door on those type of acquisitions, especially where we can own on multiple buildings that makes sense for us.
You've seen on the small side, we can add one or two buildings on any given street that were already active then and we're a small enough nimble enough company. We can do that well as we think about larger portfolio transactions there needs to be concentration and they need to make sense or we won't do them <unk>, but as I started this conversation one I don't know too, but when I look around.
I like how we're positioned in terms of.
The.
Lack of competition, there's still plenty of competition out there.
But it's much different than it used to be and that makes us pretty excited.
Okay. That's helpful and what about in fund five with the high yielding investment strategy. There. So you noted the spread between Unlevered returns and borrowing cost being extremely attractive.
Are you starting to see cap rates compress a little bit on that product.
You know as it sounds like you might be underwriting or or anticipating based on your comments.
And is the competition changing at all.
For those assets given the decline in borrowing costs.
Yeah, So I keep waiting for that and there is a somewhat gets a friend of world. We live in where we are waiting could cap rates go up when you talk to some people could they go down when you talk to others to be clear and so everyone understands.
This spread is primarily in non supermarket anchored shopping centers and there's still a lot of muscle memory around supermarket anchored shopping centers, it's not that we don't like them, but even John hinted at this earlier.
In his prepared remarks, there's a lot of disruption in the supermarket space.
That may or may not be priced into the amount of redevelopment that has to occur there, but for non supermarket anchored centers so far.
We are seeing decent dealflow, there's competition, but not nearly as much as they're used to be because institutional investors are still for the most part on the sidelines what I do expect to change is the type of seller.
HM primarily over the last couple of years. It has been public companies selling assets and I think appropriately so de leveraging.
It seems to me based on a bunch of recent data plus how stocks of trade that many of them are saying mission accomplished on their side and great.
What we're now seeing as other institutions, saying it is time given the life of those funds or is there and core funds for them to try to monetize.
And.
I'm not seeing enough new institutional private capital jumping in to think that those spreads compressed but do keep in mind I think we're in a win win position.
So if interest rates stay low end cap rates compressed a little bit we can still achieve our returns because we didnt underwrite 3.7% blended.
Interest rate, we underwrote higher.
If cap rates compress a lot I think Amy hinted at a we have no problem then our bikes excel model monetizing. So we just have to be nimble enough that if the markets continue we'll continue to add that is my guess is my base case for the next year or two.
But if we see a shift if we see a return in terms of institutional capital coming back.
Into this stable low growth, but stable.
Retail environment, right, we know how to monetize and how to create shareholder value around that.
Okay. Thank you.
Thanks, Yeah, and our next question comes from fan.
Of Green Street Advisors. Your line is now open.
Hey, good morning. So it was the Los Angeles is a new market for Acadia I'm, just curious if you're actively looking to gain further scale there and if so would it be likely concentrate in the Melrose area or are there. Other streets are submarkets in L.A. that you find interesting.
So Vince you know, we don't enter new markets casually and we'd spent months if not years.
Watching the different markets to see where can we get the right combination or.
Scale adequate barriers to entry strong retailer demand.
In L.A. is eight disperse to call at one market to even pretend that it's anything like San Francisco or New York in terms of that level of dispersion. It's very different so we would welcome the opportunities. If we see them you could run through your list right now of where are the key streets that we'd want to be active in.
And.
Then the question is do we have enough realistic sellers, where we can aggregate enough of a portfolio on a given prominent to say we can make a difference and if the answer is no and it's just to disperse and it's still going through.
Too much headwind will probably hold off on that location until we see it turning the corner. There may other be other areas that are great to go out to dinner that are really hip but again, we don't think we can add enough buildings. There when we may wait until we see a larger opportunity, but there are probably.
Three to five different markets in L.A. each of them separate and that excite different retailers different ways. If we can see the right entry point.
I see no reason for US 10, not add but you know we are patient and disciplined so for now I would.
Expect to see a stay focused on Melrose place, let's prove that out and then we'll see what shows up next.
I mean, it makes sense, so kind of on that point it seems like other new markets seem pretty unlikely I'm in the near term then I mean is it fair to say that growth will be no external growth will probably be concentrated more in your core market. The now possibly Los Angeles.
We on a ratio of.
10 to one.
Our acquisition investment and leasing team spend time on those markets that were currently active there.
So we do not feel like we need to though at a new market a quarter a month or even a year.
We have great concentration down in DC.
We're beginning finally to build concentration in New York City.
Boston, Chicago, San Francisco now a law.
We could debate online or offline weird the next place should be but I would expect our team to be spending 90% of their time and effort on the existing market because that's what we're going to know best and frankly other than maybe one or two other markets where retailers are saying those are must have.
Locations the ones we are.
Our in our the key gateway must have locations for retailers looking to express their brand to the consumer in a unique way that complements their omni channel channel strategies.
Got it. Thank you so I have sure.
Thank you Yeah and our next question comes from far as fan discount of Compass point. Your line is open.
Great. Thanks, guys.
Quick question on on the return expectations, you've talked about for your funds needing 8%.
Unlevered returns presumably for the core.
It's the same.
Level or if not a little bit higher and the composition of returns obviously is both income and growth as you think about.
Or acquisition on Melrose place.
How does the composition between income and growth compared to your to your new.
Worked assets and your overall portfolio.
Sure So let me.
Talk Floris about our hundred $80 million of core acquisitions year to date and be a little more vague about building by building or even melrose versus Soho et cetera.
And you are absolutely right. That's the way we think about the world is there's assets you can buy at an Unlevered eight and then there's asset that you buy at a lower well and the Unlevered eight having what we anticipate to be very limited.
Yield growth, meaning there may be rent growth as tenants turn but you have to spend money. So you started an eight and it grows to an eight and our goal is making sure we don't by eight that grow to force.
Then on the longer dated core assets, we've been pretty clear what we're looking for is plus or minus 4% compounded annual growth.
Through a combination of contractual leases these leases contractually tend to be about 3%. Sometimes there are two sometimes they're higher but three is probably pretty good number and then we are looking for.
Certain upticks along the way.
Although we are very sober about the realities of the marketplace right now so we do not believe trees are gonna grow to this guy there, but if you use for.
So then what I would tell you is and again, we have a few moving pieces on $180 million of acquisitions. This year. It before we even get them closed.
But with a few moving pieces John said on the last call and it still remains the case, we expect to be pretty darn close to a 5% yield going in.
And then we expect that 3% to 4% growth can't tell you, which quarter three becomes for but we feel pretty good. After we have seen rents in some markets declined in some cases precipitously, we feel pretty.
Pretty good that there will be a rebound now whether the rebound.
Is.
Hey, rents, increasing periodically at 10% which would be great.
We're an unhealthy 20, or 30%, which was what was occurring in the 2010 to 2015 period, which we are not pushing for.
But if there's some form of rebound we think there will be asymmetrical upside such that the returns we get in the core.
Reward us for not getting current yield at eight day, one reward us for a I think more interesting more robust long term ownership as retailers continue to shrink their footprint do more with less but it's also a longer dated investment.
We're not sitting there levering it two to one we're not worried about what the exit cap might be in two years.
So hopefully that I guess, that's a long way of saying.
Eight plus zero or a five plus three or four get you to similar returns.
Fair enough and so they do we should think about it so maybe maybe five or five ish.
Initial return and then and then growing overtime is that the right way to think about it.
With the following huge caviar, there's a bunch of assets.
That trade well below that.
Going in and we have to recognize that the that given how low global interest rates are.
For these markets don't be surprised when you see very low cap rate trades elsewhere.
We acknowledge that we don't chase it but we acknowledge it.
But where we can find.
The REIT portfolios the right assets that meet those needs.
The answer is yes.
Fair enough if so the just so if we see those lower yield so presumably we have to assume that.
The growth will be higher too to get to your.
You are 80% plus return that means that potentially you're looking at.
4.5% return overtime.
Well, so let me be let me growth.
Let me be clear in case I Wasnt when you see those transactions with very low yields printed.
The first thing you should assume is we're not the acquirer.
But there has been a few transactions on fifth Avenue do I think that have just been incredible in terms of how low the mark to market effective yield this.
We're not requires with us and sellers like to point to them and say well why can't you compete with that sovereign wealth fund and Byetta three and a half we can't we won't in the core.
Our focus is not chasing liquid markets. It's great to know that there's liquidity. There is a backstop in terms of the capital markets. Our focus is to.
Chaise, where retailers want to be and where we stand a fighting chance of seeing exceptional rental growth and because we're going to own them in the long run.
If we can acquire at the yields I just discussed if it's lower yes, you're right. If the going in yield is lower than that you should accept expect us to be able to realize upon.
Higher rental growth and I just discussed.
But I was referring in lower yields primarily to some transactions that have made the papers at cap rates that we can't compete with.
Fair enough.
One follow up question on city points and the expected stabilization are you getting closer to having that asset be stabilize and have a whole for ground floor retail.
Leased or when do you expect that to happen.
So the short answer is yes, we're getting closer and but we're nowhere near as close as I would like to be the great News is historically the challenge in urban mixed use retail is always then what do you do with the upper levels and what do you do with your basement and in that case, we are fully stabilized and for.
Finally, the retailers are crushing it between Alamo Drafthouse target.
Dekalb market trader Joe's so we solved the hard part what we have not been able to solve for is the realities that we're still under construction. So.
That the park, that's going to be incredible across the street, but is beyond our control is still at least a year away is that the tallest tower today in downtown Brooklyn is adjacent to us and their topped off but they still have some more work to do so it still feels more construction like then the street it will.
Down the road that once that towers complete theres. Another tower block away that will then be tallest tower, Brooklyn, probably for a long time so I.
I don't want to predict when all of this gets done.
But what is becoming clearer to us as we look around is that we are at the epicenter of a pretty exciting area in terms of mass transit in terms of sales that alamos doing trader Joe's doing et cetera, and then we just need to.
As aggressively as we can but we need to be sober about how long it's going to take we need to get this ground floor leased up our focus here would be I don't want to leave money on the table, we were too long to hard for us so predicting or telling you that next year. All these rents will be at full market.
I think is unlikely I think it's a multi year task, but we're up to it.
Great. Thanks.
Thank you yeah.
Question comes from Hong Kong of Jpmorgan. Your line is now open.
Yeah, Hi, guys, Yes last quarter, you talked about how how you're benefiting from lower than expected credit loss reserve. That's still the case I guess it sounds like next year the credit loss will be higher is that fair.
Hey on so yes, I would say in terms of where we were for the quarter I'd say, we were with the exception to the forever 21, we were.
A little higher by the 30 basis points that that we took this quarter in terms of next year I again, I think it's been early but I think we always start the year somewhere between thinking about.
Between 100 150 basis points, so I'll definitely have a better view on that as we get.
Up to our next call.
Yes. Thank you.
Thanks, Yeah, and ladies and gentlemen, this does conclude our question answer session I would now let's turn the call back over to kids Bernstein for any closing remarks.
Thanks to everyone look forward to speaking to next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating may now disconnect.