Q3 2020 Acadia Realty Trust Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2020, Acadia Realty Trust earnings Conference call.
This time, all participants are not listen only mode. After the speakers presentation. There will be a question and answer session asked the question. During the session you will need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Jim.
For Han Please go ahead.
Good morning, and thank you for joining us for the third quarter 2020, Acadia Realty Trust earnings Conference call.
My name is Jennifer Han and I am in assisting controller in our accounting Department.
Before we begin please be aware that statements made during this call that are not historical maybe deemed forward looking statements.
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 FCC forward looking statements speak only as of the date of this call November 4th 2020.
And the company undertakes no duty to update them.
During this call management may refer to certain non-GAAP financial measures.
Including funds from operations and net operating income.
Please see Acadias earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.
Once the call becomes open for questions. We ask that you limit your first round to two questions per caller to give everyone the opportunity to participate.
You may ask further questions by Reinserting yourself.
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And we will answer as time permits.
[laughter].
The call over to Ken.
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President and Chief Executive Officer.
We will begin todays management remarks.
Thanks, Jen good afternoon, everyone I hope everyone is well.
Today is certainly today chalk full of distraction. So I appreciate you joining us perhaps it gives you some time to turn off C N N or Fox news or whatever election feed.
And talk with us.
So before I hand, the call over to John and Amy Let me discuss some of the trends that we're seeing throughout our portfolio on our platform.
First as it relates to our core portfolio performance in our collection.
We have seen continued improvement continued re stabilization after a very scary sprint as you may recall back in April.
Half of our tenants were not paying us rent.
Then by June things began to improve.
We were collecting approach.
Approximately 80% of our build rents with approximately half of the unpaid balance attributable to credit tenants that were either in the borough agreements.
Or in dispute resolution.
Thankfully since then.
Our credit tenants have largely resumed paying.
Paying pursuant to their leases and accordingly by the end of the third quarter cash collections.
We're in at 90% of our pre coal the billings.
And what we're seeing is that each month.
Has been getting better than the prior month, and thus we got to the 90% rate sooner than we forecasted.
This improvement is also consistent with our stores reopening which at quarter end were at similar levels to our collection rate.
So what does this mean for the remaining 10% of our portfolio, that's not yet been collector well the splits into two even buckets about half.
Our tenants on our watch list.
Where we are not expecting these tenants to survive post called it.
We're rooting for them.
Well work with them.
But we will continue to fully reserve against their rents for reporting purposes.
And are much more focused.
On the quality of the locations, which is strong.
And the tenant interest which is also strong.
Then the other half.
Consist of a combination of tenants that entered into this crisis on healthy footing, but are dependent on post the cobot conditions for a full recovery.
This includes our Jim our theaters or sit down restaurants, as well as certain other local tenants in our suburban portfolio.
So here for this 5% of our in Hawaii.
The repayment of background.
It's less of an issue.
Then when can these tenants get fully reopened.
And back to prior revenue.
So then on the other side how stable is the 90% that we are collecting well as we've discussed on past calls.
Our core portfolio breaks down roughly 40% Street retail, 20% urban 40% suburban generally.
The properties have longer term leases with about 10% of our portfolio expiring per year over the next few years.
Our portfolio wall concentrated in the key gateway markets.
It is also nicely diversified target as our largest tenant throughout our portfolio and then other significant tenants include TJX.
Oh supermarkets trader Joe's.
Even in the 60% of our portfolio.
That is street and urban.
Keep in mind, one third of our properties are with tenants meeting the essential or daily needs of local customers ranging from target to trader Joe's to Walgreens.
One third of our street and urban portfolio consist of properties in less dense, but unique streets in areas like Greenwich are Westport, Connecticut and here, we are seeing a lift in the residential market. After several very quiet years.
And this too is beginning to play out positively for our retail assets there.
Thankfully this diversification has enabled us to maintain collection rates in our street and our urban component of our portfolio that approximates our suburban collection rates.
Now that being said.
For that portion of our street and urban property.
Properties at the epicenter of this crisis, whether it be Soho or North Michigan Avenue, it would be crazy to ignore.
The short term challenges that.
That we're facing here 24, seven cities can not get back to prior vibrance.
While tourism is on hold while the majority of office workers are working from home, especially when that home is temporarily somewhere else.
But this trend will for the most part reverse folks.
Folks who are hiding out in mom talk or Montana.
Most likely they're going to come back home.
And others are going to come in as well and eventually.
So we'll tourists.
Who frankly really don't care, what sub or people are moving to.
When they're planning their vacations.
What our retailers are telling us.
[noise] as they refine their fleet and redefine the importance of their stores.
These gateway locations, especially at current rents.
We will again be of Paramount importance.
But to be clear.
We don't expect ranch, a bounce back to prior peaks anytime soon we don't need them too.
We were careful about how we bought we were careful about how we leased our assets in these markets for instance in Manhattan.
Which represents about 10% of our otherwise.
Our rents their blend to $250 a foot now that's expensive for tenants.
When the city is locked down.
But is a fraction of pre co bid market rents and it's likely to be a good basis to build on as these markets reopen similarly in Chicago, our rents their blend to $60 a foot and again there one third of our revenues come from.
Hi credit essential retailers.
So what.
Well, we have a ways to go before we are in full recovery there is more upside than downside in Iran. Even after taking into account.
The significant impact.
Of this cobot crisis.
And thankfully this is not just wishful thinking.
We are seeing this in our leasing activity on the last call, we discussed our leasing pipeline being over $6 million.
Where we are at various stages of completion with potential retailers as of this call not only has that pipeline continue to grow in total dollars.
But we have already successfully completed over $1.3 million of leases.
And have another $1.7 million with finalize leases out for signature and then behind that a significant and growing pipeline.
So keep in mind.
Given that our pre cobot core NOI.
Was roughly $140 million.
And as we discussed on our last call we are expecting roughly a 10% hit to the satellite before we start seeing a bounce back.
Well the leasing progress.
We are seeing and we are executing on is a solid first step in that bounce back.
It's also encouraging that our leasing activity is spread fairly evenly throughout our portfolio notwithstanding all of the short term challenges in the gateway cities over half the leases signed.
And a similar percentage for those in our pipeline.
Were for our street and urban assets.
And when I look at this pipeline.
And in our conversations with our retailers a few trends the Plano.
First of all.
While the accelerated growth of online sales may be getting all the headlines.
Even more significant.
Is the acceleration of the omni channel business model.
Direct to consumer DTC.
Online sales have been a lifesaver for some businesses such as the digitally native retailers like Warby Parker, all birds, who used their online direct connection to the customer to navigate through the crisis, but now as we are beginning to climb out.
These tenants are making it clear to us.
That they continue to view their stores.
Like those that they have with us on Armitage revenue in Chicago as a critical part of their growth plan.
And keep in mind Omnichannel is not just the startups, but it's also proving to be.
A long term profit driver for other dominant retailers like target who has proven during this crisis.
That the combination of great stores.
And solid online execution is a critical differentiator for them.
And targets continued rollout of their small format stores.
Is yet another positive indication of how omnichannel is likely to play out.
This trend in the long term bodes well for our portfolio given the density and the demographics of our portfolio.
Given the long term last mile attractiveness of our street and urban portfolio.
We believe our assets are going to continue to resonate with our retailers as we recover.
Then a second trend.
The U.S. is working through the realities of being over retail.
Our industry is battling through a sea of sameness well.
Well frankly that is hardly induced flash but.
If cove. It is in fact, an accelerator and it certainly appears to be.
Expect to see an acceleration of the resolution of our over retailed environment.
As well.
And rising from this disruption will likely be fewer stores as retailers refine their fleets.
But also fewer shopping centers as failing retail centers get re purpose.
And the stores of the future will be even more impactful.
The stores of the future will either provide everyday needs in the most cost efficient and time efficient manner.
As we see with tenants like target.
Or they're going to provide exciting and highly curated.
Shopping opportunities as we see with successful retailers in our portfolio like we will limit or they're going to provide a truly unique treasure hunt and value proposition.
That is generally not available online and as we see with tenants of ours like trader Joes and TJ Maxx and that is why as we work through this incredibly difficult time.
Highly differentiated and mission critical locations like those in our portfolio will win.
Whether it's Armitage Avenue or Greenwich Avenue for certain retailers.
Green Street, or Melrose place for certain shoppers.
Or our target anchored shopping centers in Chicago, and San Francisco meeting the daily needs of the millions of residents who will be living there.
Even after everyone moves to Nashville.
Okay.
Turning now to new investment activity.
We thankfully have are fully discretionary fund five and half 40%.
Of those commitment commitments available for new investments, that's roughly $600 million on a levered basis.
Given the amount of disruption in the retail real estate markets and for a variety of reasons is understandably, taking a while for actionable investments to come to fruition.
So we were disciplined last quarter, we did not close on any new acquisitions, but we are beginning to see a pipeline build with interesting opportunities and if the public markets.
Our even partially or Directionally correct.
We expect some of our current deal flow to present actionable and exciting opportunity so stay tuned.
And in summary.
While our country.
Our industry.
Our company.
Are all still working through an incredibly challenging health crisis, and the corresponding economic fallout from it.
I am very pleased with the progress that our team has made last quarter. Both in terms of collections and in terms of leasing.
And then as we begin to think about the past this crisis.
And look at the very unique and very high quality portfolio that we have assembled and its potential for asymmetrical upside.
When I think about our team's ability to execute on new investments both for our fund and then eventually again for our core.
I remain very encouraged about what the next few years could bring.
Most of all.
I look forward to all of us safely soundly.
And profitably getting to the other side of this.
So with that I would like to thank the team for their hard work during a time period, where using the word unprecedented sounds trite, but during an unprecedented time and with that I'll turn the call over to John.
Thanks, Ken and good morning, everyone as Kent has already hit the key points on cash collections Im just going to add a few additional thoughts about how we actually think about those percentages as we monitor and manage our business.
And it really falls into two buckets first.
What is the collection percentage, telling us about a postcode ally.
As Ken mentioned, we're now collecting 90% of our monthly billings.
July high and growing collection percentages certainly our goal it doesn't tell us the full story.
Consistent with our past disclosures, we monitor and report our percentages based upon pre cobot billings, which means that we don't modify the denominator for deferral agreements.
Additionally, our billings for the third quarter or about 99% of what we were building pre Toby.
So what this really tells US is that our increased collection percentages are continuing to support our current expectation of about a 10% adjustment to analyze.
As this higher percentage is indicative of increased cash flows and not from reducing our denominator for deferral agreements or even worse declining occupancy.
Now moving onto the second bucket I mentioned, we also assess how the cash collections translate into our operating results and ultimately what I believe is the most relevant data point our balance sheet.
Through our increased Capex cash collections of approximately 90% coupled with our ability to breakeven below 50%.
We were able to retain in excess of $20 million in cash during the quarter.
And in fact this is what showed up as a reduction of our debt on the balance sheet.
And secondly, I think about how much tenant exposure, we are carrying on our balance sheet or said differently. What do we have remaining on our books at September thirtyth irrespective as to whether or not they are covered by a deferral agreement.
And consistent with our proved collections our tenant receivable balance has decreased considerably as compared to Q2.
And in fact is on par with our balance at year end.
Now in terms of deferral agreement, which again as a reminder is not part of the 90% we collected it turned out to be a relatively insignificant number.
With approximately $5 million of deferrals sitting in our receivables at 930 and repayment expected in 2021.
Now moving on to earnings.
FFO as adjusted was 20 cents a share for the third quarter, which is highlighted in our release included about 15 cents of credit reserves.
Of the 15% of reserves, we took six cents of those came from reserves against straight line rent.
And those arose from a handful of tenants primarily within our fund business and the vast majority from the bankruptcy of century 21.
So while it's always tricky to predict reserve against straight line rent, particularly in the current environment. My expectation is that the amount of reserves should decline considerably going forward.
The remaining nine cents of reserves was taken on build rents and recoveries. So while an increase as compared to Q2, we don't view this as being an indication of deteriorating operating kid conditions during the quarter, but rather a clean up of some past two accounts that we took this quarter in both our core and fund prime.
Primarily within the gym theater and full service restaurant portion of our portfolio.
As you will recall this represents a little over 5% of our core SBR, but.
But yet comprise over 50% of our third quarter reserves.
Sweating, 90% collection rate and a reserve of about 10, percents again rents and recoveries, we are effectively reserving whatever we're not getting paid during the quarter. So all else being equal if we retain our current collection pays we should see a reduction in our core credit reserves during the fourth.
Additionally, consistent with the trends we saw in the second quarter. Our reserves continue to largely follow the percentage of FBR that is derived from our street urban and suburban portfolios.
As a reminder, our abbey are split approximately 40% to each of our street and suburban portfolios with the remaining 20% coming from Herb.
During the quarter approximately 38% of the reserve came from the street, 37% from suburban and 25% from RBC.
Now in addition to AFFO I also want to highlight our adjusted funds from operations or AFFO.
As we think this provides a good lens into the recurring cash flow that our portfolio is generated.
As a reminder, AFFO eliminates the impact of non cash revenue adjustments and has reduced by recurring capital expenditures.
So FFO is traditionally almost higher than hey, AFFO. However, we are now seeing the inverse play out this quarter.
AFFO for the third quarter was 24 cents, which was not only four cents higher than our FFO. It exceeded what we generated during the second quarter after excluding the impact from the realized Albertsons game.
So this highlights to us a few important things first as we approach a collection rate a 90%, we are generating and retaining over $20 million of quarterly cash flow and.
And this is after reducing our earnings by recurring Capex, which given the nature of our street and urban assets continues to be well under 10% of our NOI.
Now moving on to lease activity in occupancy as Ken mentioned, we are seeing solid and encouraging activity in our leasing.
Not only in terms of new deals and renewals, but also with an increasing pipeline.
As highlighted in our release, we had solid spreads on conforming, new and renewed leases of 12 and 5% on both a cash and GAAP basis, respectively and in addition, during the quarter, we executed leases on over 20000 square feet of July.
With rents of approximately $25 a foot on nonperforming spaces.
Now in terms of occupancy occupancy percentage as we had anticipated it dropped by approximately 200 basis points to the quarter and none of US none of this was a surprise to us.
As all of these tenants had been on our watch list, we've been reserving them for several for several quarters, even prior to code.
And as we've shared in the past all occupancy movements within our portfolio are not created equal given the wide diversity of rents between our street urban and suburban portfolio.
And the most significant movements that occurred during the during the quarter occurred within our suburban portfolio and the majority came from three tenants at an average rent per foot of about $12.
So as we think about our current occupancy levels and the 10% and analyze that we ultimately anticipate.
Given the strengthening lease pipeline that are at advanced stages of negotiation that Ken discussed this provides us with cautious optimism of the potential for significant NOI growth on the other side of the pandemic given the high quality spaces that we have in our inventory.
Lastly, I want to highlight a few items on our balance sheet with an update on the dividend on our dividend as a reminder, we have no material near term capital capital equipment with no meaningful debt maturities no material development or redevelopment commitments.
And as I mentioned earlier, a low recurring capex.
Now in terms of the dividend.
As we had highlighted in our release given the increased confidence surrounding the resiliency and pace of collections along with leasing velocity. Our current and current intent is to reinstate our dividend in the first quarter 2021.
In terms of the specific them out we're not board have yet to determine a definitive level, but we're considering the following guidepost with cash cash collection rates approaching 90% and a breakeven under 50%.
We should continue to generate cash flow before paying a dividend in excess of $20 million a quarter.
Which we think should translate to recurring FFO in the near term and the dollar range.
One dollar per share range, and while always a bit more difficult to estimate given the nuances of the tax regulations.
Our initial estimate of taxable income prior to capital gains should be roughly 60% to 70% of our anticipated AFFO.
So again, while we and our board have not yet finalized the exact amount of the dividend. This should provide a decent sense of the parameters that we're thinking about as we head into 2021.
In summary, we are pleased with the pace of recovery that has transpired within our portfolio. This past quarter and we recognize that we all have some tough months in front of us, but feel confident with the strength and resiliency of our portfolio our balance sheet and most importantly, our season management team. We are prepared and excited to work through these challenges and expect there will be a.
Tract of opportunities to create meaningful value on the other side of this I will now turn the call over to Amy to discuss our fund business.
Thanks, John today ill provide an update on our fund platform.
First with respect to our existing fungicide portfolio.
Since 2016, we successfully aggregated in approximately $650 million portfolio.
Jean Open air suburban shopping centers.
Given the state of the transactional markets, we were able to acquire these properties at a substantial discount to replacement cost and add an unleveraged yield of approximately 8% then.
Then we secured two thirds leverage at a blended interest rate of 3.6% in.
In doing so these properties have been delivering an attractive leveraged returns and.
And we expect that most of our total return will come from current cash flow.
Over the past several years, we've carefully curated this portfolio acquiring assets that we believed would have strong underlying stability.
To that point this year the Sun collection rate has remained resilient. Despite the cool the pandemic consistently coming in in the mid to high Eightys on a cash basis since July.
Accordingly, we continue to make monthly distributions from this fund to its investors.
Post outbreak Weve also been encouraged by the strong leasing activity within the fungicide portfolio with our leasing team delivering 95000 square feet of executed leases with one and a half million of annual base rent.
And another 172000 square feet of leases that are either at least or at a little light with a combined $2.8 million of annual base rent.
The pandemic has reduced our current leverage yields by approximately 100 basis points, but we are still clipping a coupon between 13 and 14% on our invested equity and this feels pretty good, especially compared to alternative investments in the real estate sector.
On the acquisitions front, while our transaction activity last quarter was quiet.
As discussed our existing fund five investments are performing well and with approximately 200 million of discretionary capital still available to invest we believe we are well positioned to deliver attractive returns for fund side overall.
Given cobot headwinds, we will remain appropriately disciplined, but we do expect to see outsized opportunities for those with retail no house.
Since launching our fund platform more than 20 years ago, we have invested under four key strategies opportunistic which includes Sunnyside suburban high yield strategy Street retail urban mixed use which includes successful investments in both retail and complimentary uses like self storage and.
Distressed retailers.
This last category includes funches investments in Mervyn's Department stores and Albertsons supermarkets.
Since inception, the fund has received $112 million of distributions on its 24 million dollar investment in Albertsons.
This has resulted in a realized 4.8 multiple on invested equity and I are in excess of 250%.
Additionally fund to still owns approximately 4 million shares an albertsons stocks.
You may have seen Albertsons announced its first common stock dividend for the third quarter of 2020.
This results in a 400000 dollar dividend to fund two of which Acadia its pro rata share is 28%.
Turning briefly to city point, we're pleased to see improving pedestrian traffic in downtown Brooklyn, which has increased from 20% at the 2019 activity in April to about 60% to 70% to 2019 activity post labor day.
At our property during the third quarter, Google Landon open for business and indoor dining resumed at Dekalb market Hall at 25% capacity.
We also executed a 10000 square foot lease in phase one with office tenant flow traders at an approximately at an approximate 50% rent spread.
Furthermore, during the third quarter century, 21 declared bankruptcy entry 21 has said it is liquidating its remaining stores, including its store at city point.
The retailer currently occupies approximately 100000 square feet, which includes prime Fulton Street frontage and most at city 0.3rd level we.
We are fortunate that there were a few different attractive releasing scenarios. We are considering for this space and we will keep you posted as our plans progress.
Finally, with respect to fund level debt, we have ample liquidity on our subscription mines and during and subsequent to the third quarter. We extended nearly 160 million funded loans maturing in 2020 and 21 for a weighted average duration of nearly 18 months. This.
This excludes any further options to extend which some of these loans have.
As previously discussed our lenders remain highly cooperative and support it.
In conclusion, our fund platform I mean, well positioned to successfully weather this period of significant disruption with the successful capital allocation strategy and ample dry powder to continue to execute on it now we will open the call to your questions.
Thank you as a reminder to ask the question you need to press star one on your telephone.
Press the pound key.
First question comes from Craig Schmidt of Bank of America. Your line is now open.
Thank you.
My question is regarding how long will it take.
The 1.3 million signed leases to open stores no Im just curious as to how long retailers are waiting before they actually opened the stores and then how long maybe to take.
No tenants that are either at lease or under Ela wide to move to a signed lease.
Sure Craig I think it's what I'll stick on the on the on the signed leases I would say for the majority of those I think we're we're targeting second half of up 21 before we would see.
In RCD on those.
It cannot be ought to talk just on the on the general trends, but I think for the most part we should expect these in the in the back half of 21 to start showing up in an end into 22.
You know that that sounds consistent and Craig.
The leasing timing feels more normal than not but we do have to keep in mind that if things get delayed over the winter that those months could add on but in general we've been pleased with the fact that our retailers are getting out there visiting properties.
Certainly proceeding with the leasing the legal process and the approval process on a business as usual fashion.
Okay, and then just a follow up are you hearing anything from state or local agent.
Agencies, given the rising costs that might result in.
For the mandated closings.
No but.
Keep in mind most of the regions most of the cities states that the majority of our core assets at least are located in half.
Have taken a very cautious view on the reopening.
Hey, it doesn't need to be a re shut down as much as a pause.
Then.
We really impressed with the thoughtfulness at the very local level. We are obviously in touch with the different municipal leaders and their agencies and they're watching things closely I think they're being careful but.
But I think we get through the next few months hope.
Hopefully with everyone staying safe and without any massive step backs in terms of reopening.
Okay. Thank you.
Thank you and our next question comes from source Van Dijkum of Compass point. Your line is now open.
Good morning, guys. Thanks for taking my question.
One or two.
I get a sense of by the way. Thank you John for the.
The the tried to quantify.
Quantifying the impact of lost recurring revenue.
Not mistaken.
If you're building, 99% fewer pre cobot rensi, you're collecting 90% that would assume just over a night.
10%.
Rental.
Is that the right way to think about it.
Yeah, absolutely floor, so I think the and so the short answer is yes that of what was our billings for the third quarter were 99% of what we were billing Boeing prior to that and then.
The thing to keep in mind and as I talked about the occupancy movements that we had those happened late in the in the quarter. So I think those were all reflected in our in our billings in the in the in the denominator, but.
Still they were built and that's what drove the 99%. So just to correlate those two that to the to want to make sure I had that piece of it.
Great and then.
I wanted to.
Obviously century 21 is.
Impacted earnings quite a bit it looks like this quarter.
Anything you can say about the.
The re leasing costs or the potential cost to two to re tenant that space because it's a it's a lot.
Yes, there is some prime frontage space as well, but presumably there is some other more difficult to lease space in that in that 100000 square feet that century 21 occupied as well if you could maybe.
Maybe if you can give you some background.
Background so.
So it's a.
First of all keep in mind is that.
Essentially 21 leases in our city point development, which is in one of our funds. So it is not a core asset.
That the earnings impact that you were referring to was associated with the straight line rent, which usually in our fund business, we buy fix and sell these assets. So quickly that the straight line is just not a factor we think about but that was the earnings impact was associated with straight line as it relates to.
Century, 21, specifically, we signed that lease in 2009 Slash 2010 during the darkest days of the global financial crisis. It was a very tenant favorite deal at the time.
But we were highly motivated to get that going to get the development started.
At a very disappointed to.
See century, 21, 21 go away because I was a big fan of their company their management team a unfortunate casualty of Covance and so don't get me wrong when I say, the following which is given the vintage of that lease.
Given the demand and Amy walked through it with some of the office leases we signed.
With New York University.
With the base to school.
With a variety of other users I.
I don't think you should anticipate.
Could happen, but I don't think you should anticipate that best and highest use is a simple retail re tenanting.
So I say that because under many of the different scenarios that were.
Discussing with a variety of retailers is the cost.
It varies depending on how many different tenants we put in.
But the answer why is quite compelling because that's.
Best and highest use for the street level on Faulcon Street will remain retail period.
And we will do that upstairs, we have the opportunity to be far more imaginative.
And cost will matter, but in general and we've said this on other calls you know thankfully when you're talking about these high quality areas costs are an issue, but there were a fraction of the issue.
Re tenanting in high rent areas.
As opposed to in our more suburban area. So we will certainly watched the costs I promise you. We will do everything we can to keep our costs down but there are a host of exciting uses and that's what the team is focused on first and foremost foremost right now.
Great maybe one one follow up for me is on the 12 38, Washington.
Oh, sorry.
Sorry, Wisconsin Avenue.
In Washington, DC can you give us a little bit more color what kind of I saw that was not expected to be stabilized for for a couple of years.
What kind of yields.
What can you tell us about that you only own 80% of that asset right.
Yeah, and that's part of our M Street in Wisconsin collection, It's a long term ground lease it still in the early days for us so.
Other then we wouldn't be doing it if we weren't highly confident that it will be profitable and accretive.
It's just not that big and it's not far enough along to me to start bragging yet.
Great. Thanks.
Yes.
Thank you and our next question comes from Kenyon Conley.
Citi. Your line is now open.
Great. Thanks. Good morning, So can you comment a little more color on the types of opportunities you're seeing for that.
Okay, and how much market dislocation.
All right.
And then based on what you have in process, how should we think about that time frame.
Though.
Sure.
So let's start with the obvious which is there has been a massive disruption to the retail industry overall.
When you have a.
Full shutdown, though way that posted hit much retail at least for a few months last spring.
Yeah.
Buyers sellers lenders Intuit state of shock and I think you've seen it play out first and foremost in most extremely in the public market.
Where they can adjust and have downward significantly I'd argue they have overshot the mark but.
But then on the other side.
Mhm lenders.
Sellers holders have been much more hesitant until.
There is better clarity around around where rents are going to re stabilize I think we're beginning to get there and I think the general conclusion is.
That credit tenants are going to pay their obligation sales are going to be impacted rents in certain areas will be impacted but there is.
Better price discovery around rents and that's critical because once we can set we're in a wise are.
We can then figure out and negotiate with sellers as to.
Where value is.
The struggle is because.
In the public markets as opposed to the private markets. They tend to use a lot more debt.
And until you have an old wide price discovery that then comes up to value price discovery, you may be talking to a borrower who is totally wiped out.
And then you go and jump and talk to the mezzanine loan.
Lender well, you're seeing instances in that case were there wiped out and then there is the mortgage lender and so what is occurring right now in part of the reason that I think things are slower is the decision makers in the capital stack.
Our finally, recognizing where they stand now does it to the extent that the junior equity is in the money and they're ready to sell well, we're ready to buy.
And we are getting closer on some of those and that could be because the junior equity did not over leveraged that could be because the junior equity bought at a decade ago et cetera.
But there are levels of distress, especially in the cities.
There are levels of opportunity throughout retail because retail has become.
In this favor at least in the short term during co bid, but even its a longer term issue associated with the retail arm, we get and et cetera.
And we have as Amy pointed out 200 million of equity that 600 million a buying power full.
Fully discretionary.
Whether or not it shows up.
In the way our historical fund five assets were which were just buying.
Yield at around an 8% Unlevered return and levering a two to one.
Or it's more heavy lifting as a result of the disruption, where we can buy 50% occupied properties and use our tenant base and knowledge and ability to redevelop to re stabilize that asset or any of the things more extreme and Amy touched on a bunch of those as well.
We're looking at a wide variety were.
We're looking at covered land plays.
Where the retail mace Ross on cash flow for a period of time and then it needs to get reinvented, we're looking at that.
We're looking at other things as well I can't tell you exactly when it happens because we can get close on deals, but if it's a financial institution. If it's a lender I think you can appreciate they may take months.
To take the write downs, they need to get to that conclusion, and so we are hanging around the hope for a wide variety of deals and what I will tell you is our pipeline over the last 30 60 days has grown exponentially.
Okay, Great and then maybe as a follow up to Craig's question on the new leasing pipeline.
For more color on the economics of the new treatment.
You bet.
Sure so.
What we have not seen.
As opposed to during other downturns, we have not seen many retailers reaching out for sheep rents forever.
And that's always a little problematic because if you signed a 20 year lease with Burlington coat factory down 30% from a year ago and rents while you have negatively impacted that asset accordingly.
But what we are seeing certainly our retailers, saying hey for the next year or two.
What if this happens what if that happens how are you going to protect us.
And so for 12 to 24 months, if it's the right retailer for the right location, we can afford to be flexible, partially because of where our basis.
His was and partially because we are still working through a pandemic.
What I am pleased to see.
His nine out of 10 times those retailers say in the next two to three years, we will step up to real rents.
Now whether those leases are three year five year tenure leases, whether they're formulaic or just a simple set.
TBD, but in general well.
What we have found for the key street as retailers are pricing rents.
Back under assumptions pre Cove it.
We have always priced our deals made our assumptions on a healthy rent to sales ratio and so far no one seems to be running away from that.
Once we get past this next difficult 12 to 24 months.
Okay, great. Thank you.
Thank you.
Question comes from Todd Thomas of Keybanc Capital markets. Your line is now open.
Hi, Thanks, Ken just following up first on the conversation around rents a little bit.
What you just discussed and also you talked about it taking time for rents to recover to pre pandemic levels.
First.
The street retail rents or does that apply more broadly to urban and suburban rents as well and then I.
I guess as it relates to those comments can you just provide a little bit more color around current market trends and whether you are seeing a stabilization and asking rents are or if you would expect a little bit.
Near term pressure.
Yeah.
So I would expect some more near term pressure Todd meaning.
Boy is this an uncertain time.
And check in with me in a week from now check in with me a month from now and the range of outcomes could be.
Significantly different based on a variety of different things.
I'm not going to know ascribed to a dystopian future where you can't even imagine collecting rents I do believe and what our retailers are telling us is that they are planning for stores that get passed this time period, but but that being said to get to your street.
Versus suburban first of all.
What we all need to keep in mind is the way, we think about things the way the private market thinks about things the way the public markets, probably should think about things is net effect different meaning what does it cost us to put in that tenant.
In suburbia I have been pleasantly surprised that face rents have more or less held up.
Really depends on are you talking about anchor junior anchor satellite space and a whole variety of other issues regionally and otherwise.
But generally we're not seeing a lot of degradation and rent, but keep in mind.
The cost to put those tenants and especially for junior anchors have gone up same for satellite.
And the cost is a much higher ratio and thus the net effective rent impact is real because if you have a $15 rent well. The good news is it's a $15 rent not a $150 rent, but its still costing us close to in many instances 80 to $100.
But to put them in.
And so its impact in net effective rent is more of what I'm seeing then on topline rent in the cities I'm seeing rental pressure.
So topline rents are down, but then keep in mind the cost of putting in those tenants is kind of the same is suburbia. So the net effect of the impact is not as great.
Although I don't want to pretend for a second.
If we're trying to sign a lease.
For the next 24 months in Midtown Manhattan to a sit down restaurant well first of all I'm not sure why we would try but even if we tried I can't pretend for a second that that tenant.
Can or should be able to pay us the same rent that he paid nine months ago, and that's where we're going to have to be patient.
Until we get to the other side of this.
Okay, that's helpful and.
Looking at the structured finance book.
I was just curious if there are any upcoming mortgage maturities or any repayments.
We should consider in the months ahead as we think about the model for 2021 and then also can you just talk.
About the performance of your your mortgage and mezzanine investments.
Yes, I'll take the first first one in terms of of any meaningful repayments I wouldn't expect anything.
Repayment wise and in the next six to 12 months.
And then in terms of performance the one big one we did at the beginning of the year was the Brooklyn loan.
And that one is and I'll, let Ken elaborate on it but I think is performed in line with our our expectations no no.
No concerns as they work through the pandemic and we think that one still in good shape and as and when anything further yeah. I mean, my friend is probably not may be listening to this earnings call, but we're clipping a 9% coupon on that mixed use project.
In Brooklyn, and we'd be thrilled to take the keys, but I have no reason to think we will so that investment Todd I think will be a good one.
When we went through this during the GFC you may recall, we made some very opportunistic loans and people were concerned during the GFC and then correctly to your point concern when we got paid back because of the dilution.
These all have another couple of years of duration in the mikes back the borrowers to utilize that and then probably in the next 12 to 24 months, we'll let you know as that money starts coming back to us.
Okay. Thank you.
Thank you and our next question comes from Jason of Jefferies. Your line is now open.
Hi, good morning.
In addition to street retail doing a little better we've heard from some industry experts that luxury is also doing better are you seeing this in your portfolio.
Yes, yes, so there.
Theres, a few different phenomenon going on and we need to differentiate between.
Some short term positive trends that we saw perhaps associated.
With stimulus or other events.
Which is still good and I'm glad when any of our luxury retailers are comping positively and several did this summer more interesting though.
Is it certain luxury segments, notwithstanding the fact that international tourism and the shopping that comes along with that.
Notwithstanding the fact that that international tourism was shut down the domestic.
Consumer stepped up now that runs contrary to prior recessions.
But this recession is contrary to prior recession housing values have held up stock market other than our stock has held up.
And the consumer has had what luxury retailers are somewhat viewing as for savings. They didnt go on vacation they couldn't go out to restaurants.
And so we're seeing spot luxury watches for instance.
Without their usual shopper luxury watches are still having strong sales and there is a variety of others. So.
That's a positive sign.
I do think it's encouraging in general just to remind us that the us consumer.
Does like to shop does like to shop for unique items and it doesn't just have to be luxury it's true from what we're seeing from Lululemons. It's true for what we're seeing from all Bert.
And a variety of other retailers certainly a bunch of the.
Sneaker companies continue to do well so so.
Yes, there there is that trend, let's hope it continues as we work our way through this.
Thanks, and then just following up on the new leases being signed or you requiring increase security deposits.
We should certainly.
Yeah.
I don't want to sound flip.
And John you May have a specific answer but you know historically the dialogue with credit tenants was hey, you don't need a security deposit we're always good for it and then April happen.
I am not aware John of any significant changes amongst our credit tenants.
No I think that's right and I think we we look at particularly lend up where we have a big capital outlay, we really drill into the credit and then we'll look to other to other types of credit support.
I think it's largely I think pretty consistent what we've what we've done in the past, but it is certainly worth a conversation if we were to ever revisit credit tenants no.
Not behaving now in their defense.
Last spring was an unprecedented time period, where everyone was hoarding cash for a period of time.
With an existential risks when I speak to retailers or board members of retailers.
They say you think you are afraid and take a look at what we were facing.
The Great news is for the most part those who are climbing through the other end.
And we pointed this out in our collections and otherwise is.
They're now on the other side of that.
And we don't expect to see that again, but I wouldn't mind getting security deposits, Chris Conlin, you should keep that in mind. It look I think the one part that I would add that a step that we sort of always does but now we always do is if it's a relo we understand how they treated landlord during the pandemic. So thats that is one piece of that we look to.
As to.
How did they react during that and did they did they fulfill their obligation during the period. So that is one thing we do differently.
Great Thanks to the color.
Thank you and our next question comes from Kevin Kim Jewish I understand open.
Thanks, Good morning, Stephen.
So you guys did a good job of explaining some of the changing nature of the leases that you're signing to reflect the current cobot environment.
But when you commit capital obviously, you can't do a short term needs because you're committing capital and that's irrespective sort at least duration. So I was wondering if you can just talk a little more.
Provides more details around the leasing that you're doing and what kind of our tenants are having in their leases.
Like reduced termination fees or maybe right, it's tied to sales things like that.
Yes, so just to be clear.
If we are investing in stores and this believe it or not is a bigger issue in the suburbs because as I pointed out the ratio of annual rent to cost to put the tenant in is five to 10 times more difficult than in the streets, just because of again, the topline rent but in EPS.
Every instance, and we have not seen retailers pushed back there.
There is an expectation of full repayment of any cost TPI LC leasing commission in the event that the tenant has some form.
They kick out tied to some performance metric or otherwise.
Okay.
So next question I'm looking at your asset at 200, West 34th Street looks like space Coast Ashburn, It's all under a tenant.
They were paying about $400 or higher a square foot in rent Im just curious.
The remaining tendency.
Is that is that the Dunkin' donuts and this would be near store and how do you feel about that credit and if that was is that it's that at all agreed or 4.4.
So let me be first very clear about that asset in Midtown Manhattan that is dependent on both tourism.
And returned to office work.
That is one of the more challenging assets in our portfolio. When it comes back we will all be.
Thrilled to own it.
But we're going to have to be patient on the way through yet Theres you write Dunkin' Donuts is credit et cetera.
But I don't want to over promise on that asset and the only thing I'll mention is once upon a time that was stage delicatessen.
And once upon a time again, it's going to be a great restaurant.
But we have to imagine a post pandemic life.
Okay, and just last quick one John.
John When you mentioned a dollar per share of FFO as like a run rate near term you mean lower EBITDA.
Just a little confused by that an AFFO AFFO.
Warren John.
Hey, I've got Lucky and we had a bit conversationalist ki bin and I'm going to look at the transcript, but I'm pretty sure I say Fo, but it is a AFFO yes.
Okay. Thank you.
Thank you and our next question comes from Vince to you on that Green.
Green Street. Your line is now open.
Hi, good morning.
I will follow up on the leasing pipeline all the commentary you provided was was very helpful. But I think mostly related to renewal discussion just could you elaborate a little bit more on 10, an accurate tenant interest for new stores in your street retail portfolio and our other retailers looking to sign new leases and open urban.
Patients in 2021.
Yes.
Hi, I'm kind of being flipped yes, yes, then there are.
A big chunk of the leases were working on and John maybe you can pull it up.
Our new tenants.
New leases.
And on one hand, you say Wow that sounds a little crazy unless you saw while its obviously that fast casual with a drive through or walk through and they're crushing it in almost every store they have and of course, they want to use this opportunity to or medical uses that are popping up in cities.
And in suburbs.
Or the off price folks, who use these opportunities to gain toehold into markets that otherwise they couldn't.
So.
None of the new leases strike me as particularly surprising.
Actually if you overlay some of the other things I mentioned, which is you know we were always heading into this recession, a little concerned about our digitally native like the all birds and Warby Parker young brands are they going to make it to the other side because they had the online connection.
They made it to the other side.
And as you know Vince almost without exception every retailer who is good at opening stores and running stores find that to be the most profitable component.
You should expect to see a continued rollout in an omnichannel world of those retailers, who have the DTC piece of their business put together to use this opportunity to open stores as well. So it's a nice wide variety of new tenants not just renewals.
That I think over the upcoming 12, and 24 months, we'll make a lot of sense.
Yes, no thats, while it add to that is I think that I think that we were intending that disclosure to be on the new tenants are what I would say is that on the street Street and urban side to elaborate a bit as we think of our street exposure and call. It 40% of our Hbr half of it is similar to the conversation. We just had what we think is.
More covert exposed in the more office dependent tourism markets, but then the other half of that is because of the people where people live and work and look what we think is lower density Street and I would say for the most part where we're seeing that that growth is in some of those lower density Street Street locations and the.
These are one run the gamut there credit tenants.
Some of them are digitally native that are looking to branch out.
Into our locations I think that that is where some of it is in some of the things that are not in our in those numbers. We have people poking around in the high density locations as well for the same reason Ken mentioned on stage is that these will be locations that will be essential to a retailer at some point in the future. So we havent talked about those but the ones the ones that.
Our actionable are really falling into that 20% bucket of of lower density of street locations.
Thank you for that thank you for that color very helpful. One more for me could you discuss the decision to extend the maturities on the on mortgages versus refinancing is that all an indication of that.
Very tight credit markets today or was that always.
Part of the plan.
Uh huh.
So it is it is almost without exception easier to extend.
Then refinance at this point in the cycle borrowing costs for retail.
Have gone up spreads have widened notwithstanding base rates down so to the extent that you have the ability to extend.
Of course, you will.
Thankfully, we have great relationships with our lenders and we deserve that and then they extend then reciprocate by things like options took debt.
Yes, so what do you think you need to change. This is at the end of July visibility to make the lending environment anything close to where it was pre pandemic is that still I mean, you kind of touched on that earlier green.
Greenstreet has to stop writing about.
Retail arm or get enough.
Here's the thing.
We will get passed this horrendous last spring of collection that made every lender in the world nervous.
We are going to have a sector that has relatively stable cash flow some will be flat for a long period of time, but predictable and others will have asymmetrical growth likely in our streets.
And lenders are going to look at that and lenders who are willing to lend to other forms of real estate like net leaf for.
The other thing tenants are going to say geez, it's three net lease tenants glued together of course I'll end by that.
I would not expect proceeds to come back to where they were one or two years ago. So fast I would not predict that this happens overnight, but I do think we're going to start seeing stability.
And once we climb out of this the capital markets will do what they normally do assuming we climb out of it in our credit tenants behave appropriately assuming that the economy is still.
Stronger footing 12 months from now than it is today and I would tell you. The consumer has been hanging in there so I feel pretty bullish.
With the caveat that the next several months are going to be tough.
Thank you for that don't have.
Thank you and our next question comes from Mike Mueller JP Morgan. Your line is now open.
Yes, Hi, John I was wondering can you generally runs through the rough math of how you get to the dollar.
Recurring FFO, if im just thinking about Q3.
20 cents of EPS AFFO add back your straight line write off that get you a little over a buck on a run rate, so and thats before capex coming out so.
To get to that bucket. They AFFO are you implicitly assuming that the the 50% of the reserve tied to the healthy tenants that were pre pandemic healthy tenant switches and stuff that comes back to your money good on that.
Yes, so Mike I think that a lot of moving pieces and parts, but I think it's it's really where we see that right now we're reserving about 10% of our NOI.
10% of our Hbr and as Ken mentioned that falls into into the two buckets. So we think between a combination of half of that bucket.
Ultimately getting to the other side and and rent paying as well as some of the lease up that we have built in that is going to go in the normal course that we get to a sense of normalcy at at that point. So a lot of moving pieces that that get us there but.
And again, we're not intending as amounted to provide guidance. We're just thinking about what we see this quarter, what our current expectation is and and how we're going to think about setting forward, but we're feeling pretty good about that.
Got it okay, but let's just be clear, Mike, where we are not expecting.
A quick rebound in that 5% until there is better resolution on the health side.
Got it Okay, and then I guess, if we look at the 20 2021 rent rolls in Manhattan in particular can you well I guess the overall lease expiration schedule can you just walk us through is there anything we should be cognizant of that is going to be particularly a headwind or tailwind.
Yeah within Manhattan, Mike So keep in mind thats less than 10% of our overall overall portfolio. So just keep that in in perspective, but in terms of.
Significant role.
We do have a a space and in Soho.
That we that we think is possible that we get back on conversations that you can magic conversations with all of these.
And I would say the other one that still and occupancy is in Union Union square.
The event space I think Thats one you should assume is also.
One that we are actively looking to to work with and ultimately we tenants I think those are probably be the the two I would point to.
Okay. That's helpful. Thank you.
Thank you and again, ladies and gentlemen, if you would like.
A question. Please press Star then one on your telephone again to ask a question. Please press Star then one.
And this does conclude our question and answer actually we do have a follow up question from Kevin Kim.
It is now open.
Hey, how are you.
Pfeiffer along it is called but I'm just curious.
As a management team what else you want to see before you start to implement a sustainable dividend.
Well.
Sustainable David So I think that the first part and maybe I'll tell you I'll I'll have can talk about the second part of it but I think ki bin we are going to have and as we have this year. We have taxable income so whether we want to or not we will have to pay a dividend given the low leverage where we're at so I think what I would say that I would.
Talk to our board about as a sustainable dividend is once that we are very comfortable with our near term near term guidance, which we are getting there I mean, we update our budgets.
I want to say daily, but pretty close to daily as to where we think the world shakes out. So I think it's really at the point.
That I would be disappointed if in February we were not at a point, where we had conviction around where our budgets for cash flows where market has settled out. So I think it's really continuing go through that process anymore.
Leasing velocity and deals and where our pipeline is and you'll see more of that pipeline that we discuss turned into leases et cetera, I think gives us the conviction around what what it what it looks like and how resilient. It is and I think the last point before I turn over to Ken is how sticky is this 90%. So I would say we sought in September we.
Sought to get an October knock on wood will only the fourth day into November but off to a solid start in November but I think thats. The thing we're going to watch closely as well as how resilient is that 90% because that gives us indications as the strength of our retailers and how important these spaces artisan.
Yes, just to add to that.
And I don't speak on behalf of the entire board, but how we as a board. We think about this is our leverage is more or less where we've won it.
I'm not at.
At all concerned about assuming the world normalizes.
Paying a dividend within the range of I don't really want to go to the board and say, we need to lever up to do it and I, certainly given where our stock prices wouldn't want to go to the board and say, we need to issue stock for a dividend and you can do the math and John is laid it out but there is a pretty nice healthy certain range of what a normalized dividend.
Looks like.
In a very abnormal world.
So I think that that will become clearer over the upcoming months and then we will have the luxury of talking about how much that dividend should and could grow as we.
Lease our way out of this painful period.
Okay. Thanks again.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to Ken Bernstein for any closing remarks.
Great. Thank you all for joining us today, hopefully it was a pleasant distraction from watching your news feeds on the election.
Look forward to seeing all of you in person.
In the not distant future, but until then stay say stay well.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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