Q4 2020 Acadia Realty Trust Earnings Call
Okay.
Ladies and gentlemen, and thank you for standing by and welcome to the Q4 2020, Acadia Realty Trust earnings Conference call. At this time, all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero and I would now like to hand, the conference over to your Speaker today, Alex Berger. Please go ahead.
Good afternoon, and thank you for joining us for the fourth quarter of 2020 of Acadia Realty Trust Earnings Conference call. My name is Alex Berger and I'm, an analyst and our acquisitions Department and previously Internet Acadia and the summer of 2019 before we begin please be aware that statements made during the call that are not historical maybe deemed forward looking statements within the meaning of the Securities and Exchange Act of 19, and 34 and actual results may differ.
Materially from those indicated by such forward looking statements due to a variety of risks and uncertainties, including those discussed and disclosed in the company's most recent form 10-K, and other periodic filings with the SEC forward looking statements speak only as of the day of this call February 11, 2021, and the company undertakes no duty to update them. During this call management will refer to certain non-GAAP financial.
Measures, including funds from operations and net operating income. Please see Acadia is earnings press release posted on its website for reconciliations of these non-GAAP financial measures, but the most directly comparable GAAP financial measures. What's it called 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 Reinsert yourself into the queue.
And we will answer as time permits now it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer will begin today's management remarks.
Great. Thank you Alex good job good afternoon, everybody before we delve into the details of the last quarter I'd like to spend a few minutes on some of the trends we saw last year and what we're seeing looking into 2021 and 2022.
While we're still working through and ongoing health crisis and ensuing economic headwinds there is clearly light at the end of the tunnel.
Looking at our collection rate and the fourth quarter.
Our leasing activity, our discussions with our retailers, it's comforting to see both stability with respect to current operations and then more importantly.
Very encouraging green shoots in terms of new leasing activity.
In terms of existing retailer performance and our collections as John will discuss collections throughout our portfolio have stabilized to above 90% and.
Italy. This was driven by the more essential and suburban components of our portfolio, but more recently.
The Street retail component has begun to re stabilize as well.
And while the range of potential outcomes remains very wide.
And I suspect focus on monthly collections will continue for another few quarters. There are a few worthwhile trends that are beginning to emerge.
One of the more notable trends we saw in the fourth quarter and accelerating to date is that tenants are looking past the pandemic and positioning themselves for the reopening of the economy and the second half of the year.
Retailers are showing up.
And most recently not just in the suburban portion of our portfolio.
But also in the street and urban components.
And thankfully, we're seeing this in our current leasing activity.
In terms of our current leasing pipeline, which we mentioned on the last call.
And that's being approximately $6 million and now it has grown to over $8 million and this number is relevant because this pipeline already represents a rebound.
About half of the 10% short term hit to our NOI.
That we estimated as a result of Covid.
This pipeline has rebuilt faster than we had initially expected and has continued to improve over the past month.
To date, we have executed $3 million of leases and this pipeline where at least for another $3 million and then the balance is at the letter of intent stage.
Leasing activity and our pipeline is now weighted fairly proportionate to our portfolio weighted meaning that while initially the activity was weighted to our suburban and necessity portion of our portfolio looking forward and.
And our pipeline our deal flow is now rebalancing and about 70%.
Is in street and urban.
Now given that the street portion of our portfolio represents about 40% of our core portfolio and is a key area of differentiation for us.
It's worth spending a few minutes.
And the encouraging rebound we're seeing there.
After a very scary and quite a couple of quarters retailers and are actively touring.
And going to lease and these markets there.
And the early movers, we saw for the street component they were in the half of our street portfolio located in the less dense markets that were generally quicker to reopen for business for example, and Greenwich and Westport, Connecticut and the last few weeks, we have finalized leases and both of those markets rents there are approaching pre COVID-19 levels.
Yes.
But even more encouraging in terms of street retail trend is the recent activity and the more dense gateway markets.
We are finalizing several leases and Manhattan, including and Soho.
Several leases and Chicago, including and the Gulf Coast and here, we're seeing a variety of retailers stepping up and these markets from luxury leaders.
To up and coming digitally native brands all preparing.
For a post COVID-19 economy, and using these stores to further differentiate themselves in an omni channel world.
And as these retailers focus on the shifting channel of distribution.
Our retailers are looking past the harsh short term realities that we're facing this winter.
As well as the over simplified longer term narrative around retail real estate and based on the number of retailers Turin.
And many of them signing leases.
Our retailers are making it clearer every day.
That's the key markets and our portfolio.
We will remain long term must have locations.
And.
Now starting rents compared to pre COVID-19 rates are going to vary space by space and Street by Street and they are certainly well off of their 2017 peaks, but we have built our portfolio to avoid some of these peaks and valleys.
And these leasing leases will be compelling, especially.
If the long term rents are consistent with our pre COVID-19 goals and so far they are.
And our retailers are telling us.
That the ratio of rents to their anticipated sales performance looks compelling from their perspective, which is also essential for this recovery.
It's still early.
But if these trends hold the street portion of our portfolio will be a key driver of our longer term growth metrics.
We recognize and Thats a significant portion of our portfolio, both urban and suburban that is weighted with necessity and value based tenants like target and T. J Maxx.
That that provided a very important Dallas.
To weather, a truly 100 year storm.
But it is becoming clearer.
That's the longer term growth will come from our mission critical locations for a few reasons.
First of all our re leasing potential here is a uniquely high quality locations and we were are working offered decades low occupancy level.
Second.
The contractual rental growth rates in our street portfolio is 100 to 200 basis points higher than and the other components of our portfolio.
And finally from an ASF flow perspective.
Since the cost of re tenancy in these higher rent markets is substantially less as a percentage of rent.
The net effective rent growth will be stronger than in the lower ramp portions of our portfolio.
Now this is not ignoring.
Some of the longer term trends that are playing out and our industry. The accelerated move to digital commerce. The realities that the U S is over retailed and general and Thats. Some formats are facing functional obsolescence.
And orders ignoring a workforce, that's pondering, where they might live how they might work.
These are real challenges challenges that our industry is being force to adapt to an.
On an accelerated basis.
But notwithstanding these challenges.
We are seeing signs of recovery and our portfolio.
Is well positioned for that.
And some of this rebound.
In hindsight.
We will look obvious.
For example.
It is important to keep in mind.
And that the consumer in general.
And especially that segment of the consumer.
That is shopping at the stores and our portfolio is that consumer is climbing out of this recession and a much different spot than prior recessions.
Now for that significant portion of the population that could not shift to remote work that is living paycheck to paycheck or worse.
The impact of this crisis as Heartland.
But that portion of the economy that has been able to shift to remote work that has seen their house values and their stock portfolios rise, but those consumers.
Their savings rate and disposable income is much stronger.
And then when they were climbing out of the global financial crisis, but to date spending by this segment.
It has been down as the short term trend has been on necessities on essentials and pajamas.
Irrespective of the financial condition of that specific consumer.
Not because of fear or belt tightening by the affluent as much as just the realities of the lockdown and as we move past this lockdown.
Our retailers are expecting shifts in consumer spending as well.
And our retailers are seeing not just short term pent up demand, but longer term trends and are planning accordingly.
From a capital markets perspective, both the debt markets.
And the equity markets are slowly beginning to rebuild albeit selectively.
The retail real estate industry is still working through the drama around the collection crisis and last spring and while that is abating the aftershocks.
Still with us and many of the traditional and found metrics.
And that our industry has historically used to evaluate location quality.
Have passed.
Last spring for instance property level collection rates.
Trumped credit quality.
And credit quality Trump location quality now during the darkest days of the crisis this might it make sense.
But longer term.
Location quality tends to win out.
And while this trend is beginning to resolve it is going to take time.
Additionally, many institutional investors are overweight retailed due to their ball holdings, and even investors who were not overweight retail are looking for clarity.
Clarity as to what the cost to re stabilized assets will be clarity as to when and what level will rents.
And tenant performance stabilize.
And then finally, what will the longer term growth rates look like.
Now I get that providing this clarity sounds like a tall order. It always does at this point and the cycle.
And then the rebound happens usually faster than most of us predict.
In terms of our investment activity with our stock at a discount to NAV and our cost of capital being elevated and we don't anticipate acquisitions and our core and the short term in fact will be opportunistically monetizing assets as we recently did with a freestanding home depot, and New Jersey, where the net lease REIT.
Rail market is still robust and properties are trading at peak pricing, but.
But we are hopeful that.
As significant buying opportunities arise, we will be and are positioned to capitalize on them.
Given that retail is in such disfavor and many folks who previously dabbled in it our non.
There will be less competition.
And our expertise will be in demand and it will be of value.
And while we wait for the public markets to rebalance Fortunately as Amy will discuss we have our discretionary fund, where we still have plenty of dry powder.
And deal flow is finally picking up after a quiet year.
So to conclude.
We are pleased to see tenants stepping up.
And while it's hard to predict when the capital markets will also respond in kind.
And when they do.
A portfolio like ours dominated by unique must have locations with stability and then strong prospects for growth.
Will once again become compelling.
And management teams like ours.
With access to multiple types of capital and a proven track record of deploying it will be well positioned to execute on the opportunities in front of us.
So with that I'd like to thank our team for their hard work and their focus over the past year.
I know that it felt like at times that the Earth stopped spinning around its axis I assure you with it.
And your efforts and your commitment.
Not only helped us get through this treacherous period and survive but.
But helped us plant the seeds going forward for our ability to thrive as well.
And with that I'll turn the call over to John.
Thanks, Ken and good afternoon, everyone.
I will start off by providing an update on our cash collections, along with our fourth quarter results.
Followed by a discussion of our 2021 guidance and then closing with our balance sheet.
And I'll starting with collections.
And hindsight, the initial and immediate impact of the pandemic was staggering.
With our April 2020 results barely achieving a 50% collection rate and over the course of the year. We quickly saw improvement not only with the collections at current rent, but also on pass through amounts and in fact, as we look back over the course of the pandemic, we actually ended up collecting over 86% of our billings during the three quarters in 2020.
And over 90% when we look at the third and fourth quarter alone.
And does that we outlined in our release, we are now consistently collecting and excess of 90% of our reps.
And as we experienced throughout the pandemic our collection percentages remained consistent throughout our street urban and suburban locations given the relatively comparable credit that exist across our portfolio.
And as I discussed last quarter, our balance sheet continues to reflect our collection efforts not only do we see our net tenant receivables declined from the prior quarter and factor actually even lower than they were as it compared to the fourth quarter of 2019.
In terms of tenant deferral agreements, we have approximately $3 million on our books at December 31.
And as our approach was to largely focus our deferral efforts and credit tenants.
We remain on track for full repayment in 2021.
Moving on to quarterly earnings.
Our <unk> as adjusted for special items was 24, a share for the fourth quarter.
We anticipate that our quarterly <unk> prior to any transactional items should remain around the current level level for the next few quarters.
Give or take a few pennies and other direction as we navigate through the pandemic.
As we highlighted in our release, we have provided our 2021 guidance with a range of 98 to $1 14 about <unk> before special items.
And now we continue to expect ongoing variable and our results for at least the first half of 2021.
And we've not attempted to predict the impact of this within our guidance, but as we've done throughout the pandemic. We will continue to point out any significant items and our quarterly results and will update our expectations Accordingly.
Additionally, although we didn't include any specific NOI assumptions I wanted to provide a bit more color as to how we're thinking.
Consistent with what we experienced the past couple of quarters, we expect that our quarterly pro rata core and fund NOI should trend and the low to mid $30 million range for at least the first half of 'twenty and 'twenty one and this is based on our assumption of maintaining a 90% collection rate along with no meaningful tenant explorations are no leases coming online.
And.
In terms of overall occupancy occupancy.
As we've said in the past given the wide range of rents that exist within our portfolio.
A percentage change and and of itself is generally and not particularly well correlated to the NOI impact.
Our expectation is our physical occupancy percentage drops a bit further in Q1, and Q2, primarily to natural lease expirations within our suburban portfolio before bank begins climbing and the second half of the year.
It's worth highlighting that our current spread between physical and leased occupancy is in excess of 1% and given the velocity as to which our leasing team is building the pipeline and executing leases we.
We anticipate this spread, particularly and our street and urban locations to continue to expand throughout the year.
Now as we move into the latter half of 'twenty and 'twenty one we.
We anticipate that our quarterly NOI run rate will increase by approximately $1 million to $3 million.
And this is coming from a combination of reduced credit losses.
Along with the additional NOI from the leasing efforts.
Beginning to come online.
Now in terms of rent commencement on those new leases.
Of the $8 million pipeline that Ken mentioned.
Approximately 40% of this involves a $3 million involves executing leases and.
And we expect about $800000 of that will show up and the second half of 2021, and the remaining portion coming online at various points throughout 2022.
And as I will touch on shortly we are becoming cautiously cautiously optimistic that this will be the start and what we believe is a meaningful multi year NOI growth trajectory.
In terms of other assumptions within our fund and transactional side of our business I wanted to point out a few things.
Consistent with our past practice, we will continue to exclude any changes in value from our unsold albertson shares rather we will only include the realized gains and the shares are sold and.
And as I mentioned on prior calls we expect that the remaining albertsons shares should be sold over the course of the next 18 months to 24 months as a reminder, we own on a pro rata basis, approximately 1 million shares which are subject to certain lockup arrangements and based upon the current share price. This equates to approximately $16 million of gains as a shares.
Okay.
Additionally, we have guided towards $2 million to $5 million of a temporary reduction and fund fees.
This is primarily a result of the pandemic driven timing delays and our acquisition and leasing activities and we anticipate these fees should revert back to more normalized levels in 2022.
I also wanted to point out and Amy will discuss further we have approximately 40% remaining and fund five to deploy it and if we invest that consistent with the fund five returns to date. This provides us with an additional five to six cents of incremental <unk> on an annual basis.
Now in terms of the multi year core NOI growth trajectory.
Not only does our base case model have us returning to pre COVID-19 levels by late 2022 early 2023.
We are also starting to see the building blocks forming to grow above and beyond that.
And we are becoming increasingly optimistic that this shows up within the next few years.
The key drivers of that return to pre Covid core NOI and the ongoing growth beyond that are expected to come from two primary sources first.
A reduction and credit losses.
And we estimate that should result in roughly $7 million of annual NOI. We continue to estimate that about half of our non paying tenants get to the other side of the pandemic and revert back to contractual rates and terms of timing.
As I mentioned in my guidance, we expect to see some improvement beginning in the second half of 2021 with stabilization at some point and 22.
Secondly, Lisa and more specifically the lease up and our street and urban portfolio.
Our overall core occupancy is at a decade low occupancy of 90% with the street and urban portion at 87% and some of our best locations available and.
Terms of timing of lease up and as Ken mentioned, our team has made strong progress and this past several months with building out and even the $8 million pipeline. The majority of which is coming from street and urban locations.
And for those spaces that have not yet made it into our pipeline.
It's premature to pencil and percent rent precise rent commencement dates we are optimistic and a good chunk of the space is leased over the next 12 to 18 months.
Based upon the leasing discussions, we're having and the increased momentum that we see building and the marketplace.
So we certainly have a lot of hard work in front of US. We are encouraged that the leasing activity, we have seen and continue to see and the opportunities it presents for meaningful and profitable multiyear NOI growth.
Now moving on to the balance sheet.
I wanted to highlight just a few items along with an update on our dividend.
We continue to maintain and ample liquidity between our cash on hand and available liquidity under our various facilities with no material near term core capital needs and at a 90% cash collection rate coupled with a breakeven below 50% we are continuing to retain cash flow.
In terms of the dividend as we highlighted in our release, we expect to initially we understand our dividend at <unk> 15 cents a share.
Our initial payout was conservatively determined based upon what we currently expect will be the minimum payout required to maintain REIT compliance.
And at this level, we should be able to generate meaningful amounts of liquidity and to set ourselves up for strong dividend growth over the next several years as we execute on the lease up opportunities within our portfolio.
In summary, while we are still in the midst of the pandemic. We are starting to see the green shoots and while our earnings will continue to feel the impacts of the pandemic for the next couple of quarters.
We are starting 2021 with increased optimism and a positive outlook as we look forward.
I will now turn the call over to Amy to discuss our fund business.
Thanks, John.
Usually discuss all of our funds on these calls.
And I will focus my remarks, primarily on some side, which is our current one vehicle for new investments.
When we launch this fund and 2016, we were already facing disruption and the retailing industry and newly we're late cycle.
In response, we chose to focus this fun and selectively acquiring out of fever suburban shopping centers, where most of our return comes from existing cash flow.
Our thesis was Fiat and 8% cap rate leverage at two thirds and Archie said, a sub 4% interest rate and then clip and mid teens coupon.
We did not anticipate any material growth and NOI, nor was it required to make an attractive return and an 8% going in yield.
This thesis proved to be prudent.
While the events from the past year were certainly unexpected consistent with our original expectations for our fungicides portfolio and properties have largely been performing consistent with plan.
For example last year at the property level, we achieved roughly a 14% leveraged yield on invested equity including deferred rents.
Looking ahead, we expect 2021 and 'twenty two to achieve similar mid teens returns, reflecting continued growth in NOI, but also continued investment of equity and we compete various leasing activities.
Second collections have rebounded since April and May and are now roughly at or above the 90% level.
Third our team has built a strong leasing pipeline, which has enabled us to maintain our NOI.
Most COVID-19 outbreak our fund five leasing pipeline has 32 leases aggregating annual base rent or E. B R a $5.1 million.
20 leases and approximately $2 6 million of E b or have already been executed.
These metrics provide further evidence of our acquisition and selectivity and our overall careful approach to capital allocation.
I'd also like to share a couple of examples at the property level.
First since recapturing and 95000 square foot Kmart, Frederick County Square and Maryland last February we have successfully pre leased 83% of that box too.
Ollie's bargain outlet and harbor freight tools together with our partners that DLC management.
We are also negotiating a lease for the remaining 17000 square feet.
Blended rent for new leases is more than five times kmart's rent.
Next consistent with our core portfolio, we monetize two parcels that families and threatened or Gal and Utah.
The parcels located at the back of the shopping center generated $10 million of gross sale proceeds.
Given the strength of the net lease market, we were able to achieve roughly a 200 basis point spread between the allocated cap rate and our underwriting and our actual exit cap rate is.
This translates into about two and a half to $3 million of profit on these two sales alone.
Looking ahead to mute transactional activity, we have approximately $200 million of discretionary equity available to invest.
Which gives us approximately $600 million and our buying power and all that.
Average basis.
We are still seeing opportunities consistent with fund five existing high yield strategy and hope to close several more of these types of deals this year.
The good news is we're seeing an increasing appetite among our lenders to finance these types of properties.
And the other end of the risk spectrum. We are also focused on the acquisition of more deep distressed and opportunistic investments ranging from buying distressed debt restructuring to heavier lifting value add projects.
All areas, where we have successfully invested in the past.
These opportunities have been for a variety of reasons slower to emerge, but they are clearly coming.
Most importantly, we'll make sure that we are being rewarded appropriately for the risks we're taking.
Given the success that some sites and the longstanding support of our investors. We remain confident that we will have the time, we need to put the balance of the fund to work at.
At the same time, we continued to proactively mine, our existing fund portfolio for disposition opportunities.
And the they smaller transactions less reliant on debt or large levels of debt or traditional shopping centers with a larger share of essential retailers.
Finally on the debt front during and subsequent to quarter and we successfully extended approximately $150 million of loans.
Our fund platform at a weighted average duration of 17 months.
In conclusion, our fund platform remains well positioned with a successful capital allocation strategy and ample dry powder to continue to execute on it now.
Now we will open the call to your questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the balance sheet.
And while we compile the Q&A roster.
Our first question comes from Todd Thomas with Keybanc Capital markets. You May proceed with your question.
Hi, Thanks, good afternoon.
First just a couple of questions on on guidance, John the 24 cents and the quarter or 96 cents annualized that's a that's a clean number without albertsons and it sounds like that's the right level to think about for the next few quarters.
Which is above the low end of the comparable 21 range after stripping out what's embedded in the guidance for Albertsons, what's assumed in the guidance range that would would get you down to sort of the low end of the range.
Yeah, Todd you know and at what I would say is that and if you and within the press release, we had and observation there and the on the credit losses.
Really say when we look at our quarterly run rate look at the third and fourth quarter combined right to come up with between whereas I think we are at 20 cents, which was too low and in Q3 and 24. This period. So I think that's probably just I would look at that second half is really be indicative of what what what I'm. You know the first half of next year should be so like I said remarks give or.
A few pennies is is really what we're talking about particularly with the cash basis of accounting creates creates noise simply based upon when that portion of our tenants pay offs.
Okay, and then you talked last quarter about getting back to sort of a recurring a F O.
A level of one dollar per share and in the near term.
Can you just help reconcile the 21 and <unk> guidance, which.
On a recurring basis again after stripping out Albertsons as is and then sort of 93 to $1. One range, you know with that recurring and F O target and what's the timeline and your view to get back to a dollar per share of recurring <unk> on a quarterly run rate.
Yes, just how would I what I would say is that I think where we're there and the fourth quarter and this is just a seasonal piece of our business that our fourth quarter tends to trend higher on our capex spend so when I look out over the course of next year I still think we're and that on average 25.
Arrange particularly with the growth we have and the backend. So you know what I think we're far off of that and I would not use the capex spend which is really the driver of.
And where were a few cent short and assets this quarter as being a run rate.
Okay.
And then just last last question for for Amy or maybe Ken.
In terms of fund five you know you talked about.
'bout, you know some of the activity that's picking up.
It sounds like Theres, a broad sort of set of opportunities across the capital stack and across the board.
And that you're that you're seeing can you can you sort of characterize the opportunity that youre seeing for fun and five in terms of timely.
Timeline and what you think you might end up sort of maybe you could kind of book and you know.
The value of the investments that you're targeting here over the next couple of quarters in 'twenty, one and and how much risk are heavy lifting are you willing to undertake just given what seems like a lot of opportunities that are starting to surface.
So and Amy I'll take a first stab at it if anything do you want to add by all means.
We have deals under letter of intent that look feel and cash flow very similar to our previous.
Previous fund five and I think given the uncertainties and the marketplace. There's just nothing wrong with continuing to add assets, where we get the majority of our return out of current cash flow.
And there's enough uncertainty and the world.
You should expect if I were to guess and this is just a guess that probably half of the remaining fund five looks a lot like the prior <unk>.
And then for the other half of that Todd.
And we're willing to and you've seen us and the past undertaken very heavy lifting opportunities. We just have to make sure that our stakeholders are rewarded for the risk we're taking and.
That requires two things one we need to see improvements.
Improvements in tenant demand.
And we're beginning to see that so that's encouraging and then we need sellers to be realistic about the time cost effort and what returns we deserve and that's taken a little longer because.
And I have a feeling on the heavy lifting pieces.
Much of this deal flow is going to come not from the junior equity, but from the lenders or mezzanine.
Older who are going to ultimately control that capital stack.
And because I think for good reasons.
The fed has urge banks to be very accommodative, because things first for awhile and thats been taking a bit longer but we are now starting to see things become actionable, we're seeing the selling stakeholders.
Be rational about what their expectations are and so if we can get better rewarded for buying vacancy doing heavy lift and then existing cash flow, we will do that and if we can and will just continue to do those type of fund five field and the market is going to be there for those as well because there is a.
And up institutions, primarily private.
Who.
Who are.
And need of.
Liquidity, either reducing their holdings and retail or for otherwise and we're in the perfect spot to I think take advantage of that.
Okay.
Okay, Alright, thank you sure.
Thank you. Our next question comes from Linda Tsai with Jefferies. You May proceed with your question.
Hi.
Can you talk about some of the tenants signing leases and your street retail portfolio anything interesting to highlight here.
Are the tenants new to your portfolio or existing.
It's a combination.
Linda I think.
First of all the important thing is they are showing up.
And there was moments and the summer were like Wow.
And my tenants go away forever and the answer is clearly they are not at.
At the luxury level, there are a host of encouraging signs.
And the luxury segment is not going to wait for international tourism to come back and order for them to open.
Open stores, where they can.
Differentiate themselves from their peers, where they can control their format and where they can get in front of both the domestic customer and otherwise and so the luxury piece is encouraging and youre seeing signs of it and Soho youre seeing signs of it elsewhere in the country.
And we expect to get our fair share of that.
And then the digitally native who again over the summer we were wondering who is going to make it through or not.
Those retailers, who started off with strong online presence.
And they use that presence during the lockdown to get them through this but what they're seeing.
Is that the stores are still a critical way for them to drive both topline, but especially bottom line. If you think about our assets on Armitage Avenue with tenants ranging from all birds to war be Parker, we're continuing to work with a variety of those type of tenants throughout our portfolio and I'd expect.
To see them continue.
And then in between or just the.
Brands that have weathered this storm have rethought, how they are going to <unk>.
Connect with their customer they are recognizing that the days of pushing a whole bunch of product through department stores that those days are changing that the days of.
Being able to just sell the same stuff and the same way that those are ending and so they want to use these unique stores.
As a way to connect with their customers as well. So all of that is adding up to tenants showing up looking to be around cluster with each other in specific select areas. So let me be clear I don't think this means.
And that the retailer demand the amount of square footage is going to expand over the next several years I don't the United States is over retailed, but in these select corridors.
Retailers are seeing is that they can show up that way and you should expect to see that is that on top of that.
Do we expect to see service retailers and show up after a period of nothing but essentials and other uses that are complementary to everything that we think about when we look forward to.
Getting back out there.
Thanks for that and then understanding that sales are still recovering for a number of non essential retailers you know looking out a year from now do you think occupancy cost ratios changed meaningfully from pre COVID-19.
Yeah.
And this will be critical and this is something that I think we all are going to have to keep our eyes on because simply listening to retailers, saying that they can afford to open that space.
And can lead to some errors. So we saw rents for instance on certain streets increase.
Increased 10, 20 plus percent a year for several years, and we really need to monitor where rent to sales or so.
Based on the rents that we see tenants executing based on the sales history pre COVID-19 as well as what we might anticipate as things open up the rent to sales ratios look very healthy.
Retailers are acknowledging it and as they also are acknowledging that there is from many of them a so called Halo effect, where they're not just going to have strong sales on a four wall basis, but the benefits to their online initiatives as well so.
I think.
To be crystal clear it is going to be a retailer's market.
For a period of time.
And with that rent to sales ratios.
And the argon and be lower meaning rather than paying 15, and $17, 20%, they're going to be at the lower end of that and everything we see about how our portfolio stacks up we can afford to do those deals were going to and I think there'll be some really good growth on the other side of that.
Thanks, a lot.
Sure.
Thank you. Our next question comes from Katy and was hung with Citi. You May proceed with your question.
Okay, great. Thanks.
Occupancy fall out with a little bit lighter than we had expected. So I'm curious to hear your thoughts around the magnitude and potential fallout from one channel and why do you do that and no more delayed after the holidays, ladies and gents.
If you have a lighter overall.
Have been renegotiated.
And let me just start with sort of the numbers and then you could maybe backfill and some of the other pieces but.
And what I would I would I would say is that in terms of you know what.
What I mentioned and I might call is that we have a handful of suburban natural expirations coming up in and and the first quarter and and the second quarter. So I think just the expectation is on a percentage basis and it'll drop and you need to keep in mind as you know that we have very different rents. So the percentage itself is somewhat you need to look at that and contact.
<unk>.
But in terms of of <unk>.
Actual physical declines.
And I'll go back to is of the 10% that are not paying us I think half of those ultimately go away. So whether that goes away first quarter second quarter 2022.
And we'll see where that shakes out so I don't really have a view other than that other than from an NOI perspective, its not showing up because we're reserving and so that's really the unknown and Katie when that when that goes through but I think of what I know and what I expect is like I said, a handful of suburban movements.
Okay, and then within that $8 million leasing pipeline understanding ambiance.
And they're going to be a little bit different but can you provide a wide range.
From what you're expecting for leasing spreads.
And thank you Dan.
And I wanted to take that.
Yeah, So I think it's going to vary and.
What I will tell you is that on our street a lot of times. These don't show up and the spreads for post reasons, whether it be kind of the space or are otherwise.
So what I would do is we actually as we get these executed we will provide color as to what the profitability was before and and afterwards as well as the cost to get US there to the extent they are not showing up in and spreads, but I would say that they're pretty pretty consistent with what we've seen in the past theres not any.
And it's pretty pretty solid, but I'll provide color on them as they show up and our results.
Okay and that would be great. Thanks.
Thank you. Our next question comes from Craig Schmidt with Bank of America and May proceed with your question.
Great. Thank you good afternoon.
And I was just wondering in terms of the the <unk>.
Street and urban retailers that are now starting to investigate it.
Did you see a noticeable change once the vaccines were announced or has there been more recently.
And the ones that are now looking to run and when might those new leases hit your P&L.
So.
And Craig I think it was.
A combination of events and certainly the encouraging news around the vaccines.
We're a first step in getting and retailers to say, okay. We can now start thinking about 2021, and 2022 and what the world might look like.
But I would tell you that.
Also going through the holiday season, we saw a change in tenor with the retailers in terms of how they're thinking about executing through their various different channels.
And much more of a focus on.
Getting back to offense.
Themes that have been around for a while but that are clearly resonating do doing more with less.
Picking their stores carefully.
And then thinking about based on who those retailers are where they want to be so it really.
<unk>.
October November felt good I'd say December January fell significantly better in terms of just retailers and recognizing that theyre going to get through this theyre going to get to the other side.
The opportunities in terms of spaces available.
Or in the cities unprecedented so if they wait much longer theyre going to at least missed out on some of those opportunities, but by moving now.
There are a variety of choices and youre, starting to see and you read about it and the papers as well, but you are starting to see them show up.
And how long would it I mean.
People, who are just looking now when do you think he might add those rents at the P&L.
John you gave some guidance as to what hits.
This year versus next in terms of the second half Yeah, no Craig So should I think of particularly the pipeline of the 3 million that are that are executed.
A relatively small portion shows up this year and call that.
And I think that's what episode and my script was the it was about 800000.
And that's going to be and the balance of that is going to start showing up in 2022 and.
And I think the good thing with the Street and we've said this before is that there's not a lot that goes into these spaces. So the time from execution to opening is much different than a suburban property that could take.
18 months to build out and split etcetera. So it could it could happen quickly.
And we're starting to see increased conversation. So I think on the street that could ramp up very very quickly but.
And this year I'm guiding about 800000 to that 3 million, we've signed shows up.
Right and.
And then and just real quick for Amy.
I believe <unk> five has till August 2021 to be invested.
And given the more robust pipeline do you think you can accomplish that might or might that they'd get extended.
You know, Craig that's where I said and my remarks earlier that these are long standing relationships, we've had with our limited partners and the phone.
So whether it's done over the next several months or if there is.
And if there's time beyond that we just we're confident that we'll have the time, we need to make sure that we put the bounds to work.
Great. Thank you.
Thank you and our next question comes from Michael Young with.
J P. Morgan you May proceed with your question.
Yeah, Hi, this is Hong on for Mike I guess, it looks like you put a few other tenants on a cash basis. This quarter. How should we think about that is that kind of just a year and clean up all the tent and non paint to answer and a cash basis now or can we expect more in the coming quarters.
Hi.
And I assume you're referring to just from the straight line, where we did the straight line write off the incremental is that where the question is coming from.
So I think it's the.
Just as you suspected it just incremental incremental cleanup at this point.
Got it and.
And.
Would you know what cash collections were for these for your tenants on a cash basis and both the fourth quarter and in January.
It's the top of my head I would would not I mean, I think it's one where I think if I look at the.
And I keep going back to the 10% that aren't paying us. So certainly it's that that bucket that if those are on a cash basis and I would estimate we're probably another 5% to 10% above that that are that are paying us and I don't really have the percentage handy as to what percentage of those are actually paying us.
Yeah no worries. Thank you.
Thank you. Our next question comes from Paul You know Ross Smith with Green Street. You May proceed with your question.
You might be on mute.
Can you hear me now.
Yes.
Okay, sorry for that.
And so my question is about 10, and reopening and about 10% of your tenants and that's and unsecured portfolio haven't reopened yet.
While it appears these numbers match network closer to 3% for other strip center peers.
Can you help me understand the reason behind this gap.
Is it.
You have and lower exposure to essential tenants is it more your and Duke.
The geographic distribution and for your assets and any color would be appreciated.
John you want to well and let me.
It is first and foremost geographic and so because our properties are dominated in the major urban markets and they experienced a more significant shut down.
More of those tenants were slower to reopen and New York City restaurants for instance, not a significant portion of what we own but many of them were forced to shut down or remote only.
The glass.
Half empty side of this is yes more of our stores are currently closed then and some other parts of the country. The glass half full side is they are getting ready to reopen those that can't make it to the other side as John mentioned, we're fully reserved for and.
And I think that's to be expected, but those that have yet to reopen and do intend to get to the other side I think that that will be a quick bounce back for us John I don't know if theres any additional color you want to add no I think that's right I think it's really just the geography and getting to the point, where theres enough density and those those areas to make it profitable.
And for the store to open and so now I think thats done that much and again.
And then the second question and.
And then you have any sense of how much mark rents and New York lets say so changed in 2020 from your type of street retail assets.
Yes.
Too hard to tell.
But here's part of the problem.
And when people held theyre asking rents at prior peaks and keep in mind rent peaked in 2016 2017.
And we were very cautious about that when rents were climbing to those levels, but if a landlord is quoting off of those rents.
The lease that they would execute and 2020 will be substantially lower.
Because rents had already fallen whereas realistic lenders.
Excuse me and realistic landlords, who had been transacting throughout the period 2019, 2020, pre COVID-19 et cetera. There I don't think there will be as big a distinction, but it's so hard to gauge and each store is different et cetera.
What I will tell you is that 2020 rents are going to continue to be transitional to the extent that the tenants get opened.
2021 same thing.
But as we think about 2022 2023, our retailers are showing a fairly bullish attitude and are willing to see pretty significant rental growth, whether it be contractual or fair market value resets. So short term I think you should expect a lot of terra.
And so you should expect a bunch of headlines across the board, but longer term I think youre going to see some very nice momentum.
Thank you.
Thank you and as a reminder to ask a question you will need to press star one and your telephone. Our next question comes from Kevin Kim with choose you May proceed and your questions.
Thanks, Dan and good afternoon, everyone.
And so it was good to hear you guys talking about the green shoots and street and urban retail leasing.
But I'm curious.
And what would take.
What are the retailers looking for to turn that kind of buy and positive attitude and you talked about too much more on signing for it to be more on a solid footing.
Yeah and.
And let's be clear this winter's going to stick.
Because of everything that we read about and the headlines.
Cold weather et cetera. So some of this is going to be simply the seasons changing and with that retailer.
Our retailers are starting to as I said look forward because it takes them months, if not longer to gear up for a strong reopening.
Watch luxury and.
And I think what Youll see pretty consistently is the luxury retailers are picking their spots and one of the spots happens to be silver.
And Watson stepping up there and where theyre going and I.
Say that again will bode well for our portfolio and for Soho and specific and its not just Soho and the same thing in other parts of the country elsewhere and our portfolio.
And then watch where the up and coming retailers are clustering as well.
And what I think you will start seeing over the next few quarters is a rational migration to a few key areas.
Where they can do strong topline growth and strong bottom line.
Where they can.
Present, their brand and a differentiated way because remember the <unk>.
The channels are shifting and some brands May say you know what I can do all of my sales online and achieve all of my needs and for those select few great, but that's going to be the exception to the rule most recognized the stores are critical.
And then it's a matter of where.
So I think that will be clearer, which markets when which market flus.
Much of this will take into account a whole bunch of the trends we're talking about.
But our focus and our portfolio is to make sure that we have those kind of must have locations.
Okay, and the deals that you've talked about better and the pipeline is the nature of the leases different than what we're used to so and things like.
Some optionality or duration things like that.
So here's spend the evolution and its been different than climbing out of other recessions.
And out of the GSE.
Retailers were cutting tough deals and very long dated deals.
And so when you are signing that lease you were committed to a bearish outlook for a long period of time.
And initially or certainly over the first half of this year long crisis retailers that we're staffing up we're stepping up generally with shorter term leases and they said well figure out 2023 or 24, when we get there and so it worked for the landlord.
And the tenant on that side.
And I would still say that's more the theme. We're seeing then very long dated leases, but now we are seeing especially some luxury retailers, saying no. We know we want to be here for a long period of time, you've even seen on Madison Avenue and the last few months to different retailers announcing that they're buying.
Theyre locations, so talk about long term commitments as retailers are starting to make longer term commitments.
And then there is a give and take.
And what rental growth would look like and I am very encouraged.
By retailers willingness to see their rents grow back to certainly pre COVID-19 and other levels as.
As they are interested and reaching out longer term.
Again.
Short term, mainly retailers and saying how do we get open how do we figure out. The next couple of years and then we will have some form of reset, but youll start seeing longer dated leases and we are starting to sign some of them as well.
Thanks for that and Ken.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Ken Bernstein for any further remarks.
Thanks, everybody.
Probably a few more months before we get to get together in person, but I cannot wait to see you all and person until then stay safe and we'll talk soon.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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