Q1 2021 Acadia Realty Trust Earnings Call
Good day and thank you for standing by welcome to the Acadia Realty Trust first quarter 2021 earnings conference call at the.
This time, all participants on a listen only mode. After the Speakers' presentation. There was the question and answer session.
Ask the question during the session you'll need the 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 I would now like to hand, the conference over to you speak of today Nathan named Yang. Please go ahead.
Good morning, and thank you for joining us today for the first quarter 2021, Acadia Realty Trust earnings Conference call. My name is the day on your mix and I've been an intern in our development department since the since the summer of 2020, it'll be transitioning to full time in the spring before we begin please be aware of the statements made during the call that are not historical maybe deemed forward.
Looking statements within the meanings of the Securities and Exchange Act of 1934 and <unk>.
Actual results may differ materially from those indicated by such forward looking statements due.
Due to a variety of risks and uncertainties, including those disclosed in the company's most recent form 10-K.
Other periodic filings with the SEC forward looking statements speak only as of the date of this call April 29th 2021 and the company undertakes no duty to update them.
During this call management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia as 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 the you limit your first round to two questions per caller to give everyone the opportunity to participate.
I ask further questions by re inserting 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, who will begin today's management remarks.
Thank you Nathan great job and welcome to the team good morning, everybody.
The first discuss some of the trends that we're seeing and how they impact our business and then we will delve into the details.
First of all the.
The improving retailer demand, which we began to see in the fourth quarter of last year has continued to accelerate.
Leasing tours of negotiations, which began in the fall.
Our continuing at an increased pace and are now converting into signed leases.
We're at a point, where our leasing team is seeing more activity now.
The prior to the pandemic.
And while initially the leasing activity was weighted to our suburban and more of necessity portion of our portfolio looking forward in our pipeline.
We are seeing strong and encouraging emphasis on street retail and the more discretionary components of our portfolio.
We're seeing this reflected in a variety of our improving metrics most significantly though.
Looking b on the quarterly results. This improvement is beginning to feel more of long lasting and duration as opposed to just the simple snapback.
And to be clear.
Our country is still working through the pains of the COVID-19 crisis.
And several of our gateway cities are still far from re stabilized. Additionally, retail real estate had already faced several years of headwinds and disruptions before the pandemic.
Nevertheless, it's becoming clearer every day.
Debt, our tenants are positioning themselves for the reopening of the economy and more recently retailers are beginning to recognize that as the result of this multi year disruption.
If they can correctly positioned themselves going forward.
And because of the painful shakeout that has occurred as opposed to despite it.
The next several years could see spending levels.
And profit margins well in excess of pre pandemic levels.
Now that doesn't mean simply the reopening of past businesses, nor does it ignore.
The crisis of ubiquity.
That we saw in the overbuilt and over retail landscape that existed pre COVID-19.
If the COVID-19 crisis has been a great accelerant, what that has meant for physical retail real estate is not it's the mice.
But rather and acceleration of change and an acceleration of the separation of the haves and have nots, both for retailers and retail real estate.
It means that valuable locations.
Once we get through this crisis has the potential to be even more powerful and more valuable to our retailers than before the crisis.
Our portfolio is.
He is well positioned for this.
Whether it is digitally native retailers like the real real coming to our Greenwich Avenue property last quarter or luxury retailers like watches of Switzerland.
Opening an additional store next month in Soho at our Spring Street location.
Retailers are clearly focusing on more effectively connecting directly with customers, whether digitally or through their own stores or ideally both.
And thus using these stores and more powerful ways, whether his showroom or pickup of return, but then more importantly to create an experience and reinforce their brand.
Now looking back over the COVID-19 crisis, and as we think about the different components of our portfolio.
The approximately half of our portfolio that is focused on necessities essentials stay at home needs that portion of proved critical <unk>.
During the lockdown.
With target as our largest tenant and other tenants ranging from traditional supermarkets to T. J ex us Homegoods. This component continues to show stability, but now as we move past the lockdown.
We are seeing a significant improvement in tenant interest for the discretionary side of our business, especially from those retailers, whose customers are climbing out of this crisis with pent up demand with increased savings and in some cases significant perhaps the unanticipated wealth from the appreciation of their homes.
The stock portfolios.
And this rebound is starting to show up in our numbers.
You may recall, a couple of quarters ago.
We discussed that as we were assessing the impact of COVID-19 on our portfolio, we anticipated a hit to our net operating income of about 10% or roughly $15 million and.
And we saw that dropped rebuilding over the next few years driven most significantly through our leasing pipeline.
As you May recall, our pipeline started at around $6 million then as of the fourth quarter. It had grown to $8 million and then it is now currently well in excess of $10 million.
And importantly.
Already over $5 million of this pipeline. We're in another words substantially all of the $6 million of initial pipeline has already been converted to signed leases.
This pipeline has rebuilt faster than we had initially expected and has continued to improve both in terms of number of tenants engaging with us.
And the overall ramp profile.
It also appears of the trajectory of growth should continue beyond the simple recapture of Boston NOI and continue for several years due to the growth in the rebound potential in the street component of our portfolio.
And while early movers in our leasing pipeline were concentrated in the less dense markets that were generally quicker to reopen such.
Such as Greenwich for Westport, Connecticut more recently.
We're seeing of rebalancing.
With our recent activity now being in the more dense gateway markets along with watches the Switzerland in Soho for instance, we executed a lease for a new mark for the owned restaurant in Tribeca and are finalizing a lease with a luxury tenant in Chicago Gulf Coast.
And it's not just in our portfolio.
Neighboring properties are beginning to attract exciting complementary tenants as well such as cardiac <unk> Bottega, Veneta Valentino and Soho Similarly in the Gulf coast of Chicago neighboring retailers.
The include luxury brands Christian Dior, and Brunello Cuccinelli, both who are expanding their stores on rush and Walton.
We're the first to acknowledge that this type of retailer demand.
We will not backfill of the space on the United States.
Retailers are going to be selective and theyre going to be disciplined.
But for properties in our portfolio with our demographics and our density in our barriers to entry.
We see far stronger recovery than we could have anticipated just a few quarters ago.
To be clear the current vacancy rates on some of these key streets that we do business in are a bit daunting and don't expect that the change overnight.
But this vacancy is also offering key card or as an opportunity for a significant refresh of concept.
And while zero vacancy may sound comforting.
If it translates through into still retailers on adult shopping experience, that's often even a worst of long term outcome. We are much more encouraged by Carter's where new and exciting retailers of planting the flags Denver.
And then by just okay folks hanging around.
And thankfully our locations throughout the country.
Or where the new exciting concepts of shown up.
Whether melrose place in L. A or M Street in Georgetown, we are seeing the right retailers once again planting their flags there.
And while it may take a few years for these markets the fully regain.
And then exceed the pre COVID-19 rent levels, which by the way has almost always been the case during prior cycles.
Even during this transition period, we should still have plenty of the embedded growth in our portfolio and John will discuss the key drivers of the that shortly.
Then from a capital markets and investment perspective.
Both of the debt markets.
And the equity markets are continuing to rebuild albeit selectively.
The retail real estate sector is still eight less favorite asset class on the private markets.
But this will likely play out to our advantage as there are likely to remain fewer well capitalized teams with proven investment expertise and many groups that.
Previously we're active in this space have lost the muscle memory to navigate the new normal for retail.
Then notwithstanding the huge.
Short term impact from the COVID-19 crisis on collections and the stock volatility that many of US based today there has been much less actionable distress than we might have thought in the early days of the crisis and Theres a variety of reasons for this.
But it currently appears that there will be.
Likely fewer opportunities opportunistic buying opportunities in the more favorable or less unfavored components of retail such as supermarket anchored shopping centers or net leased assets, but we very likely could see increased opportunities in the other less crowded components, including <unk>.
Certain properties in gateway markets.
What does that mean for our investment activity well in terms of our core portfolio, while our stock price is not yet at a point, where we have a cost of capital advantage in the private markets.
Given our retained earnings given our healthy balance sheet, we are starting to dip our toes in and certainly gearing up for what we expect could be a very interesting investment period.
And we're confident that as buying opportunities arise.
We're going to be in a position to capitalize on them.
Keep in mind, our relatively small size means that even modest amounts of the external growth can really move the needle.
And while we may have to wait a bit for the public markets to rebalance Fortunately as Amy will discuss we have our discretionary funds, where we still have plenty of dry powder and deal flow is finally picking up after a quiet year.
Yeah.
So to conclude.
We are pleased to see retailers continuing to step up and get ready to capture the pent up demand and then longer term growth potential that we see in front of us.
And it is becoming clearer every day.
That of portfolio like ours dominated by unique must have locations with both stability and then strong prospects for growth will once again be compelling and then more importantly management teams like ours.
With access to multiple types of capital.
And a proven track record of deploying it.
We will be well positioned to execute on the opportunities in front of us.
I'd like to thank the team for their hard work and their success last quarter and now I will turn the call over to John.
Thanks, Ken and good morning, everyone.
I'll start off with our first quarter results and key metrics, then providing an update on our core NOI growth expectations, and then closing with our balance sheet.
Starting with core cash collections as we had anticipated these continued to edge up with collection rates of 92% during the first quarter.
And continued consistency between our suburban in street and urban portfolios.
While we're still in the midst of collecting and processing of our April rents, we are continuing to see stability within our collections and have already collected over 90% of this month's rent.
And for those 8% of our tenants that are currently paying us consistent with our past practices. We are fully reserve against these on paid rents in the large portion coming from the small percentage of our portfolio. The contingent continues to experience the lingering impacts from the pandemic named.
Namely, our gyms theaters and full service restaurants, which as a reminder, represent about 5% of our portfolio.
And as we move further into the year. We anticipate these businesses will continue to stabilize as operating restrictions are eased with nearly all of our large format and studio gyms, representing about 3% of our ABR now open and operating subject of capacity limits and the sole theater tenant in our core successfully reopened on April 16th.
So not only do we think this provides us with an opportunity for near term improvement of NOI equally important we are encouraged by the continued consumer appetite for these venues.
And absent any setbacks in a pandemic process, where hopefully nearing the final stages of the cash collection focus with collection rates now hovering much closer to pre pandemic levels and in fact, notwithstanding the really scary moment of time last April when we barely collected 50 per cent of our rents in hindsight as the year moved on.
We ended up collecting about 90% of our billed rents during the pandemic.
And that percentage of meeting our 2020 rent collections continues to rise as our tenants continue to honor the repayment obligations with the short term deferral arrangements that we have provided them.
Now moving on to our quarterly earnings are.
Our quarterly results of 25 of share were in excess of our expectations.
This was driven both by our leasing leasing efforts along with improved credit reserves with our quarterly credit loss of declining by roughly 40 percentage compared to the prior quarter.
After adjusting for the $2 million benefit that we recognized on our Q4 of reserve relating to two credit reserve reversals on cash basis tenants.
Our fourth quarter results were also very clean meaning of our results did not include any pandemic related noise or other onetime items as we did not receive any meaning we do not have any meaningful write off of straight line rents or other nonrecurring adjustments from the cash basis of accounting.
Ladies and gentlemen, please remain on the line and your conference will resume shortly.
Once again, please remain on the line your conference will resume shortly.
Good day.
Okay.
Okay.
Yes.
Hi, Joel can you hear us.
Come from.
So we live on the line.
Yes.
Yeah.
So now I'll turn the call again to John who will start at once again apologies for the technical difficulty of apologies. So I'm going to have to I understand that the first two minutes may have been caught so I'm going to bore you for another two minutes debt to start at the beginning so very.
Very quickly I'm going to start with our first quarter results and key metrics, providing an overview on our core NOI growth expectations, and then closing with our balance sheet.
Starting with core cash collections as we had anticipated we continued to edge up with collection rates of 92% during the first quarter along with continued consistency between our suburban in street and urban portfolios and while we are still in the midst of collecting and processing of our April rents, we continue to see stability within our collections and we've already collected over 90.
90% of this month's rent and for those 8% of our tenants that are currently paying us consistent with our past practices. We are fully reserve against these on paid rats.
With the largely coming from the small percentage of our portfolio that continues to experience the lingering impacts from the pandemic, namely our gyms theaters and full service restaurants, which as a reminder, represent about 5% of our portfolio.
As we move further into the year, we anticipate that these businesses will continue to stabilize as our operating restrictions are eased with nearly all of our large format and studio gyms, which represent about 3% of our a b are now open and operating albeit subject of capacity limits and the sole theater and our tenant successfully reopened on April 16th.
So not only do we think this provides us with an opportunity for near term improvement of NOI equally important we are encouraged by the continued consumer appetite for these banks so absent any setbacks in our pandemic progress hopefully we are nearing the final stages of the cash collection focus with collection rates now hovering much closer to pre pandemic levels.
And in fact, notwithstanding the really scary moment in time last April when we had barely collected 50 per cent of it.
Please remain on the line your conference will resume shortly once.
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It does.
Joe are you still there.
Your line is now live.
Alright, so, let's let's hope for the third time is a charm and I really apologize for that I'm gonna start again at the top so here's here's take three and hopefully the final so.
Hanging with us here.
So again, we will start off with our current first quarter results on key metrics, providing an update on our core NOI growth expectations, and then closing with our balance sheet, starting with core cash collections, we continue to hedge up with collection rates of 92% during the first quarter along with continued consistency between our suburban in street and urban portfolios and while we are still in the.
<unk> of collecting and processing April rents, we continue to see stability within our collections and we have already collected over 90% of this month's run.
And for those 8% of our tenants that arent currently paying us consistent with our past practices. We are fully reserved against these on paid rents with the largely coming from the small percentage of our for our portfolio that continues to experience the lingering impacts from the pandemic name of our gyms theaters and full service restaurants, which as a reminder, represent about 5% of our.
Our portfolio.
As we move further into the year. We anticipate these businesses will continue to stabilize its operation operating restrictions are eased with nearly all of our large large format and studio gyms, which represent about 3% of our ABR in the open and operating subject to the capacity limits and our sole theater tenant on our core successfully reopened on April 16th so.
Not only do we think this provides us with an opportunity for near term improvement in the NOI equally important we are encouraged by the continued consumer appetite for these venues.
And absent of any setbacks on our pandemic process progress hopefully we are nearing the final stages of the cash collection focus.
With collection rates now hovering much closer to pre pandemic levels and in fact, notwithstanding the really scary moment in time last April when we barely collected 50% of our rents.
In hindsight as the year moved on we ended up collecting about 90% of our billed rents during the pandemic and that percentage, meaning 2020 rent collections will continue to rise as our tenants continue to honor the repayment obligations on the short term deferral arrangements that we have provided them.
Now moving on to our quarterly earnings and let's hope I get passed at this time on the because of where I keep getting cut you off so our quarterly results of <unk> 25, a share we're in excess of our expectation driven by both our leasing efforts along with continued improvement in our credit reserves with our quarterly credit loss of declining by roughly 40% as compared to the prior quarter after adjusting for the <unk>.
$2 million benefit that we recognized in the fourth quarter reserve last year relating to credit reserve.
Reserve reversals on cash basis tenants.
Our first quarter results were also very clean meaning of that did not include any pandemic related noise or other onetime items as we did not have any meaningful write offs of straight line rent or other non recurring adjustments from the cash basis of accounting nor did we recognize any material onetime transactional items during the quarter.
And as we look into the second quarter, we anticipate that our core and fund the NOI should remain relatively in line with the first quarter and consistent with the assumptions that we had outlined in our guidance. We are anticipating a slight decline in the run rate of our fund fees given that we earned a few large leasing commissions of this past quarter.
In terms of the second half of the year, we are increasingly optimistic about the incremental 1% to three <unk> per quarter that we had guided towards on a prior call and in fact as evidenced by our raise in guidance. It is starting to feel like the rebound that we had anticipated starting in the second half of the year has already begun.
And as we had outlined we raised our guidance to $1 for $1 14, and while admittedly, we're a bit hesitant to adjust our guidance. So early in the year the strength and successful execution of our lease pipeline along with the improvements we are seeing our credit analysis increased the confidence as we look forward into the balance of the year and quite frankly alleviate some of the concerns that we.
We had built into our initial assumptions involving both the timing of velocity of the rebound.
Additionally, we did not recognize any realized gains this quarter from the sale of Albertsons and as a reminder.
Used upon today's share price and the remaining shares we own we have approximately $20 million of embedded gains representing over 20 cents of <unk>.
Given the nature of our investment of our investment we can't predict the specific timing as to when or how many shares are sold in any given quarter.
And if I had the guests I would target it towards the later half of the year, but that is truly just the gas and keep in mind. This is all about win meaning what specific quarter that we recognize and monetize these gains not enough.
So not only do we are we becoming increasingly confident on our 2021 core NOI expectations. We are gaining additional conviction on our growth trajectory as we look beyond 2021.
As we discussed on our last call. We had highlighted two key milestones on our path forward first as Ken had mentioned, we had anticipated that we would get back to a pre COVID-19.
Pre COVID-19 of NOI by late 2022 early 2023, and we remain on track if not ahead of that expectation and this would set us up for mid to high single digit core NOI growth of about 20, 22% in 2023, which is being driven by the $10 million of new leasing activity, then I will touch on in the moment, along with an expectation of <unk>.
<unk> credit charges.
On the second milestone is the continued growth above and beyond simply getting back to where we started with our model showing solid core NOI growth as we look beyond 2023, and the key drivers of this internal growth is both the lease up coupled with the contractual growth of about 2% that's embedded in our portfolio and.
To put this growth in context.
We estimate that in the near term defined as within the next three to four years, we expect to generate over $25 million of incremental core NOI, which translates to an increase of 20% and that's even before we layer in the profitable redevelopment and expansion opportunities that exist across our portfolio.
Our leasing team has made meaningful progress on the lease up portion with the $10 million core leasing pipeline that kind of discussed.
And to put what we're seeing on the leasing front in context, our current activity is about 50% higher than what we have seen historically, so it's clearly a data point, reflecting the strength, we're seeing across our portfolio and particularly within our street and urban markets now.
A bit more color on the pipeline the $10 million is comprised of roughly 250000 pro rata the square feet or roughly 400 basis points of occupancy and it represents our pro rata share of ABR, excluding recoveries and over 80% of the $10 million of incremental meaning of theres not replacing an existing in place tenant nor did we.
Recognize rent on these spaces at any point in 2020.
Additionally, and as highlighted on our quarterly results. We are continuing to see the signed leases reflected on our physical versus leased occupancy spread which grew to 150 basis points at March 31.
And in line with Ken's remarks of the strength, we're seeing in our street leasing our New York Metro portfolio is leading the way with the spread of nearly 600 basis points at March 31, and the vast majority of that arose this past quarter.
And as we continue to convert our pipeline into signed leases, we anticipate this spread will.
Continued to positively widen throughout the year.
Now to provide an update on the timing as Ken mentioned, we have now executed leases on over $5 million of the $10 million and we expect that approximately $1 5 million of this will show up in the second half of 2021 with the balance of it coming on line of various points throughout 2022.
The 2021, NOI expectation of $1 5 million compares to the 800000 debt we had guided towards on the last call and that's being driven by a combination of the new leases that were signed this quarter along with a number of tenants that have accelerated their opening dates primarily on some of our street locations.
Now in terms of tenant expirations in any given year, we typically average roughly 10% to 15% tenant rollover.
And 2021 of 22 is a fairly typical if not a bit lighter than usual year with less than 15, 15% of our ABR scheduled to expire by December 31, 2022, and this 15% translates to about $18 million and it's split relatively in line with our portfolio mix with about 65% expire.
The on street, and urban assets of 35% on our suburban portfolio.
Now, while it's still fluid given the timing of tenant notification dates. We are currently anticipating about half of these will not renew and we are already in discussions with prospective tenants on the vast majority of the spaces.
I also thought of as worth highlighting a few points involving the scheduled expirations on our street leases.
And more specifically focusing on those street tenants that we are assuming will not renew our exercise an option, meaning we currently expect to get that space back.
We are projecting positive cash spreads of 15% on the street leases.
And thats using todays lenses with our sober expectations as to where we see the market of the current moment.
And should the economic rebound play out as currently anticipated and as Ken discussed this could provide us with a meaningful opportunity for outsized growth above and beyond our current expectations.
Now moving onto our balance sheet as outlined in our release, we generated over $40 million of cash during the quarter.
Largely from retained cash flow from operations, along with the small strategic core disposition, which given our already low leverage resulted in nearly a 5% reduction quarter over quarter of our outstanding indebtedness in.
In summary, we had a solid quarter that came in ahead of expectations and this is driving our increased optimism as to how our portfolio is poised to benefit from what may be a tremendous rebound our liquidity and balance sheet is built to grow and we're looking forward to what could be an exciting and profitable part of the cycle.
I will now turn the call over to Amy to discuss our fund business.
Thanks, John today, I'd like to provide a brief update on each of our for active funds beginning with on site.
First during the first quarter as deal flow began kicking in we secured the unanimous support of our fund five investors can extend the funds investment period to August 2022.
It felt great to have our investor stand alongside us and behind the successful fund, providing us with an extra year to put the funds the remaining dry powder to work.
So far we have allocated approximately 60% of fund five $520 million of capital commitments.
In response to the capital markets, we chose to focus the spend on acquiring out of favor suburban shopping centers, where most of our return come from existing cash flow.
Our thesis was buy at an 8% cap rate leverage at two thirds and clip on mid teens coupon.
We do not anticipate any material growth in NOI, nor was it required to make an attractive return at an 8% going in yield.
Due to our selectivity on acquisition these assets have held up well during the pandemic.
Since September of last year, our existing fund five portfolio has maintained the cash collection three of approximately 90%.
And the portfolio has delivered a consistent mid teens leveraged return.
We are we.
We have also been pleased to see solid leasing momentum within this portfolio. For example, since March of 2020, we had executed leases with an aggregate annual base rent of $3 $1 million.
We also have another $1 5 million of annual base rent currently at least.
In the aggregate this represents approximately eight 5% of the funds annual base rent.
While the tenant improvement costs are up we have been able to hold on to yield generally speaking.
Looking ahead, we have approximately $200 million of the equity available to invest with leverage this equates to $600 million of buying power.
As noted in our earnings release, we have an approximate 100 million dollar of acquisition pipeline, which gets US one sixth of the way to full utilization of these commitments from.
New acquisitions are higher yielding shopping centers on the east coast with going in yields consistent with those of our existing fund size of investments.
As we review potential new additions to the pipeline, it's great to see our fully discretionary capital finally, getting the credit it deserves.
For these acquisitions, we were part of the small group of buyers that was considered due to our strong sponsorship and credibility to close.
For the same reasons, we are continuing to see interest from our lenders to finance these properties.
Given the amount of capital on the sidelines and recovering retail fundamentals. This is also a good time to harvest properties, particularly in our older vintage funds three and for <unk>.
One area of focus is our grocery anchored properties, which have gotten a pandemic boost and remain in favor in the capital markets.
Finally, turning to <unk> City point. This property continues to benefit from the resilient Brooklyn shopper.
First for traffic is steadily increasing at the center.
Last month was the busiest since the pandemic began one year ago with a 27% increase in foot traffic over February.
And while current that traffic is approximately half of it is pre pandemic high.
Remember that these counts exclude any benefit from the Alamo, who plans to reopen on may 7th and century 21, who vacated at the end of the year.
On the leasing front, we've seen strong interest on the former century 21 space from both the traditional retail users as well as commercial tenants with multiple options for each space.
Additionally, decal market Hall, who is currently open for indoor dining at 50% capacity is seeing strong week over week sales.
Currently 26 vendors are open and operating including for new vendors that have opened post outbreak.
We also have another seven vendors in our potential leasing pipeline and we look forward to being able to open fully this summer.
In conclusion, our fund platform remains well positioned with the successful capital allocation strategy ample dry powder to continue to execute on it and our portfolio of existing investments that continue to March towards stabilization now we will open the call to your questions.
Thank you.
Under the ask a question you will need the press star one on your telephone.
Withdraw you question because of the Pankey free state.
And I will be compile the Q&A roster.
Our first question comes from Todd Thomas with Keybanc capital markets. Your line is now open.
Hi, good afternoon.
The first question and I've had the.
Regarding the.
The growth that youre seeing or the comments that you've made between sort of the suburban shopping center portfolio and also the street retail portfolio, you've always compare and contrast of.
Of the growth between the two segments there was a few hundred basis points spread.
In favor of the street and urban and I'm. Just curious you know the trend sounds encouraging on on both fronts over the next couple of years here.
I was hoping that you can compare and contrast, the spread of growth that you anticipate between the two segments.
Terms of thinking out over the next few years.
Sure.
And apologies the technical difficulty before.
<unk>.
The way, we should think about it and I think Todd you spot on we're seeing.
Strong sales performance and strong tenant demand across the board, but the reality in our suburban centers.
Is.
No matter, how well TJ maxx doesn't matter, how well target the those long dated leases tend to have much less contractual growth.
And we love them, they love us, but they ain't going to pay us more rent irrespective of their sales.
Converse Lee.
In our street portfolio.
We tend to have higher contractual growth now there is a transition period going on right now where we're seeing for 2021, perhaps even 2022.
The tenants are coming in and those who are moving quickly are getting at least for their initial year of very attractive.
Rents and so the contractual rent growth is going to be significantly higher during that period, but what we're seeing over the long haul is that 3% contractual growth steam seems to be.
Sticking and so just as we compare and contrast, once we get reopened and back to a new normal. It is our expectation that the great streets that have that kind of demand are going to have higher growth rates were still.
In the early stages of reopening theres still a lot of moving pieces, but we continue to be encouraged from that perspective, and we think overall.
Both suburbia and then especially in these great streets on the.
<unk> of the weaker tenants have left.
The new strong ones are coming in that we think in a world that will be omni channel.
Is that these retailers who are going to take these powerful locations.
On our both getting in at attractive rents are going to see very strong sales and we're already seeing signs of that in terms of sales reports and so we think that that trend to continue tot.
It's still a little early to tell you whether it's a 100, the 200 basis points in precisely the timing, but that's how it is feeling.
Okay and then.
Some of the commentary around investments.
Just wondering if you can comment was that predominantly focused or targeted around fund five or you know where you're starting to see some potential opportunities that might pencil in the core and in terms of deploying capital in the core to the extent that youre getting youre getting closer.
How should we think about those incremental investments being split between.
The street and urban and in shopping centers and the suburban shopping centers, where you have been much less active over the last several years.
Sure So the majority of the.
Volume that we're referencing is for fund five.
And it looks very similar to the assets that we have been buying prior to the lockdown.
But it is beginning to shift even there where there are more value added components, because as retailers left and there's vacancy where we have a high level of confidence for re tenant thing that works and so while for the majority of fund five of the.
The thesis was pre COVID-19 pre recession investing in out of favor assets, where we could get the majority of our return out of current cash flow.
Going forward it'll be that plus some interesting value add opportunities.
I wouldn't be surprised to see some of fund five then go back to some of the more opportunistic.
And more value add pieces of our business. We're good at that we like to do it but it's still a little bit early.
Then on the core.
The most of those asset trades.
Everything froze during COVID-19, because there was no price discovery of around rent and there was really no price discovery around the capital markets. We are starting to see that reopen and unlike the more stable suburban space, especially in the as I referred to.
In the prepared remarks of the less unfavored pieces, there's a lot of disruption out there and we're beginning to see some interest in conversations with stakeholders, who are realistic about their rent expectations realistic about value. It wouldn't surprise us within the core of that there could be some real interesting opportunities still.
A little bit early.
But they are because of the amount of disruption that our gateway cities went through that on a variety of other things that really could be some very interesting opportunities there.
Okay, and just one last one of if I could sneak in for Amy for <unk>.
<unk> five do you anticipate fully deploying the remaining equity capital of the for $500 million of additional investments beyond the $100 million its under contract.
Do you expect that to be predominantly comprised of high yielding investments.
So we have about a year and a half remaining to go on we are confident that we will deploy the full amount and per what Ken just said it will certainly be.
A lot of the are higher yielding assets, but we are starting to see some value add opportunities, that's where we have capabilities and I would expect us to explore those as well.
Okay, Great alright, thank you. Thanks.
Thanks Todd.
Thank you. Our next question comes from Floris Van <unk> with Compass point. Your line is now open.
Thanks for taking my question guys.
Obviously.
The the tone of the call is significantly improved from the last couple of quarters.
Just wanted to maybe if you guys could talk a little bit about your.
The lease spreads, which still are low.
Low for your historical.
Uh huh.
Perspective.
Theres a difference between street and suburban.
Particularly new lease spreads and.
If you could give some more color on that and also talk about the what you are seeing can you had mentioned.
Some of the leasing that's occurring in Soho.
It's happening to the rent levels, there and are you seeing a stabilized.
Stabilization in market rents and relative to your existing rents do you feel good about where your existing spaces.
Is the least at the moment.
So on one of your starting I said any Oh sure. Good morning for us. So in terms of the what we're seeing on on spreads and I think just given the nature of our portfolio and as we often cut up space. The spreads that we actually report aren't always you know a good portion of them on on comparable and so I think the.
The really the way to look at it is what I outlined on the explorations, so where we'd looked at we have a number of street explorations coming up over the next next several years.
We're expecting on the streets that whether we reported on our spreads are not an output, Colorado as we as we do that we're expecting those expiring leases to show a 15% spread on that and keep in mind. These are with rents that have grown 3% in the prior term so still feeling still feeling good and positive about that and as we.
Continue to execute on those we will we'll certainly update you.
And then just in terms of color and it's true for Soho, It's true for a lot of these other market keep in mind rents peaked around 2017.
And we've been hopefully transparent the.
The evolution from 2017 down until COVID-19.
But rents have dropped and retailers were telling us pre COVID-19 that at the rents that the markets were at they could make money now.
Now when COVID-19 hit.
During that time period, the first movers showed up.
There was a discount at least for 2021, perhaps 2022, but what we are seeing.
For the first movers is that by 2022 of 23 rents were meeting or exceeding Johnson my estimates of where the rents should have been even before COVID-19.
And now we're finally again seeing multiple tenants with interest in the same spot and happiness is two tenants bidding on the same location because some of this is about rent to sales.
But also we know some of this is about supply and demand and so we are starting to see that confluence it's going to take a while but we welcome the refresh that we're going to see and we welcome the kind of retailers that are showing up.
And I think you will start seeing over the upcoming quarters and years, some very positive trends in terms of rents from that.
Great.
One more question I guess, if I could.
From from the commentary that it's still perhaps a little bit early for some of the street and urban opportunities, but the debt.
Debt, those that's probably where you're going to make your better a more attractive investments could you maybe contrast.
Some of the things that you think about in and does that also mean that for example in New York you've been heavily focused on on on Soho.
But would you consider going to times square or two to other parts of Manhattan, and how does governments.
The.
Leadership impact your thinking around New York, and San Francisco in particular Q2 markets that debt.
Our very out of favor for them.
For most of the investors at the moment.
Well that is one heck of a third question because we could spend the next hour on it let me let me touch on a few things one there are some markets that we feel are going to see a rebound sooner.
Then others that are more dependent on one component in other words, the vast majority of our portfolio throughout the United States.
Works because of the live work play component, meaning we don't count just on residents. We don't count just on people showing up into the office, we don't count just on tourism, it's a confluence of all of those and so places like Soho are responding or will respond likely faster than some other areas that are heavily dependent on one component.
Does it mean that those won't work for us, but we just need to be careful about that we do think there'll be opportunities across the board and it's not just New York Remember New York is just one component of what we own.
As it goes for.
Leadership, I do not fall into the camp as it relates to any city.
That the recovery of that city is inevitable theres, a level of arrogance and complacency with that and it is essential that political leadership that businesses and communities. All step up New York has rebounded wonderfully in the past, but it had that kind of leadership and I think it's critical for our.
Political leaders to understand.
That.
The universal sign of welcoming people back to New York is not raising the middle finger.
It is embracing.
Embracing them, whether they are tourists businesses local communities or residents and I think based on the political leadership that I've spoken with in the various different cities that the vast majority.
The political leaders understand that and so I am hopeful, but I as I said I do not think it is inevitable and we need to watch these things closely.
Thanks, Ken sure.
Thank you. Our next question comes from Linda Tsai with Jefferies. Your line is now open.
Hi, good afternoon.
Can you talk about New York Metro leasing, leading the way of new leases being signed can you give for some color on the types of tenants.
How might they be similar or dissimilar to the other types of tenants that vacated.
Sure.
And I think the first important thing is as we were heading into the crisis. Linda we were very concerned about some of the younger brands. Some of the digitally native whether they'd get to the other side, whether they'd have the funding and the wherewithal and now if we look backwards.
Those retailers, who had a digital connection with their customer we're able in fact to do quite well.
Because of that digital connection so the thought that the all birds of the world or the war be parkers et cetera, we're gonna be a moment in time and go away well, we've certainly seen that that's not the case. So some of the leases that we have been signing are in those younger interesting concepts.
And what's so exciting about that is the way they think about the world. The way they think about their stores goes beyond just four wall EBITDA because the power of the store is far in excess of the number of eyeglasses or shoes, etcetera that Theyre zone.
Now the counter balance to that and again this is.
Is true for New York Metro, it's true for the country.
These companies are not going to open the 1000 stores, they're going to be very selective and that's why we like how our portfolios throughout the U S are set up for that for that digitally native piece.
And then the other surprises we're climbing out of this crisis was how well luxury debt.
Notwithstanding a lockdown notwithstanding a virtual halt to international tourism. The U S consumer has stepped up.
And having stores is critical for them and then finally in between a bunch of retailers.
Who over the last few years have gotten their act together, they're stepping up as well. So I think it's that combination whether you want to think of it as luxury.
As more bridge or Lulu lemon or aspirational and then some of these digitally native or doing really exciting things, we have the right kind of realistic to capture that.
Thanks, and maybe just a follow up to that I mean, your earlier comment about luxury retailers signing around why rush and Walton, but not necessarily filling all of the vacancy broadly how do you think luxury retailers are approaching their street retail presence post pandemic.
What we're seeing and again not just in our portfolio, but as we walk around Soho when we see the the luxury tenants seem to be using this as an opportunity to upgrade and expand their locations. They're recognizing again they may not have.
A.
Larger store count in the future, but these stores are going to become more powerful partially because of the different shifts in channel, meaning perhaps less is sold through department stores. Perhaps there are other changes that they are thinking about.
No.
We are encouraged we're also encouraged by the collaboration as Youre seeing it not just in how luxury is producing sneakers, but also who they want to be near so around the corner from our sale of wrong is a sneaker stadium and years ago that would make no sense of them right now that makes a lot of sense so stay tuned.
But I think youre going to see some very exciting things.
Thank you and just a quick one for John.
Talk a little bit about the home depot disposition in the quarter of maybe some color on the cap rate and the type of buyer and whether we should expect more dispositions for the remainder of 2021.
Yeah. So that was something we looked at and had the opportunity that came up late and we had actually talked about on our fourth quarter call on was in.
In play, but it was a home depot long term lease really no no growth associated with it beyond just the you know the one or 2% that was there. So there was a triple net leased buyer that had a very low cost of capital return ex rate expectation and we trade of that in the in the for so I think certainly we always look at.
Across our portfolio and business plans with the given asset but this one just just made a lot of sense for us.
And was it a private or buyer of public.
This was a private buyer in this case.
Thank you.
Thank you. Our next question comes from Katy Mcconnell of Citi. Your line is now open.
Hey, it's Chris Mcquarrie on with Katy just a quick follow up question can you provide some more.
Color on the types of the investments you guys are targeting under fund five.
The pipeline for the remaining $500 million still consistent with some of these out of favor of east coast shopping centers.
Yes.
Let me spend a minute to just explain what we didn't see we saw going into the crisis. It is very likely.
Is that there is going to be massive disruption on the debt markets.
And due to.
Government intervention, both fiscal and monetary due to a light touch from a regulatory perspective, we didn't see the debt.
Debt at a huge discount buying opportunities that perhaps we thought 612 months ago.
What we are seeing now.
As owners of a variety of shopping centers and other retail are climbing out of this they are recognizing a few things one if this is not core to what they own probably a good time to dispose of it too if theres a fair amount of capital required to re stabilize the asset even if there is.
Clear tenant interest.
Not cheap to re anchor it's not cheap to release.
And then finally, if they are looking for liquidity for other components of their portfolio.
So.
That in general is creating deal flow.
That is similar to fund five although again.
Most of our fund five investments.
We're in anticipation of some type of a recession is certainly not a global pandemic. They have held up very well. Our current cash flow was great. Now we are seeing and trying to step in front of growth and so we will capture some of that lease up opportunity the.
The final piece of this is keep in mind, we do a wide variety of things and I don't the most exciting part of my job is I don't really know day to day, what the next best most exciting opportunity will be having fully discretionary capital available is what enabled us to do.
Mervyn's and Albertsons to step up and buy in Lincoln Road in Miami to do a variety of other deals.
Im not prepared to talk about them right now on this call, but I would tell you that the range of potential investments for the discretionary fund five is pretty darn wide and as things reopen I do think we're going to see some more interesting opportunities than simply cash flow but.
There is nothing wrong with simply cash flow.
Got it and and now that you are seeing more deal flow to what extent are you seeing cap rates move on and how is that different between your suburban and street portfolios on.
Based on the assets Youre looking at.
Yeah. So it's still a little tricky what I'd say is I don't think we have seen a meaningful moving cap rates one direction or another.
But remember base rates have shifted borrowing costs are flat to down now.
What you have seen is significant shifts in net operating income or potential lease and lease up and so I think it's really been more up out of <unk>.
Coming to an understanding with a seller as to where they think their year three four or five stabilized NOI is in the cost to get there than it is on the going in cap rates, if I was to make a prediction.
Once an asset has been.
Cleansed of.
<unk> gone through the horrific COVID-19 crisis, and you have some visibility as to where NOI I think cap rates come down I think borrowing costs flat to down and leveraged yields remain attractive compared to so many of the other asset classes out there.
Got it thank you.
Yeah.
Thank you. Our next question comes from Craig Schmidt with Bank of America. Your line is now open.
Thank you.
Ken the chatter on the depth of.
But the retail.
Very different from your leasing results on your portfolio.
Was wondering if you've had and the idea of what you think of accounts for the.
Parity between the views.
The disparity just to make sure I understand Craig the disparity between just the overall narrative of the vacancies on the streets and things like that compared to the right we're seeing.
And and that's why I tried to in my prepared remarks Carson everybody. The vacancy is not going away tomorrow.
But tenants are showing up and remember theyre showing up there thinking not just one or three quarters ahead, but 135 10 years ahead.
And what they're seeing is a lot of their competition has cleared out.
And if they can be in the pole position.
As things reopen.
Theyre going to be in a unique position.
Now for the landlords like us.
And we can afford to be flexible for 2021, and we can afford to be fair in 'twenty. Two and then we're going to start seeing some really nice growth those retailers who move first on.
Our not only capturing attractive going in rents day one.
But they're going to capture outsized sales.
If what youre looking at is Midtown Manhattan, youre going to have to be patient.
The return of business. The return of full New York, That's a summer to fall transition.
But if you spend time in some of the neighborhoods Youre already seeing it now.
And just I mean, when you're dealing with such an elevated vacancy of how do you win those leases the music.
It sounds like possibly some of it is.
Of the way you structure of the leases.
Yeah. So again, it's not like one size fits all.
And for a tenant who is opening up this summer.
There's two good things happen.
One they're getting good attractive first year rents I can live with that our numbers reflect debt it's fine the.
Other benefit that we're seeing much to our pleasant surprise is the sales have been really strong. This notion of pent up demand, we're seeing at month over month and our sales reports so.
Great for them for 'twenty, one and then they're stepping up to real rents because the.
They recognize the opportunity for these stores.
And they recognize the long term value.
We have some vacancy so we're not holding a lot of inventory as much as we also have some great cash flow and thus if we're hovering around 90% and we will grow from there. We've got several hundred basis points of lease up over the next few years and that's going to feel pretty good.
Okay.
Thanks for that for sure.
Yeah.
Thank you. Our next question comes from the Hong Zhang with Jpmorgan. Your line is now open.
Yeah, Hi, Thanks for taking my question, yes it.
Ken you talked about.
Good demand from discretionary retailers.
I guess with respect to sales trends how have the discretionary sales done.
One in recent history compared to your more central Phoenix.
Yeah.
So and John maybe you want to also add from any color that you've seen through data still a little bit early but we have been really impressed with the sales results. We're seeing even the month of March for some of these markets, which we are.
Still working through locked down.
The sales results have been in some instances stronger than pre COVID-19.
Attributed to pent up demand for now.
And we will watch these carefully.
But we also should not lose sight of the GDP numbers the savings range of the U S consumer and a whole host of other factors that many of our retailers are saying may have legs beyond just pent up demand among.
On the other thing and kind of just mentioned it is that we have just to frame. It we get probably it's under 20% of our of our tenants report, but it does give us a good sense given its a broad range of of tenants do think it's probably representative direction of our of our portfolio and looked at it really two ways I looked at.
If we look over month over month sales. So if I look at March.
<unk> 21 compared to February 'twenty, one those were up nearly 100% just in that period and that's when the world was starting to to reopen on a lot of our markets and these were some of the Big Street, So Chicago, particularly North Michigan Avenue, Soho et cetera, we're up like I said over nearly 100% just over that period and secondly, just following up to what Ken just said.
Year over year, so if we look at.
March 'twenty, one compared to March 'twenty I think at this time.
And in March of last year was really when the pandemic was really starting to to cause concern we're up of that same under 20% of our portfolio reporting.
Those of those rents were up 60% I'm sorry, the sales at reported are up 60% and those are on the street markets as well so both incredibly encouraging trends and we're looking to see that go forward just anecdotally, we're all walking the streets and our tenants in and see the activity. So really looking forward to where April is starting to play out but.
The pent up demand that we're seeing in the leasing is showing up in our tenants.
Tennant's cash registers as well.
Got it and I think last quarter, you talked about potentially returning to 2019 NOI levels.
Late 'twenty 'twenty two early 'twenty two 'twenty three just given.
Just given the kind of the optimism.
The journal optimistic tone on this call on the renewal leasing volume.
Do you see yourself returning to those levels of little earlier or is it still too early to tell.
Yeah, So I mean in my remarks.
You did say we are certainly on track to late 'twenty, two 'twenty three and I think just given the acceleration on I think it's we are seeing that trending earlier stay tuned we have a lot of calendar in front of us, but we are definitely ahead of where I thought we would have been three months ago.
Got it thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Ken Bernstein for closing remarks, great. Thank you all for joining us.
Apologize for the technical difficulty I apologize for John for having to two of three times, but what compared to the COVID-19. This is a walk in the beach.
Please keep your eyes open for these trends, we're seeing it and we've tried to just call. It like we see it and we are seeing a lot of positive activity, but we still have of ways to go and so we look forward to speaking to you again next quarter and more importantly, seeing many of you or as many of you as possible in person in the near future.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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