Q1 2022 Acadia Realty Trust Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by him walk through the Q1 2022 Acadia Realty Trust earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone.
The assistance. Please press Star Zero I would now like to turn the call over to your host real Green you may begin.
Good morning, and thank you for joining us for the first quarter 2022.
Realty Trust earnings Conference call. My name is real Green and I'm the director.
At Acadia.
Before we begin please be aware that statements made during the call that are not historical maybe deemed forward looking statements within the meaning of the Securities and Exchange Act.
1934 and actual.
<unk> results may differ materially from those indicated by such forward looking statements.
Due to a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10-K and other periodic filings with the forward looking statements speak only as of the date of this call may start 'twenty 'twenty chair and the company undertakes no duty to update.
During this call management may refer to certain non-GAAP financial measures, including funds from operations and net operating income please.
Please see our 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 re inserting yourself into the queue and we will answer uptime.
Now it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer will begin today's management remarks.
Yeah.
Great job Reale. Thank you welcome everyone. Good morning.
We had another solid quarter, both in terms of our internal growth as well as our <unk>.
External investment activities and wall over the past quarter, there has been significant volatility in the capital markets.
And legitimate concerns around inflation and economic growth when we look at the fundamentals of our business.
Driven by tenant performance and tenant demand.
The momentum that began a few quarters ago continues to exceed our expectations.
Then when we couple.
This internal growth with external growth either despite capital markets volatility or more likely as a result of it.
Our leasing traction plus our investment activity.
Our positioning us for solid long term growth.
In terms of leasing and tenant performance as we noted last quarter. The reopening that begin in early 2021.
Resulted in our second half NOI last year, increasing by over 5%.
And this above average growth is continuing to play out this year as well.
Over the last quarter, we saw an improvement in our collections.
And our leasing activity and most importantly.
Tenant demand and market rents continue to exceed our earlier predictions.
Now this is not to suggest that inflation.
Supply chain or recessionary issues are not relevant.
But let's not lose sight of the strength of the job market and the strength of the consumer either.
And as we think about.
Which segments of our portfolio are likely to be the most resilient in this current environment ultimately, it's going to come down to where consumer spending will remain strong which retailers have pricing power to hold onto their top client and their margins or have wider margins to absorb supply shocks and then.
Most importantly.
Where can we as landlord capture that growth.
And from that perspective, while I think most segments of our portfolio should be in good shape. The street portion of our portfolio seems to be particularly well positioned to.
Absorbed the speed bump was inflation.
And then the affluence of.
The consumers that are retailer surf.
We'll likely insulate our retailers in the event of a recession.
In terms of inflationary pressures a few things to keep in mind first our street leases generally have stronger contractual growth.
And more fair market value rent reset than in our suburban assets second tenant improvements.
As well as operating expenses are a much lower percentage of occupancy cost for our street based retailers, thus less impactful on net effective rent growth.
Third.
Rents at many of our streets are at cyclical lows.
And retailer sales theyre already rebounding rapidly. This means that many retailers are already doing sales well in excess of their pre COVID-19 volume.
While rents are still in the early stages of recovery.
Now sales performance, both topline and Bottomline is obviously a critical driver of ramp.
But the other key driver.
The supply demand ratio after several tough years the supply demand dynamic is finally, turning in our favor.
For instance on Greene Street in Soho.
A year ago, there were 14 vacancies on this Carter.
There's one.
Similarly for M Street in Georgetown, which got hit hard even before Covid.
But because we and our partners control enough of the street. It has been rejuvenated in the last year by recent arrivals, including ever Lane Fox prosperity and last quarter, we added glossy angle-off slab.
So our forecast for a multi year rebound in our portfolio is playing out nicely.
Now I appreciate that.
That after several years of powerful headwinds hitting our retailers and hitting our portfolio.
There remains a.
Understandable fog around the rebound and physical store retail, especially in the urban corridors.
But whether it's luxury in Soho.
Digitally native on M Street.
Or advanced contemporary in Melrose place, the recovery is happening faster and stronger than we expected.
And as you have been reading in the papers and hearing from a wide variety of retailers.
Customer acquisition cost Halo effect profit margins there.
Theyre, all converting bricks and mortar skeptics.
Into long term tenants.
Then turning to the new investment side.
Over the last couple of quarters.
We're also seeing nice growth and investment opportunities both for our core portfolio as well as for our funds.
On the core side, our focus has been acquiring assets in high barrier to entry markets, where tenant performance and demand are likely to drive market rents materially higher over the next several years.
And what we're focused on there is picking the right retail corridors.
Where our retailers will want to cluster for a vibrant shopping experience and then making sure that there are adequate barriers to entry such that the retailers are reluctant to move off the block.
And some of the markets. We have successfully done. This include Armitage Avenue in Chicago, Melrose place in Los Angeles Green Street in Soho Greenwich Avenue in Kinect, Connecticut.
Now the markets I, just mentioned, we're not immune to the headwinds of Covid.
But they are rebounding quickly and many are already performing better than pre COVID-19.
Our Gulf our core investments is to have a combination of accretive going in yield, but then more importantly, strong embedded long term growth.
This growth will come from contractual growth a rebound in market rents as well as value add components for instance in January we closed on a $100 million portfolio in Williamsburg, Brooklyn. The portfolio is on Deptford Avenue wrapping third and fourth streets our.
Leo is adjacent to the Apple store with our tenants ranging from Sephora at our Sweet Green, but also 23 residential units and a supermarket that significantly below market. Thus, we have an accretive yield going in.
Strong contractual growth and then long term value add opportunities as well.
We made this investment through a recapitalization from the existing owner borrowers and lenders, all whom we knew well and this enabled us to complete the transaction before it went to market.
We also acquired one of the great corners in Soho on the corner of spring in grain with Bang in Austin as our tenants here market rents are rebounding quickly.
And this key corner has strong contractual growth plus poised for long term upside.
Then in West Hollywood in Los Angeles, we added to our presence there with an acquisition on Beverly Boulevard again strong contractual growth and long term upside from potential redevelopment down the road.
Finally in Dallas.
We closed on a portfolio on Henderson Avenue, which is part of the Knox Henderson corridor, we have been studying the Dallas market in General and Henderson Avenue.
Specifically.
For many years.
The positive demographic shifts over the last several years has turned Dallas into a must have market for many of our retailers and Henderson given the popularity of Knox Henderson from a live work play perspective will be a ideal entry point for many of our retailers.
As I mentioned before we're always looking for carters with tenant demand and tenant performance at similar to our entry in Armitage Avenue in Chicago or Melrose place in Los Angeles. Additionally, we look for locations, where the barriers to entry from a supply demand perspective, where the current market rents.
And then where the tenant performance.
Enables long term rental growth potential in Henderson.
All of these boxes.
Because of the significant growth in the residential market in Dallas in General and Henderson market, specifically the retail rejuvenation of this Carter is the next logical step.
Henderson has long been.
And important corridor.
For great restaurants, and a variety of more local tenancy and then more recently the digitally native retailers began showing up.
Several years ago, it became clear that Henderson was ready to be taken to the next level.
And prior ownership was successful in obtaining the zoning approvals for some key redevelopment is a process that took several years and was quite comprehensive but before the plants could be implemented COVID-19 hit.
We're now in a position to execute on those plans.
The shorter term value add for US include some re leasing that's already in the works then adding some important new retail and parking in the midpoint of the street that will further connect the dots.
And then further down the road the sprouts supermarket parcel will be a great redevelopment opportunity, which can add further densification and further upside.
The size of this portfolio gives us a good initial starting point with additional investment opportunities down the road.
Yeah.
From a pricing perspective for all of our acquisitions this quarter, while going in yields will vary deal by deal.
We are making sure that our acquisitions are both accretive, but then more importantly have the kind of long term growth that complements our existing portfolio, we see contractual growth from these acquisitions being at about 3%.
And then incorporating growth from tenant roll in Mark to market should take us to about 5% compounded annual growth.
And then with the addition of value add redevelopment components, the growth and accretion is going to be even higher.
Turning to the fund side and I'll, let Amy discussed this in detail, but last quarter, we closed on $130 million of deals that were previously under contract.
Two deals are consistent with our fund five strategy and our fund investing remains very complementary to our platform and very profitable.
Even with the rise in interest rates, we are still finding plenty of deals that pencil out.
So in short.
Internal growth driven by strong leasing and our external growth driven by our core and fund investments puts us in a good position to continue to create the growth.
That we saw last quarter, and we see going forward.
I want to thank our entire team for their hard work last quarter and now I will turn the call to John .
Thanks, Ken and good morning, we're off to a strong start with our first quarter results and full year 2022 earnings guidance exceeding our expectations.
Our quarterly results reflected strong internal growth of nearly 10% along with the accretion from nearly $380 million of core and fund investments.
And our core balance sheet remains in great shape, we have ample liquidity with no meaningful upcoming core maturities.
And as I'll walk through shortly substantially all of our core debt is effectively fixed for the next several years.
Thus mitigating our earnings volatility within our core portfolio should interest rates rise as anticipated.
Now I'll dive into the detail starting with our quarterly results. Our first quarter earnings of 33, a share came in ahead of our expectations driven by four key factors.
Profitable rent commencement on new leases driven by the sequential occupancy growth of 100 basis points, this quarter, and our street and urban portfolio.
Second we are continuing to see strength in tenant credit with improvements in both our current period reserves as well as cash collections on past due accounts.
Core collections exceeded 98% for the quarter coming in above our expectations.
Additionally, and in line with the assumptions outlined in our initial guidance, we recognize the benefit of approximately $1 $3 million or a penny a share of <unk> from prior period cash collections, we had assumed three to seven of cash recoveries from prior collections within our initial full year 2022 guidance.
And we are on track to land within that range with an expectation that the majority of these amounts will show up in the first half of the year.
Third we are we are off to a strong start against our investment goals closing on approximately $380 million of.
Accretive core and fund deals.
Fourth and finally profits from our fund business with a gain of approximately $1 5 million or over a penny a share of <unk> <unk> from the monetization of fund III investment that Amy will provide additional color.
In terms of our 2022 earnings guidance, we conservatively increased our full year guidance, which at the midpoint represents year over year <unk> growth in excess of 13%.
And I am optimistic that we have further earnings upside should we see this positive momentum continuing.
Now moving onto our first quarter same store NOI. We also saw strength in our same store NOI with growth of nine 7%.
The growth over the comparable period was driven by three items first improved credit conditions with significant improvements in credit losses and abatements.
Second occupied occupancy increases, including sequential improvements in our street and urban portfolio of 70 basis points this quarter.
Third positive cash spreads on leases that commenced during the quarter, including growth in excess of 15% on street leases that took occupancy during the quarter.
Now it is also worth pointing out that our nine 7% same store growth. This quarter is inclusive of the headwinds from cash recoveries that were included in our comparable prior results.
As reflected in our numbers, we're on track to achieve our occupancy goals, but more importantly, and as Ken mentioned, we are feeling increasingly confident that we should be able to beat our rent expectations.
Thus, we remain optimistic on both our 2022 same store growth, but more importantly, with our continued expectation of 5% to 10% of our internal growth for the next several years.
And this optimism is being fueled by the continued leasing velocity along with improving rental rates that we're seeing within our core portfolio.
In addition to a 50 basis point improvement in our physical occupancy this quarter. We further increased our leased occupancy by an additional 90 basis points to 94, 1% at March 31.
And at a lease rate of 94, 1%.
Spread between our signed but not yet open space remains at an all time high of 360 basis points.
And this represents approximately $7 $5 million of pro rata ABR or more than 5% of our annualized first quarter base rents.
Over 90% of the signed but not yet opened leases are scheduled to commence during 2022 predominantly in the second half of the year.
And it's also worth pointing out that consistent with what we saw in our same store growth this quarter.
Not only are we seeing growth from lease up we are also seeing meaningful growth in rental rates.
With embedded rental growth in excess of 15% on the signed but not yet open leases as compared to the prior rents on same spaces.
And while we are seeing solid growth across our suburban urban and street portfolios.
It's worth pointing out that our current multi year model has our street and urban portfolio outperforming our suburban assets by approximately 300 basis points.
During the quarter, we recognized GAAP and cash spreads of approximately 11% and 8% respectively.
<unk> executed new and renewed leases.
And as we've said in the past it's worth a reminder, that not all these spreads are created equal.
For example in with our own portfolio.
Assuming a 10 year lease term, we need to print a cash spread in excess of 25% on a suburban lease to achieve the equivalent economics of a 10% spread on a street lease.
And this is driven by the fact that we generally receive 3% contractual growth on a street lease compared to one 5% growth from suburban.
Lastly, I wanted to touch on a few items on our balance sheet.
And starting with our strategy of managing our earnings exposure to interest rate volatility within our core portfolio.
It is important to keep in mind that our overall core leverages pretty modest with a debt to GDP ratio in the low 30% range.
And our strategy is to utilize the interest rate swap market to hedge substantially all of our core long term variable rate exposure.
Thus, our core floating rate exposure, which ranges between 10% to 20% of our core debt obligations is generally limited to the short term borrowings we used to fund our very profitable structured finance book.
And Furthermore, in addition to locking in substantially all of our corridor core variable rate exposure through the swap market, we have virtually no upcoming fixed rate maturities within our core portfolio for the next several years.
And the final point on interest rates as our fund business, Amy will provide a fund that update but as you would expect given the transitional nature of our fund investments and the need for flexibility, we have a higher percentage of variable rate debt.
But given our pro rata ownership of approximately 20% in our funds the earnings impact is minimal.
With forward looking interest rate expectations already reflected in our guidance.
Now moving on to acquisition funding, we have funded substantially all of our acquisitions.
Issuing approximately $125 million of equity year to date.
<unk> of the roughly $95 million that we had announced on our prior call.
Equity was sold under our ATM program at a gross issuance price of approximately $22 50, and as a reminder, we have various avenues to access capital to fuel all external growth.
Whether it's from the promotes embedded in our fund business repayments from our structured finance book monetizing our ownership interest in Albertsons or retained cash flow.
Our core balance sheet is in great shape with no meaningful core debt maturities, along with ample liquidity on our corporate facilities.
In summary, we had a very strong start to the year with increased optimism not only on our 2022 earnings but also on our expectations of multiyear internal and external growth.
I'll 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 beginning with fund five.
First we are continuing to selectively add to our high yield shopping center portfolio, which now totals approximately $1 billion.
During the first quarter and as detailed in our press release, we acquired two properties in Texas for a total of $130 million both in partnership with DLC management.
Our blended cost basis for these two was approximately $170 per square foot, which represents a substantial discount to replacement cost.
Laura Terra village and the Austin MSA is a 535000 square foot open Air shopping center anchored by Kohl's, Burlington Marshalls and old Navy.
The population within a five mile radius exceeds 250000, making it the second most dense sub market in our fund five portfolio.
Since acquisition, we have already executed a lease with boot barn for 21000 square feet, increasing the lease rate from 90% to 94%.
Next woodwinds Plaza in the Woodlands is a 210000 square foot retail property comprised of three retail centers located along the highly trafficked Interstate 45, which sees nearly 240000 vehicles per day.
The property is currently 88% occupied key tenants include Kirkland's, and Skechers with an opportunity for some value add leasing.
Including these recent acquisitions, we've now allocated approximately 85% of our $520 million.
Five capital commitments.
As previously discussed our fund six investor discussions are progressing and in the meantime, we still have approximately $200 million.
Buying power in fund five which we expect to deploy before the end of the funds investment period in August .
While we haven't yet seen a material shift in cap rates due to the bumping. This in the capital markets. We are seeing that certainty of execution matters more to our sellers and sponsorship not only matters more to our vendors, but also seems to be having a material impact on borrowing spreads.
Overall, we like how we're positioned on both fronts.
Turning to dispositions. This year, we remain active sellers across our fund platform. For example in fund III as previously discussed in February we completed the $66 million sale of Cortlandt crossing a supermarket anchored property in Westchester County, New York. Additionally.
Additionally, recall that fund III previously owned a portfolio of 11 self storage properties under the storage posts banner.
This portfolio was sold in 2012, but fund III retained its 50% interest in storage post operating company.
During the first quarter of this remaining opco interest with monetized for $6 million of which the REIT share was $1 5 billion.
As a result of these recent dispositions we are now within striking distance of our embedded promote in this fund.
Additionally, during the first quarter, we completed the sales of the last two properties and fund for its northeast grocery portfolio for a total of $45 million.
Turning to the balance sheet as of the first quarter, we have $365 million of fund debt that is expiring in 2022 without extension options.
This excludes our two capital commitment backed subscription facilities.
Of this amount about 30% or $108 million is spread over four loans and is expected to be refinanced or extended in the normal course of business.
The balance or $257 million pertains to city point, our mixed use property in downtown Brooklyn, which is anchored by target trader Joe's and Alamo Drafthouse.
The city point that matures during the third quarter, and we are well underway on the refinancing.
While we have had to navigate this property through a few different challenges among them the global financial crisis, and the COVID-19 pandemic, we believe that city point is well positioned to thrive in the years ahead.
For example over the past decade, the population within a 10 minute walk of city point has grown 52%.
And at the property level momentum continues to increase.
Since August of last year, we've executed six new leases the largest of these is prime Mark an exciting addition to our anchor lineup.
We continue to position city point as a must visit destination for necessities as well as specialty shops food and entertainment.
So in conclusion, our fund platform remains well positioned with the successful capital allocation strategy and our portfolio of existing investments that continue to March towards stabilization. At this time, we will open the call to your questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Todd Thomas with Keybanc capital.
Hi, Thanks, Good morning first question around investments.
Strong start to the year in terms of <unk>.
Capital deployment.
So sorry, if I missed this but John is there any change in the updated guidance for core and fund investment activity relative to the $300 million to $500 million range that was included in the initial guidance and then.
Can you comment a little bit more broadly around the investment pipeline and.
Whether youre changing investment hurdles for either the core <unk> the funds, where you would tend to utilize a little bit more leverage.
Yeah, Todd on the first point, so we did not.
Update any of the individual detailed assumptions that we put out it at year end and let me I'll turn it over to Ken to provide an update on pipeline and how we're thinking.
Yeah. So Todd I think it's fair to assume that our acquisition team is not going on vacation and especially because our fund business is not dependent on the public capital markets. We have much more latitude on that side. So you should expect to see us revise that or certainly upped.
<unk> on a quarterly basis, we've always struggled with two months ago, putting out our annual guidance and then having to update each component of it.
But since we have met our yearly goals already I think it would be a fair assumption to expect us to be busy as it relates to pricing in the capital markets.
I do think especially for the fund five suburban shopping center acquisitions I do think we will be able to be somewhat more opportunistic because the selling community while trying to digest the movement in rates and.
Perhaps moving on pricing, perhaps not and I've read enough debate about it that I'm not going to predict what I will tell you already.
Is that certainty of execution.
Having buyers sponsors who are have a proven track record of closing have the capital everything that our fund business stands for Peru.
That proven track record and.
Certainty of execution is of increasing importance already.
We're also seeing that on the borrowing side, where the spread four first tier borrowers versus the general population of buyers has shifted that also should work to our benefit.
Final piece is I am not.
Not sure exactly what it means or ramp specific going in yields, but I believe we can continue to buy.
High quality fund assets at a discount to replacement cost where our going in yield represents the majority of the growth but.
Tenant interest remains stronger than we expected three months ago six months ago 12 months ago, there may be more value add upside in some of the deals that counterbalance some of the concerns around interest rates now on the core side.
I do think again because of certain corridors that are ready to be activated where we can see long term growth.
Dependant on our capital recycling opportunities dependent on our cost of capital in the public market. There. It's less about interest rates, we don't use a lot of debt and all those other moving pieces, but I do think there are going to be continued interesting accretive buying opportunities.
Once we get through the current speed bumps that we're all trying to wrap our heads around.
Okay. That's helpful. And then if we could just shift to the investment in Dallas in the quarter, along the Knox Henderson Carter there.
Can you talk about the what kind of development and redevelopment spend.
Contemplating as you look ahead, and what the expected time frame and.
Yield expectation on any incremental spend might look like.
Sure and so we're only going to be.
Investing incremental dollars, where the yield makes sense and to the extent that it's more like a redevelopment development than just a re tenancy of space is there youre going to want to see unlevered yields in the sevens and eights and beyond and.
Based on what we see right now we think theres enough tenant demand that all of that plays out but.
But we don't have to do it unless it is meaningfully accretive.
And so far so good as.
As I mentioned in my prepared remarks prior ownership did a very good job of a surprisingly long.
And.
Dynamic approval process.
And then they got stalled with Covid. So the pieces are in place for us to take this corridor and continue the vision that the prior team.
And im hoping some of the prior team very well.
Stay involved because they believe in it but one way or another taking this from a more heavily food.
Food and beverage focus still accretive for us and into more of a $24 seven live work play variety of retailers.
Our tenants say, they're ready to come here. The population is ready for it and Thats, where youre going to see this growth and now in terms of timing I.
Think it's over the next 24 months.
Five years, Todd and we could put our initial $85 million, we're going to be in for 100, no matter, what but then that could double or triple.
On Henderson Avenue.
If the stars align.
And thats the kind of position, we want to be in because if we're going to take the time and effort to see this turnaround we want to see that it could be a meaningful avenue for capital deployment profitably in a market that.
Is geographically different than Soho, let's say, but it's very complementary.
A lot of the projects you've visited Todd with us whether it's.
Armitage Avenue in Chicago and St or.
Melrose place in La and the list goes on and on so it's very complementary to what we do it's very complementary to some of the movement demographically and otherwise.
And it helps reinforce our position.
As a dominant player in this kind of street retail.
Okay. That's helpful and just to be clear. So you are saying the investment.
Along that corridor, it could double or triple over that timeframe, that's so 200 or $300 million total investment opportunity around in and around that that corridor.
Yes in total.
Let me.
Explain that so what we've learned over the years.
While we may want to take a small investment in a marketplace and see if we can grow it always works best for US is where we can make a meaningful enough investment day one.
But then also through additional acquisitions additional redevelopment.
Really dominate that given marketplace.
And this has all of those attributes for us, including having a spine where retailers are going to want to congregate and not move down the road because supply and demand barriers to entry for our retailers matters.
Okay.
Okay, great. Thank you.
Our next question comes from Linda Tsai with Jefferies.
Yes, hi, good morning, what's the competition like for buyers of Street retail assets. I think previously you said you were seeing less competition and if this is still the case who has dropped out.
So, let's let's be clear in our world everything is retail so we think Oh my gosh, there is competition everywhere, but retail even open air retail is still in.
Institutional this paper so it's just a smaller group overall.
Most of the capital as we all know.
That has re-entered has been around the.
Defensive COVID-19 friendly supermarket anchored.
A variety of those type of investments.
The street retail investors.
Prior cycle. It is not that they necessarily dropped out but if you think about even within the public markets. There were two or three primarily office Reits that have had strong retail presence they're not active.
There was GGP, which had a very active presence and I preferred not to compete with them given deal. They have obviously moved on through their privatization and focused elsewhere and in the private markets. There are good competition. There is one or two funds out there.
That a very smart very good we got to work hard to stay one step ahead of them. There are two or three other institutions, but compared Linda to prior cycles.
Where we're seeing the kind of rental recovery.
Not only in Soho not only in Williamsburg, but in a variety of other markets in other cycles. There has been much more competition and thankfully that's not there right now it's still a tough business made that much more difficult by the volatility in the marketplace.
But there is just less today.
Thank goodness.
Thanks, and then it seems like there are bears on their urban recovery thesis what are your street retail tenants, telling you as it relates to traffic and sales in terms of how they are trending relative to expectations.
Yes, so the first thing in this.
Caught us off guard climbing out of Covid.
We thought in a live work play environment that work was going to be the critical piece and thus return to office office activation was going to be the critical leading indicator turned out we were wrong.
Return to the apartment.
The leading indicator and for any of you trying to rent an apartment in Manhattan. Good luck and for those of you who rented a year ago and think you're going to renew up a few percentage point. Good luck because that market has bounced back and then what we saw is with the residential rebound.
Our retailer sales.
Rebounded.
Leinster, Italy. So it has not been a return to work, which was the old urban narrative.
It's really about a different dynamic now that's not true everywhere.
Some markets are still lagging.
And certainly.
Those markets that really are 18 hour urban office markets or Midtown Manhattan, If you own a salad bar, yeah, youre going to feel it thankfully that's not our business and so while there are some areas that we look forward to their rebound, but the vast majority.
Charity of what Ive been talking about our retailers are telling us.
They are not only comping positive to the dark days, they're comping positive in their sales.
Prior to their pre Covid sales.
And thats, because while we can be negative up to out a whole bunch of different issues in the economy, we can't lose sight of the fact that physical retail real estate has been re embraced by so many tenants because it's being re embraced by the shopper.
Want to get out.
Thus those sales are showing up already.
That's helpful. Thank you just last one when you look at the core acquisition acquisitions year to date, how do you compare the different growth profiles between the Williamsburg collection, the Henderson assets West Hollywood in Spring Street.
So.
A lot of it depends on what are going to be the key drivers of <unk>.
Contractual growth.
And if it is simply topline and Bottomline sales growth and then some of them just through roll on spring Street might be really strong.
Hunches.
That while we will see above contractual growth across the board for everything you mentioned my hunch is that some of the more significant value add redevelopment densification.
That can occur to almost all of the deals we talked about because in most of them.
On the ground level street retail and above.
That the Redevelopments overtime will then provide that next layer of significant profit as it should because there were going to have to roll up our sleeves and add more value.
So we will see over the next several years, what I liked though.
Day, one if you have 3% contractual growth and almost without exception we do.
And if day, one it looks like tenant sales and thus tenant demand and thus our rents are going to grow in excess of that 3%. We feel like we're in a pretty good position to complement our existing strong internal growth.
And then down the road at some of these other events occur it can be that much more accretive.
Thank you.
Thanks.
Our next question comes from Michael Bilerman with Citi.
Okay.
This is Michael Ken.
Ken I was wondering just in terms of.
Pipeline in your acquisition pipeline has been growing.
Obviously throughout last year, and obviously, you're sort of looking at opportunities even prior to that in the throes of Covid.
Environment, obviously, you talked a little bit about interest rates the.
The environment overall has changed pretty meaningfully over the last 30 to 60 days and I'm just curious how youre sort of underwriting your pipeline. How are your discussions with your partners going in terms of opportunities and really the discussions with the retailers and whether the last 30 to 60 days, whether it's the inflationary environment.
It's interest rates, whether it's the war is there so.
So many elements.
That are putting pressure on the environment I'm, just wondering if thats changing at all the way your underwriting in the way youre approaching transactions.
Yes.
And Michael the challenge with Us I'm always trying to find a song.
And so this I'm struggling but I may have to chime in later when I can think of it let's so let's touch on a few different pieces.
There is just no doubt that there has been so much change over the last 30, 60, 90 days and for us to stick our heads in the sand would be inconsistent with who we are as a company, let's start on the retailer side I spoke to a friend of mine who's the CEO of a major retailer. This morning, just to double check you're seeing any signs.
The consumer tapping out in your different businesses and the answer was not really now let's just all keep in mind what this means.
First of all the shift from the Covid spend the pull forward for that kind of retail versus what youre seeing now that shift is still playing out and secondly, the consumers in strong shape.
We feel very good about their jobs, and especially again for the type of retailers. Michael that we are primarily doing business with and we do business with dollar stores and we do business with a variety of other retailers ranging from target to supermarkets, but on the discretionary side. That's the one that I would say we need to watch the most clos.
Firstly, given all these uncertainties the consumer is showing up in the stores because they want to get out and because they have dollars in their pocket and because they feel good about their jobs and if we've owned the house for the last couple of years. They feel good about that and then the retailers.
Climbed out of this feeling very good about bricks and mortar as part of Omnichannel. So in terms of demand.
So far it's holding up.
We're being more cautious in terms of watching it more carefully thinking about their balance sheet. So thinking about the structure of leases certainly thinking about inflation.
And then in terms of the capital markets.
The negative is borrowing costs are up.
The positive around this is there were many sailor as sellers and you and I discussed this during the dark day of Cove days of Covid, If you want high quality retail real estate.
You froze for the most part we didn't see a lot of good trades around that stuff.
They started coming back.
They started saying you know what we will sell to the highest bidder because theres so much capital.
And now.
They're saying I need certainty of execution I need to know this is getting done and that a nurse to our benefits. So I can't tell you. What this means in terms of pricing what it means in terms of opportunities.
But it's not all bad.
So a lot of the headaches that our economy has to go through our unfortunate there also probably inevitable and we get through this.
So do you I guess.
Have you baked in I guess are you adjusting pricing at all.
The deals to account for the environment or.
And I recognize you also have a lot of loans coming due this year predominantly fund oriented until you like we have a pretty good.
So where you can finance some of the steel that but I'm just trying to get a sense of whether there's been any change at all on your on your cost of capital and what you are willing to spend right. So we are not immune to rising base rates thankfully, we have a strong lending pool. So we get good execution, but our <unk>.
Your writing has taken this into account.
And so you shouldnt expect assuming that everyone's kind of base too bearish case without interest rates you should assume thats in our numbers.
In terms of refinancing of existing assets or otherwise and John walked through where we're very well hedged on the core side now in terms of pricing for new deal absolutely that has to come into play.
They are balancing it.
Is may be deals that we previously weren't winning the bid on maybe we win now.
And.
Let's not lose sight of.
<unk> strong tenant demand.
So.
I would tell you I am incrementally bullish on retailer demand based on everything we're seeing I am obviously concerned about interest rates, we think about when we buy something well what is the total return over the next five years.
And we will take the new interest rate environment into place, but also the growth that comes with it.
And then just lastly on new markets, you talked a little bit about the Texas acquisition is there anything in pipeline, where you have other new markets that youre looking at that we should expect you to.
Close on.
So I expect us to close on maybe maybe not but Michael you know because way back when we all toured our assets in Miami Thankfully, we sold those at the right time, Florida is certainly a additional market that's gotten a nice lift and we've played well in.
That there are other markets as well I'm not going to predict the specific markets, but you should assume.
Every year every multiple years, we're saying we're within our core competencies.
Do our tenants want to be with a preferred to be with us.
Then the next folks and can we make those investments accretively.
Another way of saying that is I do believe our relatively small platform.
Remains very scalable within our core competencies.
In forever markets and the definition of forever markets has evolved and Theres No reason, we can't evolve with it.
Thank you.
I didn't come up with the songs sorry, Mike.
Okay.
Our next question comes from Craig Schmidt with Bank of America.
Great. Thank you.
It appears that your small shop occupancy has improved over the pre COVID-19 levels.
Total occupancy still falls below.
I'm wondering what drove the huge gain in small shop occupancy.
This last quarter and then when the overall occupancy may return to pre COVID-19 levels.
John you want to start with that and I have some observations.
What I will always give the caveat is that our occupancy given just the range of rents it and it is usually not the best proxy just given the difference between the street rent in a suburban right. So I always start with that that every basis point of occupancy is not not created equal.
Think we're on the on that street and small shop space.
We did see and as we talked through Covid and we work through our pipeline. We did see a lot of activity in our in our in our street and urban spaces, which tend to fall into that category. So there was an outsized growth in lease up and in that effort and then in terms of timing.
I would I would say we're still in we're at 94% leased today.
And as we've talked about that velocity is continuing I would say, we get to what we view as full economic occupancy.
Next 12 to 18 months I think is still our target.
Let me add to that Craig.
And these are observations that I think we all know, but we kind of forget Dave.
Going back to the global financial crisis.
Our mom and pop tenants are satellite tenants.
<unk> got crushed because they lost all their financing.
And really 2010 to 2014 or so they were just getting back on their feet from 2014 until Covid hit.
We saw consistent strength there now.
Now Covid took some of them out, but thanks to PPP. Thanks to a variety of other interventions our shop space remained very much more healthy going through this last COVID-19 recession than the global financial crisis.
And so youre seeing that continue to run up of all the areas that I'm concerned about is we will see with inflation and supply chain and potential recession is are those tenants.
Well positioned to deal with shifts in the consumer and otherwise, but so far that looks good. So far rents are at peaks at least decade long and so we feel good about that our goal there is to maintain it make sure. We have those right satellite tenants, who can withstand whatever bumps are in front of us Conversely.
Lee.
Retail as you know.
Got hit two three years hard before Covid got hit during Covid and that recovery is right in front of us off of rather than decade highs significant lows and Thats why I think you'll see significant gains on that side.
Great and then just one other.
Would you do diligence on Henderson Avenue portfolio include checking with your retailers.
The appetite for this location.
Craig there our first call.
We have not.
We don't pretend to know.
No what they want.
Just simply listen when they tell us what they want.
Great. Okay. Thank you.
The next question comes from Mike Mueller with JP Morgan.
Yeah, Hi, maybe sticking with Henderson for a second can you talk about the potential to double or triple that investment.
How much of that is tied to visible development or redevelopment as opposed to incremental acquisitions.
Half and half very roughly Michael and I guarantee you I'm wrong on that estimate because we will see.
There are additional parcels, we could buy over time.
But the stars have to align for that and what I hate is creating a lot of value and then letting other folks just ride the coattails, but we've got 15 parcels now.
And our acquisition team is busy and conversations.
So we will see based on the amount of retailer demand timing and everything else out there than I did mention.
At one end of the Avenue, we have a freestanding sprouts supermarket with a very large parking in front of it and that is ripe for redevelopment someday someday because theres a thriving retailer there who would like to be part of.
Densification in redevelopment.
They have a seat at the table that we have to be respectful of and Thats why I couldnt predict when let's say that redevelopment occurs and then theres. Other land parcels that we can activate much sooner and put dollars to work over the next couple of years. So.
Aye.
Can't predict exactly which components hits when what I can tell you is assuming things play out the way I think they will and the way we've seen in other markets we've been involved with.
I think the right combination.
Densification.
Redevelopment and acquisition and if I had to yesterday I'll stick to half and half of the triple.
I promise you we will update you.
Periodically maybe not every quarter, but periodically as that capital gets deployed.
Got it and I may have missed this I apologize, but when youre talking about cap rates, you've started heading down the path, but I will talk to you about.
Cap rates for acquisitions.
The cap rate on the year to date, including Henderson core acquisitions in the year to date fund investments.
So on the fund side.
Give or take.
Ah bracket, it with about 100 basis points more or less in either case, because it really depends on what year, two or year three NOI. It looks like we don't just going in but.
Fund five Amy I'd say, it's been between a seven were hovering in the sevens give or take 50 basis points, that's right right.
And then going in with a lot of moving pieces remember was a complicated recapitalization in Williamsburg, and a whole host of other things that I've mentioned.
Probably about a five with some of these assets stabilized trading in the low fours.
And we just need to get them to stabilization and then others probably hovering into the fives.
Got it that was it thank you.
Sure.
Our next question comes you probably know Rojas with Green Street.
Good morning, My apologies if I missed this.
But are you confirming your prior same property NOI growth guidance.
Between 4% and 6%.
Yes.
Yeah, Hi, Paul we did not.
Date any of our individual assumptions within our guidance, but I think in my prepared remarks sort of indicated we are feeling pretty good about the year given the strong strong start so have an updated it but feeling very optimistic based upon our lease pipeline than what happened in the first quarter.
Should I read that right.
You are not.
But you're probably right.
Expecting to be closer to the high end of your prior guidance or.
Not sure how should we be inappropriate way to think about it but not giving specific guidance, but that would be the way we're thinking about it particularly as the first quarter came in our pipeline and leasing velocity is playing out.
That's certainly how we're trending.
Okay, and then regarding bad debt.
But in the quarter, we serves for the current period were materially better than expected.
Wonder if that's changing your perspective for the entire year or if there is any.
Yeah.
No I think that was one of the things we highlighted that it did come in stronger than we expected some of the.
Barry the remaining few tenants that weren't paying us we're in.
Office dependent locations, so a pretty nominal amount, we're seeing return to office come back and those tenants up and up and functioning so.
Following the fingers crossed we don't think Thats trending also in a positive direction.
Okay. Thank you.
And I'm not showing any further questions at this time I would like to turn the call to Ken Bernstein for any closing remarks.
Great well. Thank you everybody for joining US we'll speak to you next quarter and keep you updated on all of the progress that we continue to make.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a long day.
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