Q3 2021 Acadia Realty Trust Earnings Call
Good day and thank you for standing by welcome to the third quarter 2021, Acadia Realty Trust earnings Conference call.
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I would now like to hand, the conference over to Nicolas Tele analyst.
Good morning, and thank you for joining us for the third quarter 2021, Acadia Realty Trust earnings Conference call. My name is Nicholas Tele and Diamond analysts and our asset management Department 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 <unk>.
Securities and Exchange Act of 1934, and actual results may differ materially from those indicated by such forward looking statements.
Future a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10-K, and other periodic filings with the SEC forward looking statements speak only as of the date of this call October 27th 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.
Please see a Kt Kt is earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.
Once the call becomes open for questions. We ask that you limit your first round to two questions per caller to give everyone the opportunity to participate.
You may ask further questions by 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, who will begin today's management remarks.
Thank you Nicholas Great job welcome everyone.
As you can see from our earnings release, we had another solid quarter and notwithstanding some macro concerns around delta and supply chain disruption tenant leasing activity remains brisk and tenant performance remained strong in all components of our portfolio.
Additionally, transactional activity continues to pick up.
So before I turn over the call to John and Amy to delve into the details of the progress that we made last quarter I want to reflect on an interesting inflection point that we find ourselves.
Because after a couple of years of meaningful headwinds for retail real estate.
First from the so called retail Apocalypse.
And then from the impact of Covid.
We're now at a point.
We're not only are we seeing solid leasing fundamentals that should provide strong internal growth for the next several years.
But the other drivers of our business.
Most notably our external growth engines, both from our on balance sheet investing as well as through our fund platform.
Are in a position to add important growth as well in.
In short we have the potential to be hitting on all cylinders.
Way that we have not seen in a very long time.
So let me walk through the key drivers of this trajectory.
NOI growth is poised to be well above trend for the next several years now granted.
Some of this growth is from the rebound from this short term setbacks from Covid.
But we positioned ourselves to not just recapture past income.
But then to grow nicely pass that benchmark.
This growth is going to come.
From a few key components first.
We anticipate taking our occupancy.
Back to approximately 95% from the current level of approximately 90%.
Now occupancy for us is a very rough and very imprecise proxy, but however, you choose to measure it.
The growth associated with the re stabilization is going to be impactful.
And we're seeing this take hold.
Year to date, we have signed over $11 million of leases and considering our initial pipeline with $6 5 million.
This is a pretty good start.
And the growth is coming across the board, but notably.
It is showing up in our key street streets that were boarded up and left for dead.
A year ago.
And now they're coming back.
For example, we recently signed a lease with Vela sportswear for the corner of prints and Broadway in Soho.
And notwithstanding the dire predictions as to the future of Soma.
The economics of this lease provided a positive spread.
And was largely consistent.
With our pre Covid expectations.
Then the next driver of growth is coming from the contractual growth and lease role in our portfolio now trees never grow to the sky and not all leases roll up but the green shoots that we're seeing in Soho are beginning to take hold in other markets as well.
We recently achieved positive lease spreads in Melrose place in Los Angeles and in Armitage Avenue in Chicago, both at rents that were in excess.
Of our pre Covid expectations.
And importantly tenant sales as John will highlight are supporting this trend.
Many retailers are already comping positive to pre COVID-19 sales in many of the card or is that we're active in.
Now this fact is so different.
Rent.
From what most of US expected during the early days of the pandemic.
In fact, if COVID-19 has commonly been viewed as an accelerant of trends.
What it has really been for retail real estate.
Is a cleansing.
Validating mechanism.
Cleansing in that the retailers, who have made it through the storm seem to be in a much better position in terms of balance sheet strength and in terms of productivity.
And then validating.
In that the importance of the physical store.
It has clearly been validated in the post pandemic Omnichannel world that we're in.
And this is true not only for the target and Wal Marts of the world, who validated the importance of the store in their Omnichannel success, but it's also true for luxury Enbridge power, where you are seeing tenants rec.
Recognizing the power of their stores as critical.
In connecting directly with their customer, especially.
In the must have streets, where we own.
And it's also true for the digitally native retailers, where our tenants like war be Parker and all birds are making it clear that the physical store.
Is essential to their growth and essential to their profitability.
And keep in mind.
As recently as a year ago, many wondered whether these retailers would even want stores on the streets.
And while everyone was wondering.
The retailers double down.
Then along with our growth from lease up.
We will add additional internal growth from a series of Redevelopments that are actionable.
And profitable it is.
A bit early to update our progress on this front right now, but we should have some worthwhile updates by our next quarterly call.
Then complementing our internal growth or the multiple components of our external growth engine firstly.
We are doing on balance sheet investing to add to our existing core portfolio accretively.
Deal flow during the pandemic was quiet as most owners hunker down.
And most lenders were highly accommodative.
Distressed opportunities were underwhelmed in almost every segment of real estate other than stock price.
And frankly, we did not have a cost of capital that enabled us to be competitive but sellers are once again emerging and as we look around there are certainly fewer well capitalized and knowledgeable competitors for our areas of focus.
And we're beginning to see a recovery in the debt and equity markets such that we should have a cost of capital to accretively acquire and it should be a good period to put dollars to work.
Then along with on balance sheet investing beginning to heat up our fund platform is in a position to continue to add to our growth.
We can add to our fund acquisitions, both similar to fund five.
Or similar to other successful value add or opportunistic initiatives that we've done in the past.
In terms of fund five and as Amy will discuss we are continuing to buy out of favor open air retail.
Substantial discounts to replacement cost with attractive mid teens yields.
These investments have proven stable through Covid and while I think we may have a couple more years of buying these yields at a discount were also seeing signs of cap rate compression and if and when cap rates do compress.
We will have well over a $1 billion of retail in fund five alone.
Clipping mid teens yields.
And keep in mind.
Buying out of favor existing cash flow is just one of the many ways. We have created value into our fund platform over the years, whether it's buying retailers with significant embedded real estate value.
Such as our investment in Albertsons and the rest of our RCP activity.
We're opportunistic acquisitions, where we saw significant rent bumps and then monetize opportunistically as was the case in Lincoln Road in Miami.
Or a variety of redevelopment and value add projects, where tenant demand warrants it.
And thankfully we're off to a good start this year with approximately $230 million of core and fund investment activity teed up so far and our pipeline continues to grow.
Our team and our balance sheet are built to do multiples of this volume.
And we're starting to see the stars align.
Finally keep in mind.
At our size roughly every $100 million of new investments.
With a core or fund.
Adds about 1% to earnings.
So to conclude.
As we are climbing out of the harvest of the global pandemic and recognizing that the impact that was felt was especially hard on so many of our assets. The rebound is becoming clearer everyday.
And it's also becoming clearer that our company both in size and ability.
Is well positioned for accelerated growth from this recovery.
The combination of strong embedded internal growth and the ability to drive external growth both on balance sheet and then through our funds should enable us to maximize value in multiple different ways.
With that I'd like to thank the team for their hard work and achievements last quarter and I will turn the call over to John.
Thanks, Ken I'll start off with a discussion of our third quarter results followed by an update on our continued progress on the $25 million of anticipated internal core NOI growth.
And then closing with our balance sheet.
Starting with the quarter, our third quarter earnings of <unk> 27, a share exceeded our expectations.
Landing us in the upper end of the 25% to 27% range that we guided towards in our most recent call.
And this was driven by rent commencement on the new leases continuous improvements in our cash collections, along with some accretion from the approximately $140 million of external investments that we completed during the quarter.
In terms of near term <unk> expectations. We continue to anticipate 25 to 27 of quarterly <unk>, excluding any potential albertson sales for the next few quarters in terms of Albertsons as I shared on the prior call. Although a sale of shares before the end of the year as possible. We continue to believe that it's prudent to assume.
That the realized gains start showing up in 2022 and as a reminder, keep in mind that these gains are simply timing. So whether it's next quarter or next year using albertsons. Most recent share price a sale of our position would result in a gain in excess of $30 million or in excess of 30 a share of <unk>.
As outlined in our press release, we maintained our guidance at $1 five $1 14, However, I think it's worth drilling into the components as.
Is it actually represents a beat in excess of 10% off of our initial midpoint.
As Youll recall within our initial range of <unk> 98 to $1 14, we had incorporated 5% to 13.
Core and fund transactional activity, which as we highlighted was primarily attributable to the sale of albertson shares in 2021.
So after adjusting for the 5% to 13, a transactional income we had guided towards 93 to $1 one for a midpoint of 97.
And given our expectation of near term <unk> of 25% to 27.
This gets us in the 106 108 range for 2021, and that's without any albertsons shares, which is more than 10% above the midpoint of our initial range as well as 5% to 7% above the high end of our range.
And as I had updated on our progress throughout the year. This beat was largely driven by improved fundamentals within our core business around lease up and credit improvements and not onetime accounting adjustments related to reserves taken in prior periods.
In terms of cash collections, we received over 97% of our core billings during the quarter and as a reminder, each 1% increase in collections equates to increased earnings of approximately $500000 per quarter.
Or $2 million representing over <unk> when annualized.
While we are virtually back to pre pandemic collection rates. The remaining portion of our uncollected billings is largely coming from the small population of quick service restaurants in our portfolio.
I now want to spend a moment on what we're seeing on our tenant sales productivity.
Even the high quality inventory, we have available to lease we are closely watching the sales productivity of our new tenants, particularly those recently leased street locations.
As this educates us not only on the level of future tenant demand, but more importantly, the potential upside to drive rents beyond the $25 million of core internal NOI growth that we're anticipating.
Both we and our tenants are incredibly pleased with their performance to date.
In fact, our street tenants are seeing sales well in excess of our internal projections. For example, some of our recent open openings in Chicago and New York Metro are already seeing early results trending in the $2000 foot range and keeping in mind. This is even before the return of international tourism back to office and the lingering pandemic concerns.
Now moving onto our same store NOI.
Same store NOI also came in above our expectations at approximately 7% and this was driven by improving occupancy and a continued reduction in our credit reserves. It is also worth highlighting that the 7% is a pretty clean number as we had highlighted in our release the vast majority of prior period adjustments that were recognized this quarter arose from a property that was not <unk>.
Alluded in our same store pool.
And as Ken mentioned, we are seeing actionable rental rates, returning and in some instances actually exceeding pre COVID-19 rents across our market. In fact this was evident our leasing spreads this quarter as we saw cash increase of approximately 11% along with a GAAP increase of 19% and this was driven by our street leasing during the quarter <unk>.
Leading our cash spread in excess of 20% on one of our key street locations on Melrose place in Los Angeles.
It's worth highlighting that this rent substantially exceeded our initial underwriting for this space, which as a reminder, we closed on our acquisition of <unk> place just before the onset of Covid in the fourth quarter of 2019.
Additionally, as Ken mentioned, we are seeing similar trends on Armitage Avenue in Chicago with recent trends in excess of 30%, which is also well above our initial underwriting now it's also worth mentioning the structural differences between our street in suburban leases and why the point in time lease spreads that are disclosed in our quarterly results are.
Often not really comparable when evaluating deal profitability or more importantly, future growth expectations, given that we tend to reset our street leases to market every five years or so as compared to 10 to 15 years are often much longer on our suburban.
Coupled with the fact that street rents contractually increased 3% annually as compared to 1% of suburban lease and just illustrate the difference. If we were to assume that a street lease growths contractually, 3% a year and achieved a fairly modest 5% spread every five years in order for our 10 year suburban lease that has grown at one.
<unk> percent to achieve an identical CAGR.
It would need to achieve a spread of approximately 25%.
I now want to provide an update on the internal core NOI growth that we see playing out over the next few years and as a reminder, we anticipate growth of $25 million by year end 2024, resulting in over $150 million of core NOI.
And as it relates to the short term we remain on track if not ahead of our previously announced expectation of achieving our pre COVID-19 NOI by late 2022 or early 2023.
As a reminder, the three key drivers of our of our approximately $25 million or 20% increase in our core NOI off of our 2020 NOI include first net absorption.
Which is the profitable lease up of our core portfolio and is offset by anticipated tenant explorations over this period.
And we are anticipating that this generates us $10 million to $15 million of incremental NOI, representing 11% to 16 <unk>.
Second piece is further stabilization of our credit reserves.
Contributing $5 to $6 million of incremental NOI of five to six <unk> and lastly, contractual rental growth of $8 billion to $10 billion.
In terms of the most impactful are the $10 million to $15 million of net absorption I wanted to provide some insights on how we see it playing out over the next few years.
Given the significant volume and profitability of the new leases signed to date.
And using our anticipated rent commencement dates on these executed leases.
This should largely replace the NOI of the previously discussed tenant explorations at 565 Broadway in Soho and $5 55 ninth Street in San Francisco for the first half of 2022.
As previously discussed the impact of these two expirations, which occurs in October 2021 for 555 ninth in January 'twenty two for $5 65, Broadway is approximately $4 million or roughly $4 $6 million of annual NOI when factoring in recoveries.
As Ken discussed we have already profitably leased 565 Broadway several months in advance of the current lease exploration, thus significantly minimizing any downtime with an anticipated rent commencement date in the second half of 'twenty two.
When coupled with the remaining portion of our $60 million lease pipeline coming online. This sets us up for solid NOI growth in the $2 million to $3 million range in the second half of 2022 with the balance of that remaining growth coming from positive absorptions split fairly evenly between 23 and 24 at the balance of our pipeline kicks in.
The second driver of our NOI growth expects, our ongoing stabilization of credit reserves at a 97% cash collection rate, we are continuing to incur charges in the one $5 million to $2 million range or $6 million to $8 million when annualized.
Assuming the continued momentum of reopening and retailer strength, we are optimistic that the majority of this should largely returned in the second half of 'twenty two.
And the last piece comes from internal growth of contractual rental increases we are continuing to see the 3% contractual growth in our street leases, so when blended across our suburban and urban assets. This averages to about 2% a year contributing approximately $3 billion of incremental annual NOI.
So given the significant progress our team has made this year and it's accelerated recovery within our portfolio.
We are anticipating meaningful NOI and <unk> growth for the next several years and that's before we layer in the impact of any accretive redevelopments external growth or the profitable transactions that we anticipate will continue to occur within our fund business.
Now moving onto our balance sheet, we have not issued any equity since our most recent call.
As Ken mentioned, given our size each $100 million of investments whether it be core fund should result in <unk> accretion of approximately 1% and our balance sheet is well positioned to capture this accretion with ample liquidity available under our corporate facilities, along with the cost of capital that we believe enables us to accretively transact on a growing.
External investment pipeline.
So in summary, we had another strong quarter as the recovery continues to play out across our portfolio and we're feeling increasingly optimistic on our internal growth outlook as we look forward. The next several years.
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 our fund platform.
With fund size.
First we are pleased to report that fund deal flow is kicking in during the third quarter and as detailed in our press release, we completed $96 million of new acquisitions comprised of two east coast suburban shopping centers.
Like the balance of our fund five portfolio. These two properties were acquired at a substantial discount to replacement cost.
Including land, our blended cost basis for these two centers is approximately $130 per square foot.
In comparison, the cost to construct a new suburban shopping center is approximately 200 to $250 per square foot and that's excluding land cost.
Additionally, both properties ranked number one in their respective markets based on foot traffic consistent with our best game in town acquisition strategy.
The resiliency of fund side stems from our needle in a haystack approach to acquiring these types of centers.
Due to our selectivity at acquisition, we've seen a fund five collections rate that is now in the high nineties consistent with our core portfolio.
Stable mid teens without breaks return, which we're able to achieve given our use of two thirds elaborate in our fund platform.
Even during the pandemic, our cash on cash yield only depth to approximately 13%.
Looking ahead, we expect to be back to 15% relatively quickly.
Similarly on an unlevered basis are 8% yield dipped to approximately 7% during the pandemic and is now on a projected path back to 8%.
Over the life of our investment we expect to generate most of our return from operating cash flow.
That said as previously discussed there is a very tangible opportunity for outsized performance due to cap rate compression in that property appreciation.
Here are a couple of indicators, we're watching first real estate borrowing costs have returned to their pre pandemic levels in the mid 3% range.
Additionally, public market cap rates for the shopping center Reits are proteins are approaching a decade low level, while private market cap rates for the type of product. We're targeting have remained flat at approximately seven 5%.
In fact transactional cap rates in the private market are at a historically wide spread to underlying borrowing cost.
As a result, we believe that signals are pointing to a reversion to the mean in the private market to over the next few years and when that happens we will have aggregated a $1 billion portfolio, where every 50 basis points of cap rate compression would add 250 to 300 basis points to our projected IRR.
Increasing overall fund profitability and in turn our GP incentive compensation.
In the meantime, we are continuing to clip attractive returns and selectively adding to this portfolio.
To date, we've allocated approximately 75% of our fund five capital commitments and we have until August of 2022 to deploy the balance.
Given the amount of capital on the sidelines and recovering retail fundamentals. This is also a good time to Opportunistically harvest properties in our older Vintage fund.
One area of focus is our grocery anchored properties, which have gotten a pandemic boost and remain in favor in the capital markets.
Last quarter as previously discussed we completed the sale of four grocery anchored properties and fund four.
Looking ahead, we anticipate that our disposition volume will be focused on this product type.
Finally, turning to fund two in city point, we continue to see positive momentum at this iconic property with shopper traffic and tenant sales both continuing to increase and the recent opening of basis independent and elementary school in approximately 60000 square feet in phase III.
On the leasing front, we're pleased to report that last week, we executed a lease with an international retailer for 70% of the space, formerly occupied by century 21.
We look forward to sharing more details over the next several weeks, but in the meantime, no that we are excited by this edition, which nicely complements our existing merchandise mix.
The new lease replaces nearly all at century 21 prior rent obligations with 30% of the space still remaining to be leased.
Construction is anticipated to commence shortly and the retailer is expected to open in the second half of 2022.
With all these positive indicators. This is an appropriate time for us to go to market to refinance this project over the next several months.
So in conclusion, our fund platform remains well positioned with a successful capital allocation strategy and our portfolio of existing investments that continue to march towards stabilization.
Now we will open the call to your questions.
Yeah.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone two.
To withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from Todd Thomas with Keybanc.
Hi, Thanks, good morning.
First question John I think you said in your remarks that you would expect.
Around $25 27 per quarter, excluding albertsons gains over the next few quarters and you ran through some of the move outs that are taking place. This month and in January of next year. I think you said about $4 million of ABR there.
And some of the leasing and the pipeline will begin to offset that later in 'twenty two it sound.
Is that right is that the right read there I realize you're not providing 'twenty two guidance, but.
Your comments around the 25 to 27.
Is that the right quarterly range to think about sort of through mid year 2002. I guess is that is that is that right is that what your comments were suggesting.
Yes, I think first half is as we as I mentioned, there Todd is going to be offset by the pipelines I think youre reading that correctly with really the growth starting to kick in in the second half on leases that are already signed and really accelerating meaningfully in 2003 and continuing into 'twenty four.
Okay.
Helpful. And then Ken you talked about above average growth in the near term and so I'm very encouraged about about internal growth.
Previously you discussed 5% to 10% same store NOI growth per year through 'twenty four.
How do you feel about that range today is that still intact.
You see any changes to that forecasted range at this time and then.
Sort of alongside that I guess, maybe for John the net absorption of $10 million to $15 million that you included in the $25 million.
Increase in core NOI that you anticipate by the end of the 24 does that imply getting back to the 95% occupancy rate.
Are those sort of comments tied.
To that occupancy target and is that the right timeframe to think about getting back to 95% core occupancy.
So things remain on track with John There's a lot there to unpack. So why don't you walk through the yes, I think on the on the same store <unk> four for 'twenty two that trend line that we put out before continues to be in place. So keep in mind that the.
The pieces that we put together was on the absorption, but theres also the credit piece. There's also the contractual rent piece that grow that as well. So I think where we remain on track for the which we highlighted before a 5% to 10%.
Of growth each year with more tilted towards just given these expirations that are coming up in the first half more second half growth with leases already signed so we are on track for the 5%.
For next year.
And then.
In the following years is when Youll start seeing the uptick of occupancy and then the other longer term drivers to provide this above trend.
NOI growth.
And Todd just keep in mind, NOI growth and <unk> are related but distant cousins.
Yes.
Okay, but.
To get back to 95% occupancy do you anticipate that you could be there by the end of 'twenty four.
Yes.
We do.
Absolutely.
And then just keep in mind that our suburban Occupancies can move with very little NOI.
Shift and our urban ski.
Square footage substantially less but really drives NOI. So that's why I said in the prepared remarks that occupancy is a rough measure, but everything we are seeing.
Put in the new shaft side everything we are seeing.
Is.
Tenants stepping up with greater enthusiasm than we had projected.
Okay alright, thank you.
Our next question comes from Keybanc, Kim with Truest.
Thanks, and good morning.
Just sticking with the same topic can you just talk about that.
Trends in leasing momentum that you've seen across the portfolio.
No.
Earlier this year mid this year there was a as you described kind of be a renewal of interest from tenants for street retail, especially.
Has that kind of kept pace and if you can bracket that answer with any kind of snapback youre looking at that suggests I think that accelerated or apps.
The stay flat.
So tenant interest continues to grow and grow in areas that we thought might take longer or where we were just pure concern, but even let's take a step back from tenant interest, which is always welcome, especially when they sign leases what we are.
Seeing now is tenant sales performance.
That has far exceeded our tenants' expectations.
And ours.
And this is before for street retail for instance, this is before a full return to the office. This is before international tourism.
And in ways that frankly, both when I meet with our retailers.
And then just when we talk to various market participants, it's better than we expected. So we're seeing sales growth.
That then drives rental growth if you think about the many different metrics.
When we tried to determine a tenant's interest and attendance viability and profitability a big one is rent to sales.
And what we're seeing there are trends where retailers are coming to us very pleased that they are already.
Producing sales in excess of pre COVID-19.
And that was not something that we could have responsibly anticipated six months of growth six months ago, especially in some of these markets that are.
Bill just reopening.
And.
For tenants that have been opened more than a few months.
How would you describe the durability of that sales trend that youre talking about so I would imagine if youre kind of exciting new retailer opening in your phase two might be our initial surge and then maybe come down a little bit but has that variability remains high.
So so let me be clear in many of the instances that I am referring to our retailers either in our portfolio or adjacent that had been open since pre COVID-19.
That being said.
What we're all trying to figure out.
Across the board is how much of this.
Is a surge in pent up demand how much of it is due to strong government support and stimulus as well at some segments I don't think in our street retail that's relevant what I think has surprised to the upside and we've been talking about this for a while.
The consumer, especially the affluent consumer.
Is climbing out of this recession in such a different position.
Then during the global financial crisis or other recessions.
Their housing value up their stock portfolio up their job prospects strong.
And then there may also be pent up demand. So it's really hard to know how much is <unk>.
<unk> spending.
What our retailers are telling us is and the way they are telling us. This is theyre signing long term leases, what they're telling US is they are forecasting as best as they can.
This is a longer term trend.
Yeah.
Okay. Thank you.
Sure.
Our next question comes from Floris Van <unk> with Compass point.
Thanks, Good morning, guys.
On the same store NOI.
John if I could.
Very interesting to note that typically.
People when they reported lease spreads your renewal leases are significantly below your.
New leases with new tenants tend to pay higher rents.
Yes.
Last quarter, you had almost identical lease spreads and your.
Our same store NOI number.
Full of it at 7% if you can just walk us through.
What was included and excluded because you mentioned it was a relatively clean number there was a little bit of claw back in there, but not the bulk of it if you can give us some more detail on that and just to show that.
Underlying engine seems to be firing.
On all cylinders that that'd be helpful.
Yeah, no absolutely floor, so I think in terms of the.
Paul in the out of period, I think is what you're referring to.
Cash collection, we got that was related to city center, which is the redevelopment we have and in San Francisco. So there we.
Received some cash from a past due rents. So that was that was never part of that was not included in our same store pool, and thus did not get the benefit for it in the in the 7% print we did and then in terms of the spreads.
I think let me try to respond to your question I think you'll see that gap narrowing between the GAAP spread and the cash spread and I think part of it I think what I know part of that difference is is that as you may have seen in the past there was a very wide difference between cash and gap.
Coming out of Covid and that was really related to the few deals that we did in the street, where we had rents that grew into.
Into a market that is largely gone and we're getting market if not better than market now so those.
Thats tightening so thats part of it that's part of it as well and in terms of the renewals.
Those were driven by our street and again as I talked about in our in my remarks, we get a cut at the Apple every five years or so on our in our street to reset it and that's exactly what happened and I highlighted in my my remarks in la.
In Melrose place, which was one that was a renewal that reset to.
Two market that drove a plus 20% spread so I think it is all positive strong indicators thats true meaningful underlying NOI growth is as part of that because occupancy remained fairly flat. So this was really driven by fundamentals.
Thanks, and then going back to the.
You talk about.
2 million next year from.
That $16 million.
Our pipeline and that's presumably the net number the net $2 million is because of the move outs.
It looks like Youre going to get to around 5% NOI growth, but you talked about the range of 5% to 10% so presumably.
As we get further into the recovery your underlying same store NOI potential goes up is that the right way to read that absolutely no absolutely. So.
That's exactly what we're thinking Florida, So I think as we the good chunk of it and I had I had highlighted these explorations a few quarters ago.
And I think it's exactly playing out as we expected and I would say is some of the rents. We're seeing that are coming together are better than we anticipated. So stay tuned, but we feel good about that range.
Maybe last last question.
Ken.
As you think about your exit strategy related to the fund and maybe this is for Amy.
You've got about $1 billion of assets. Obviously, there are a lot of private equity players out there that would that are paying up to buy to buy assets right now in Dubai.
Yielding assets because they want income some of these some.
Some of these private Reits is there a scenario whereby you could sell.
A partial stake or a full stake in that and continue to manage that or keep an interest in that business to keep management fees going or or do you think the best way to.
To deal with that.
A clean clean break going forward.
Hi, Flores, who knows but we're certainly considering all options that would include kind of a couple of scenarios that you just referenced it's a little early.
And why is that is that.
We will remember it as opposed to other assets that may be low yielding or.
Our investors are clipping, a mid teens return while we.
Weigh the different ideal transactions still a little early we still have more money to put to work there is still this arbitrage.
But the opportunity for partial sale as you've seen in other funds.
It's certainly the case.
Yeah.
Thanks, guys Thats it for me.
Sure.
Our next question comes from Linda Tsai with Jefferies.
Hi.
In terms of the school that moved into city point, let's beliefs, Chairman do they fall under the 3% contractual rent increases.
I don't I don't actually know the exact rental increase but in term as long term long term. It is more than 10 years and this is an existing school within the Brooklyn Submarkets. So it's a nice addition for the property.
Which will complement the other new anchor that I mentioned that will be moving in next summer.
And Linda Amy's defense, we tend not to break out.
Individual leases.
Both our tenants don't like us too and it's micro but this is a really important addition in.
Fully.
Middle School, which is who will be attending here is doing incredibly well.
Got it.
And then if you had to rank the comeback of your various urban markets you discussed Soho coming back pretty nicely highlighted la.
Chicago and D C keeping up pace and what are some of the factors that might impact the pace of recovery.
Are there any specific factor yes.
It's been fascinating Linda because.
Much of this is different than I might have predicted.
And.
We spent time in Soho.
During the early reopening days and you saw tenants beginning to show, but you also saw and you still see a lot of dark stores. The difference in Soho is most of those dark stores are already spoken for.
And they are spoken for with really exciting tenants, let's talk about other cities Chicago slower to reopen overall, North Michigan Avenue being probably the example of that but what we saw through the summer and now strongly reopening our areas like Armitage Avenue or our gold coast assets.
Russia, and Walton where seller on expanded by 50% during COVID-19 because they saw the sales demand. So there rush and Walton is better positioned today than pre COVID-19 and that Chicago.
Similar story around Melrose place.
D C M Street is fascinating.
Pre COVID-19.
M Street really suffered from a host of lagging tenants and it did not have the new exciting retailers.
Based on what we know based on retailers that have signed leases whether in our portfolio or adjacent within the next 12 months and street will be more vibrant.
And then it was pre COVID-19.
So thats fascinating not necessarily predictable and not necessarily indicative of what youre seeing in DC overall, because you're waiting for a return to the federal office workers Youre waiting for a return of domestic and international tourism.
So it's not only a tale of different cities it's within.
Each city Theres different submarkets that have reopened faster than others and thankfully, we are well positioned for the most part but there are other areas that I would stay say, we're still in the earlier days of the reopening and so hopefully that progresses over the next 12 to 24 months.
Thanks for that color and then just a quick one for John on Albertsons.
$30 million of embedded gains in our original guidance given ACI has done well year to date in 2022 guidance I assume that this would be a bigger number than you would continue to break out.
Do you expect to realize.
Yeah, absolutely. So on original guidance, Linda we had 5% to $12 million and that was based as you just mentioned the share price is about half of it at the time that we provided our guidance.
So just as a reminder, we have about at our pro rata share of just over 1 million shares.
Current share prices around 30 Bucks and you should think about us unwinding that as I mentioned in my remarks, possibly in later this year, but more likely 'twenty, two and probably spread out over over a couple of years.
Thanks, it's about $30 million.
Our next question comes from Craig Schmidt with Bank of America.
Thank you.
I've been hearing commentary that the lower store closing.
That we witness in 2021.
Very will continue into 2022.
I know that you've been talking about the enthusiasm of the <unk>.
Retailers do you think that the elevated new opening of space will continue in 2022 as well.
It looks like it Craig now I guess, what I would caution.
Is you need to break it into multiple different segments.
And some of the retailers, who had a nice COVID-19 bump.
<unk> base.
They probably are many of those retailers are telling us they have the right number of stores and their expansion has occurred as the discretionary retailers.
On a wide range.
Our continuing to be active and I'd expect them to continue for the next several years and that ranges from luxury where they have absolutely confirmed that the store, especially where they can control their own footprint. The luxury retailer has set the store is essential to their direct to consumer.
Initiatives.
Then the aspirational retailers some of them do are doing incredibly well, we see that rollout continuing.
Some of this is as they transition out of department stores or out of less favorable in closed malls and others are just as they realize.
Is that the store is the most profitable channel in an Omnichannel world.
And then you do have the single channel retailers.
Otherwise known as the off price retailers, otherwise known as Burlington coat TJ Maxx Ross dress for less there.
They are continuing to open stores different format size.
I don't see it slowing down some of them T. J has done an incredibly good job with other of their components home goods home sense. So I feel pretty good on that side, but thats. The single channel and we will watch that every year great retailers.
And I would expect at least for the next 12 months to 24 months you'd see growth there.
Great and then.
It's clear that the supply chain disruption didn't impact your third quarter numbers is it your sense that.
It is not going to be an issue for holiday or linger into 2022 are you retailer seeing a wait and see.
On that issue.
Well, so let's separate supply chain as it impacts us as landlord able to reopen or get opened stores.
And if you have an HVAC unit you could blend our leasing team they would be greatly appreciated because the supply chain certainly is something that we're all focused on so far it has not had a material impact and we don't anticipate it does.
Our ability to open.
Our locations, but thats something that every landlord is watching and developers of.
New space, our specialty watches, but put that aside thankfully the vast vast majority.
Of our NOI growth is coming from re tenanted of existing stores and thus not a big concern.
Then on the retailer side, what our national retailers have told us.
Is they think they have made.
Adequate adjustments in their supply chain and in the case of some large national retailers, you've seen them take the supply chain into their own control.
But across the board they are feeling that they can navigate through this provided that this is a 2022 issue and doesn't bleed into multiple years.
That I think everyone has to watch.
It is certainly something that we're not in it take for granted however.
Keep in mind that the consumer.
Continues to show a level of flexibility.
On the delivery date of their car.
At a restaurant.
The consumer seems to be showing a level of demand and a level of flexibility that retailers have been able to manage through this and keep their topline growing and in most in most instances their bottom line as well.
Great and then just finally.
Can you just describe the kind of interest you're seeing.
In the Nordstrom rack space in San Francisco.
San Francisco has been a little slower to reopen.
But the interest is strong thankfully.
It was strong pre COVID-19. It was strong during the dark days of cover Thats one of those unique shopping centers with parking centrally located so we feel good about that.
Great. Thanks.
Sure.
Our next question comes from Katy Mcconnell with Citi.
Great. Thank you can you provide some more color on the increase in seats on leasing costs per square foot this quarter and how is that different for suburban Birch Street deals in terms of what tenants are looking for from Landlines.
Yeah, absolutely. So I think Katie as you look in our supplemental our cost did tick up a bit.
It is coming from the suburban deals that we did so I think street has remained there's just not a lot of work to put into the space, we're not seeing meaningful meaningful changes there, but in suburbia is where the majority of that increase came from.
And when do you look at that as a good run rate because we think about the future leasing pipeline.
I think it all depends on the box that we're feeling whether cutting up and doing it. So I don't know that I would apply the same per square foot cost too.
What we do forever and ever just given the nuance nature of our portfolio. Katie. So I think it is one probably each quarter will have to have to have to work through it but we are certainly seeing a bit of an uptick in <unk> and <unk>.
As Ken mentioned in cost to build out space, particularly in suburbia.
Okay, Great and then just one more quick one if you could talk about the economics and timing around 70000 square foot boxes for city point, just in terms of splitting up the space.
The remaining balance.
Sure.
That space is in good condition, because it was previously leased to a retailer who is opened and operating there.
So we just signed the lease and as I mentioned construction is going to start soon and then we expect that.
The tenant will do their own work as well and open in the second half of next year and.
And in terms of economics, I mentioned that.
This one lease is able to replace almost all at century 21 rent so a little bit of square footage left 30000 square feet.
We will put us into a nice profitability point on this re tenanted.
Okay. Thank you.
Our next question comes from Paulina Ross with Green Street.
Good morning.
Pete talk broadly talk about the structured financing equals this quarter.
It is interesting to me that in the current.
No interest rate environment.
That's too high.
Hi Fi for low fixed interest rates for financing so any color about the counterparty engineer in particular.
The transaction I appreciate it.
Sure.
And.
While every cycle is a little different this cycle consistent and by that I mean.
When entrepreneurs start stepping up usually around this time.
And are looking to get deals done.
Often.
They need capital they need certainty of execution.
And they need it quickly.
And that was the case here I won't get into the specifics of the counterparty but.
Larger institutions, whether public or private are so focused on every last basis point of cost of capital and entrepreneurs are often in a position where they say you know what over the next two years I can do these great things if they can great and then we're happy to assist in that especially and this is the key.
Key for US, where we then can get the opportunity to convert our structured finance into long term ownership, we've done that successfully in the past and I'm hopeful we'll continue to.
Okay. Thank you and then the other question can.
Can you.
Aberrate sources for operational upside on the two properties you acquired this quarter.
Especially about Merck.
The marketplace, which I think is.
99% leased currently.
Yes.
I'll take that but Amy chime in as well the thesis behind the fund five acquisitions.
Has been clipping mid teens levered yields by buying in the Sevens and eights.
And making sure that we are carefully underwriting through so that as any tenant roll occurs any what we call lose teeth.
<unk> out that we can hold on to those leverage deals are now for several years, we have proven that.
Our instances of deals that we are acquiring where there are value add components, but in that case our view is.
By out of favor retail.
Do not expect any same store NOI growth do not expect positive lease spreads do not expect a hosted the metrics at the public markets are focused on but do expect mid teens, levered yield and potentially down the road cap rate compression that leads to the kind of returns that our funds are looking for.
Okay. Thank you sure.
Our next question comes from Mike Mueller with Jpmorgan.
Yeah, Hi, I just have one quick one here of the 25 million of NOI growth that you expect by the end of 'twenty four beginning 2025.
What's the ballpark split between discrete portfolio and the suburban portfolio.
Yes, so Mike will give more color as we get through it but I would say and as we said in the past a good portion of this is coming from our street and urban portfolio.
So I think more than right now of the split is 60 40.
With Street and urban represented 60, and that's going to contribute more than its fair share of that.
Got it and then on the transaction side I think you just mentioned.
No Kevin just mentioned, 7% to eight on the fund acquisitions.
Just as a template so it's probably safe to assume those acquisitions had that sort of economics tied to them, but what about the.
The structure finance investment on the core can you give us a rough going in yield on that.
Yes.
I will.
Like Paulina take credit for it she mentioned it in the high five six as she had a pretty good. Good educated guess at it we don't break that out specifically, but that is that was a relevant range.
Got it okay. Thank you.
As a reminder, if you'd like to ask a question at this time that is star then one.
Our next question comes from Floris Van <unk> with Compass point.
Hey, guys.
A quick follow up just.
Maybe a little bit I know you said you don't want to talk about it too much yet Ken but some of the other upside you talked about is activating some of your redevelopments.
As I am thinking about it two assets in particular come to mind.
<unk>.
This former Sears box, I guess kmart or whatever it is in your Westchester shopping center and your large assets.
On Michigan Avenue.
Are those is that the bulk of the redevelopment potential or are there other things within your portfolio that could.
Be appealing for redevelopment capital as well.
While there are multiple others, Florida, some that are already redevelopment.
Certainly those are two that we're keenly focused on and I think what I said is we'll talk about it next quarter and so we will talk about it next quarter and we hopefully.
And teed up by that.
Thanks.
Yeah.
Our next question comes from Katy Mcconnell with Citi.
Hey, Ken it's Michael Bilerman.
Covered this I had to jump off just in terms of.
What youre hearing from your retailers in terms of their effective profit margins, you talked a little bit about sales growth.
<unk> of sales how are they preparing for the next few months in terms of not having enough product in their stores not being able to get the labor in so my favorite Starbucks.
At four o'clock in New York, because they can't get the staff and just how all of that will play into their store opening.
Profitability and the ability for them to pay rent and if you've addressed that then we can talk offline yeah.
Yeah.
There is no doubt that both labor constraints and short terms some supply constraints are impacting a variety of retailers differently. So far what the retailers are telling us Michael is they're getting you to pay more for that cup of coffee and Theyre getting you to show up before four o'clock, so theyre feeling pretty good.
At least for now, but if this becomes prolonged either in terms of the products on the shelf.
Or in terms of your flexibility price and otherwise then that could be an issue, but so far the retailers are feeling pretty good about their ability to maintain top line and grow it and bottom line.
Our hope is we get through the holiday season successfully, especially the national retailers.
And then we will figure it out for local retailers, which primarily are showing up as our satellite tenants in our suburban supermarket anchored centers.
They may not have that same pricing power. They may not have the same ability to navigate the supply chain. So we're watching our satellite tenants closely but again so far so good.
And then is there you've obviously seen a lot of the traditional E. Commerce players that moved into bricks and mortar a number of those companies have gone public and listed have you sensed any change in their store opening or they're willing to spend capital now that they are using public shareholder money versus private capital.
The change showed up actually before any of the steps to IPO because what they saw was in many instances.
When they opened a store their online sales went up when they opened a store that was the most profitable.
Channel for them and what I would tell you is the VC world in the private equity world are demanding that those retailers with interesting digital initiatives.
Have a ground game have physical stores as part of their outlook. So we're seeing most of them say, we got to have stores. It's now proven critical to our long term success, whether we stay private or eventually go public so.
This has been an ongoing question for years asked now and answered the store is going to work.
Okay, and then just lastly in terms of I know, you're trying to fill up the <unk>.
In terms of the remaining capital that's there to be spent.
So you are your institutional investors are approaching you for sidecar investments just in terms of the aggressiveness of the initial capital to allocate capital either in the suburbs or on the street.
Just to.
Give us a little bit more flavor of what they're thinking about doing.
So they are waking up thankfully and saying, Okay. We thought retail was in secular decline and now they recognize its not an especially when they compare it to other alternatives the kind of yields we're providing are looking very attractive so thats a positive here's here's the <unk>.
Negative if you will we're still picking needles from a haystack the United States is still over retail not every shopping center is going to get to the other side with stability. The ones. We are buying are stable, but we've been unable to piece together large portfolios that would justify that.
<unk> cars were trying maybe it happens, but every 10 or 20 property portfolio. We look at we ended up with two or three assets not all 20 of them. So we're going to continue to be selective we can afford to.
Okay, Great I appreciate you taking the time, thanks, Ken Alright.
Alright, good chatting with you.
I'm showing no further questions in queue at this time I'd like to turn the call back to Ken Bernstein for closing remarks.
Great I appreciate everyone, taking the time and I look forward to talking with all of you again next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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