Q3 2022 Acadia Realty Trust Earnings Call
Yeah.
Good day, and thank you for standing by and welcome to the third quarter 2020 to Acadia Realty Trust earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone you will then hear a message that your hand is raised please be advised that your conference is being recorded I would now like to hand the call.
Over to your speaker today Max call. Please go ahead.
Good morning, and thank you for joining us for the third quarter 2020 to Acadia Realty Trust earnings Conference call. My name is Max colon I'm, an analyst in our acquisitions 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 Securities and Exchange Act of.
<unk> 1934, and actual results may differ materially from those indicated by such forward looking statements due to a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10-K, and other periodic filings with the SEC forward looking statements speak only as of the date of this call November.
Second in 2022, and the company undertakes no duty to update them. During this call management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see <unk> earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable.
<unk> 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 them as time permits now it is my pleasure to turn the call over to Ken Bernstein, President and <unk>.
<unk> Executive Officer, who will begin today's management remarks.
Great job Max welcome everyone.
As you can see in our quarterly to quarterly release, we had another strong quarter.
Led by the outperformance of our street retail portfolio fundamentals remain strong.
And at the upper end of our forecast.
Same store NOI growth for the quarter came in stronger than forecasted at five 4% leasing activity was robust with both an increase in physical and leased occupancy leasing spreads also reflected this momentum with cash leasing spread in excess of 20%.
Looking forward in our pipeline, we see continued strong leasing momentum. This is true both in our street retail portfolio, which is earlier in its recovery and growth trajectory and thats poised for higher long term growth, but also in our suburban assets.
I'll add a more mature stage of growth still posting solid performance.
This momentum should continue to drive strong NOI growth over the next few years, even after taking into account the.
Potential headwinds from those tenants on our watch list or in our forecasted tenant role.
Now questions remain how.
How my macro headwinds from fed tightening impact this leasing momentum.
Well as we look forward in our leasing pipeline, we are not seeing declining demand for space by tenants.
Some of this stability.
Due to the quality of our locations or the affluence of our shoppers.
But from where we sit.
Demand seems strong.
In the markets, we're active in such as Soho, Our Gulf Coast, Chicago, Our Melrose place in L. A we are seeing luxury retailers double down.
These luxury retailers are not only experiencing incredibly strong sales.
There are also increasing leasing demand and shopper interest for those retailers that surround them.
We're also seeing increased demand in markets experienced strong demographic growth. An example of this is our recent acquisition.
In Dallas on Henderson Avenue, where due to the growth of the residential community surrounding that Knox Henderson Carter, we're already seeing leasing spreads of about 20% and this is even before we have executed on the expansion and rejuvenation of our assets on that stream.
In conversations with our retailers in relation to new store commitments.
They are generally looking past this current period of economic uncertainty.
And committing to key locations, especially for unique mission critical locations like we had in our portfolio.
Now we can get into this further during the Q&A, but there are a variety of reasons why this momentum may be continuing.
A major contributor is the tailwind from the ending of the so called retail arm again over the past year, our retailers have made it abundantly clear.
That physical stores are once again, the critical driver of their topline and bottom line in an Omnichannel world.
This is true for a broad selection of retailers from luxury to young brands and its true whether it's in Melrose place in La where Gucci recently came to the street or Armitage Avenue, where we have a waiting list for tenants to join other young brands. They are in our portfolio.
It's important to note.
That these shifts are causing our rents on many of our streets.
To not only recover to pre COVID-19 levels, but often exceed them.
Retailer sales.
And tenant demand in most of our street retail corridors.
Is stronger today than before Covid.
This is partially because of the pent up demand or survivor bias, meaning those retailers that made it through the last couple of years are operating from a position of strength.
But one way or another.
Being reflected in tenant sales for example.
M Street in Georgetown.
Still in the early phase of reopening and our retailer sales there are in excess of 20% higher compared to pre COVID-19.
Russia Walton in Chicago, our tenant sales are 15% higher and on Greenwich Avenue in Connecticut sales are up 30%.
Additionally, healthy tenant sales are only one part.
Of what ultimately drives ramp.
Supply demand dynamics are equally critical and as we are seeing there is very limited remaining high quality vacancies in most of the Carter's.
And they are quickly being spoken for for example, green.
Green Street in Soho, which faced years of headwinds.
Due first to the retail Apocalypse and Covid lockdown today virtually all of the quality space is spoken for.
Or Bedford Avenue in Williamsburg.
With retailers ranging from national tenants like Apple to regional superstars like Levein bakery and local Michelin starred restaurants. All of this is combining to create a dynamic shopping experience and strong tenant demand that is only now getting even stronger now that luxury is also beginning to show up there as well.
Keep in mind.
Even with the strong rebound in rents over the past year.
Rents in many markets are still well below prior peaks.
While the gap is closing.
Given the strong tenant sales performance our retailers tell us. These streets are screening is very attractive.
And importantly, as it relates to our portfolio in those markets.
Our in place rents.
Impaired to today's market rents.
Position us for strong NOI growth over time.
So while not overlooking the current economic uncertainties in the marketplace around the fed tightening.
If our operating fundamentals are any indication. This is not stacking up in any way like we had to navigate through in prior cycles during the global pandemic or the global financial crisis or the retail Armageddon leasing efforts on.
Often felt like pushing on a strength, whereas now.
Tenant demand is growing.
And so our reps.
We are not ignoring headlines are headwinds and we're certainly preparing for market volatility, but we have been through many cycles before and we have also been in periods, where our stock was disconnected from its real estate values.
Every cycle brings different conditions, but for US there are always a few common areas of focus.
First we're going to continue to lease aggressively and drive internal growth in cash flow from our existing investments.
Granted it's pretty hard to fight the fab, but it's fairly easy to lease space to tenants who want space.
And successful leasing combined with embedded property level growth should mitigate concerns about increased interest rates or longer term inflation.
We are slated to add $30 million to $40 million of NOI to our core portfolio over the next three to five years.
This growth is in excess of 25%.
And if inflation runs hotter the growth will probably be stronger.
Second.
We are making sure we can self fund our capital needs and minimized our exposure to rising rates as John will discuss.
We have capital from retained earnings and normal course of business return of capital to fund our relatively modest capital needs.
Third.
Beyond simply self funding our internal growth.
When there is such a gap between private real estate values and our stock price, we need to look at ways to close that gap on a leverage neutral basis.
While the large transaction market has slowed down significantly one off deals are still happening.
Whether monetizing at the fund level.
In our core portfolio, we can likely opportunistically sell some assets with limited impact to earnings growth.
And use the proceeds for a variety of compelling uses as they might arise.
Finally.
Beyond having dry powder.
We will make sure we're in a position to capitalize on opportunities that might arise as a result of the disruption.
Whether through remaining capacity and fund five or by other means.
Over the many cycles, we've navigated through we have been able to identify compelling opportunities and dislocations.
When these disruptions occur and then bring the right capital structure to that deal.
This has been the case for us with our emergent and Albertsons investments in our distressed retailer fund or our acquisitions of Lincoln Road in Miami in Courtland Town Center shortly after the global financial crisis.
The kind of disruption we are seeing today will create opportunity and we intend to capitalize on that as well.
So to conclude while the gyrations in the capital markets can be distracting and distressing.
We know what we have to do.
Our internal growth is continuing to drive strong results and should continue to do so for the foreseeable future.
And as it relates to future external growth.
Today's distractions.
Should be tomorrow's opportunities.
With that I'd like to thank the team for their hard work this last quarter and turn the call over to John .
Thanks, Ken and good morning, I'll start off with some comments on our most recent quarter along with an update on our multi year core internal growth and then closing with our balance sheet.
Starting with the quarter, we had another strong quarter with earnings of <unk> coming in ahead of our expectations and our third quarter results were clean with about a penny of <unk> from prior period collections and no promote our fund transactional income.
Amy will provide an update on our profitable albertsons investment in her remarks.
In terms of same store NOI, our core portfolio grew five 4% for the quarter and six 6% year to date.
And we are on track to exceed our initial 4% to 6% full year same store guidance.
And keep in mind, we are achieving the same store growth even with the headwinds from prior period cash collections, which would have further increased our reported metrics by another 200 basis points.
Driving this strength was a combination of the sheer volume of leases signed along with signing leases primarily within our street portfolio at rents in excess of our expectations and both of these are showing up in our third quarter core leasing metrics, starting with occupancy sequential physical occupancy grew by 70 basis points during the quarter, resulting in rent.
<unk> of approximately $1 2 million of pro rata ABR net of expiring leases.
In term of leased occupancy or leased occupancy increased to 94, 3% at September 30 up from 94, 1% as of the second quarter and this positive momentum is being driven by our street leases with approximately 70% of the leases executed our renewed this quarter coming from our street portfolio, resulting in a 150 basis point.
Increase in sequential leased occupancy to 92% at September 30th.
With leased occupancy gains of 210 basis points in New York 190 basis points in Washington, D C and 140 basis points in Chicago and not only we filling space in these key markets. We are filling them profitably with cash spreads of 21% during the quarter on new and renewed leases.
And it was our street portfolio that drove this growth with 30% spreads this quarter, including 40% cash spreads in Soho, followed by 35% spreads across our street and urban portfolio in Chicago.
Now in terms of Chicago, we signed a renewed nearly 80000 square feet of GLA, which represented more than 10% of our aggregate GLA in Chicago and it occurred throughout our highly targeted submarkets with leases signed or renewed in the gold Coast Lincoln Park State Street Armitage Avenue in the South loop.
So as we reflect on our quarterly and year to date results. We are excited by not only exceeding our expectations on the sheer volume of leases signed signed but we are executing leases, particularly on a street assets at rents in excess of what we had initially budgeted.
Now turning to our core signed but not yet open pipeline.
As of September 30th the spread between our leased and physical occupancy was 310 basis points.
And it's worth noting that given how effective our team has been and getting stores opened in ramping our leased versus occupied spread declined 50 basis points during the quarter from the 360 basis points that we reported for the second quarter.
However, notwithstanding this decline given the higher productivity leasing from our streets, we actually increase both our pro rata share of ABR, Ando NOI and our NOI to eight 8 million and $9 $4 million, respectively from the $6 $7 $8 3 million that we reported as of the second quarter.
Our signed but not yet open pipeline represents in excess of 5% of our in place ABR.
And in terms of timing of the anticipated rent commencement, we estimate that approximately 45% of the ABR or about $3 $5 billion will commence during the fourth quarter of this year with another 25% commencing in the first half of 2023 and the remaining 30% in the second half.
Please note that given the timing of Commencements, we won't get the full benefit in our reported results until the subsequent full annual or quarterly periods.
Now moving onto credit our collections remained strong with quarterly cash collections at 98%, which is in line with our pre pandemic levels.
As a reminder, we have one high performing Regal location, our core portfolio.
They did not make their September rent following the chapter 11 filing but have since resumed making payments in October .
And we did not incur any onetime reserves during the quarter as a result of their filing as Regal has been on the cash basis method of accounting.
Additionally, as discussed on our second quarter call, we have two bed bath locations in our core portfolio and neither of these locations were included in bed Bath initial closure list.
And as a reminder, the majority of bed Bath ABR comes from their store at 555 ninth in San Francisco with rents that are well below market and.
And as discussed on our second quarter call. This location has historically been a high performing store, but oversized for existing needs and we remain confident that if we're successful in recapturing the space, we should be able to do so very profitably.
In terms of our second location in.
Wilmington, Delaware, we are in the final stages of lease negotiations with another tenant for profitable expansion.
Therefore, both of these locations should result in incremental NOI upon re tenant them.
With the only consideration being the transition period.
However, our base case is that we pre leased this space and thus minimize any downtime.
As highlighted in our release, we increased our 2022 guidance for <unk> before special items to $1 28 to $1 30, which at the midpoint represents year over year <unk> growth of about 17%. This is our third guidance increase in 2022.
And consistent with our updated expectation of above 6% same store NOI growth in 2022.
We anticipate that the NOI generated from our core portfolio will exceed exceed the high end of our initial guidance.
The upside in this organic growth organic growth from our core business was largely offset by higher interest costs in our fund business arising from greater than initially anticipated increases in base rates base rates during the year and in particular, the third and fourth quarters.
With a bottom line net increase in 2022, <unk> before special items to reflect our revised expectation of achieving the high end of our guidance for fun promote and transactional income.
And as we start thinking about 2023, we continue to anticipate 5% to 10% pro rata core NOI growth after excluding the nonrecurring impact from 2022 cash recoveries and before factoring in the growth from city point.
We anticipate that city point will enter our same store pool in 2024 and will be meaningfully accretive to our 5% to 10% of multiyear annual NOI growth.
And as a reminder, our 5% to 10% multiyear growth has always and continues to reflect our rollover assumption assumptions across our portfolio, including our core assets on North Michigan Avenue in Chicago.
Which given the dynamics and realities of this sub market. Our two core assets will likely be part of a redevelopment as we explore alternative uses and formats.
In terms of progress on 2023 core NOI, we have already signed are in the final stages of lease negotiations on approximately 75% of the core ABR necessary to achieve our goals.
And to remind everyone. As this cash rent comes online in 2023 and increases our reported <unk> and cash NOI. It is counterbalanced by noncash adjustments for straight line rent and below market leases.
Thus for modeling purposes, we anticipate that our pro rata share of noncash GAAP adjustments to be in the $7 million to $9 million range for 2023.
Lastly, given the ongoing and profitable monetization of fund assets fund fee income is expected to decline slightly in 2023 to $14 million to $16 million from the approximately $18 million that we expect in the current year.
Which we anticipate will be more than offset by increases in our promote and transactional income in 2023.
As outlined in our release, we took a noncash GAAP impairment charge on three investments are three investments during the quarter.
As we do each quarter, we scrutinize our entire portfolio to assess whether a write down in value for accounting purposes as appropriate.
The factors leading to these write downs were very nuanced and isolated to these three individual investments.
And as we've discussed on prior calls the North Michigan Avenue corridor in Chicago and in Union Square, San Francisco Submarkets have taken longer to recover as compared to what we are seeing across our other submarkets.
Secondly, the GAAP accounting rules governing impairment require consideration of an individual investments capital structure or more specifically as it relates to these three investments when an investment declines in fair value a capital structure that involves multiple partners financed with secured debt.
Often require a noncash write down in value for accounting purposes that would not have otherwise been required had that same investment that held in a wholly owned unencumbered unencumbered capital structure.
Keep in mind that these noncash charges represent a moment in time that the complex accounting rules require us to comply with but we remain.
Confident with the long term growth prospects and the ultimate recovery of these iconic corridors.
Lastly, I wanted to touch on a few items on our balance sheet, we have ample liquidity with no meaningful maturities over the next several years.
In terms of future funding and capital allocation the projected cost to fund the $30 million to $40 million projected core NOI growth over the next several years is about $100 million and we expect to self fund these cost.
Furthermore, over the next 18 months or so we anticipate generating $150 million to $200 million of proceeds from a variety of sources, including retained cash flow from the REIT.
Repayments from our lending book.
<unk> monetization of fund assets, including all or a portion of our Albertsons investment along with the possibility for a handful of strategic core asset dispositions and.
And we intend to use these proceeds to repay debt along with keeping dry powder available for leverage neutral investment opportunities.
In terms of interest rate exposure, 93% of our core debt is fixed or hedged with long dated interest rate contracts.
At September 30, we have approximately $850 million at our pro rata share of core interest rate swap contracts that expire at various points over the next several years with a weighted average duration of about five five years and fixes our current all in borrowing costs at about 4%.
In terms of our fund business given its buy fix sell nature. This requires that we maintain financial flexibility. Thus we appropriately operate this portion of our business with a higher percentage of shorter duration variable rate debt.
So when I look through basis inclusive of our fund business. Our current exposure to variable rate debt is approximately 18%, which has declined by about a third during the quarter due in part to the profitable monetization and repayments of variable rate debt of several funded investments that Amy will discuss.
In summary, while I've thrown out a lot of data the key takeaway from this update is the continued strength, we're seeing in our business along with the opportunity for extraordinary NOI growth over the next three to five years. So we're not being naive to the mixed economic signals and likely headwinds in front of us our multiyear outlook feels really good given what we're seeing in our results.
Along with the continued extraordinary demand for space in our highly differentiated and targeted portfolio I will now turn the call over to Amy to discuss our fund business.
Yeah.
Thanks, John today, I will share updates on the key moving pieces within our profitable fund platform.
Beginning with fund five first we were pleased to receive unanimous support from our investors can extend sunrise investment period by one year to August 2023.
We still have about $300 million of buying power.
And if the pace of compelling transaction opportunities accelerate because of current market turmoil. Then we will look to expand this buying power through co investment structures.
In the meantime, here's what we're seeing on the ground.
Over the past few months the gap between buyers and sellers has widened due to the uncertain impact of rising base rates and widening spreads on returns and pricing.
So far this year, we've been able to shake loose a couple of interesting opportunities where debt maturities were a catalyst or a value add activities are a more meaningful driver of total return, putting our decades of real estate expertise to good use.
To that point in August we completed the acquisition of the shops at South Hills in Poughkeepsie, New York in partnership with DLC.
This shopping center totals about half a million square feet and was 74% occupied at acquisition.
The property was acquired at a seven 5% cap rate.
So even in a rising interest rate environment, we're still achieving positive leverage going in before we execute on our value add activities.
These include converting a vacant retail big box, representing about 15% of the centers current square footage to self storage and monetizing excess land, where we think best and highest use is residential.
We're pleased to report that we're making strong progress.
With respect to fund five overall, we're currently at a 13% with average yield on invested equity and project that the portfolio rate remains at about 12% over the next several quarters due to increases in NOI.
Of our overall approximately $625 million of property level debt, our weighted average term to the extended maturity is about two and a half years.
Next consistent with our buy fix sell mandate over the past few months, we completed $85 million of shopping center sales in fund four.
Both properties were stable and right for disposition.
On a blended basis. These sales returned a 16% internal rate of return and a 194 multiple on $34 million of invested equity and.
Overall, we were net sellers so far this year at attractive returns.
Now onto city point, we're very excited to share our recent progress as previously discussed we completed our recapitalization in the summer and Opportunistically increased Acadia ownership from 28% at the start of the year to 62% today.
This is consistent with our long stated goal to convert this finite life funds investment to a longer term holds due to their densify some market sorry.
<unk> national and credit tenancy and target and trader Joe's among others.
And strong embedded growth not only in the near term as we complete the projects meets up but also over the next decade.
To that end during the third quarter as previously reported we executed two fourth four leases totaling 37000 square feet with Alamo, Drafthouse, who will be adding five more theaters to their successful city point location.
And the indoor Tennis club 16, which provides best in class instruction based programming for active New York City families with an emphasis on community.
This will be quite 16th fourth in New York City location, and we believe their offerings strongly complement the other tenancy within the city point ecosystem.
Inclusive of these two experiential leases our upper level space.
Now approximately 60% occupied and nearly 90% leased.
The gap between leased and occupied rates on the upper levels will begin to close later this year when prime Mark is expected to open for business.
And the other tenant news last month, Brooklyn based brewery six point opened its first New York City Taproom adjacent to decal market on the concourse level.
On this level the pieces are mostly in place, but a lot of embedded NOI growth remains as rents continue to ramp up.
And now that the upper and lower levels of our projects are for the most part substantially complete our focus is primarily on the retail spaces on city point Street and mezzanine levels.
In fact here, we currently have two leases out for execution.
Spaces will overlook the new one acre park, that's currently under construction on Gold Street.
We're pleased that these tenants were able to look past the current construction disruption and envision what a great amenity in the screen space will be for our project and for downtown Brooklyn.
With respect to city point overall, we remain on track to achieve that 6% unlevered yield to cost that we discussed on our last call. Upon initial stabilization with significant projected growth beyond that as this market continues to mature.
And as John mentioned, we expect to city point will be added to our core same store pool in 2024.
In other fund two news as I'm sure you're aware Albertsons announced a planned merger with Kroger for an estimated total consideration of $34 10 per share.
There are some moving pieces here that are outside our control, but the shares are likely locked up to may of 2023, unless certain conditions are met.
Remember <unk> currently holds about 4 million shares of which Acadia is pro rata ownership is about $1 5 million.
And at $34 per share we will have achieved an 11 times multiple on the funds initial equity investment of about $24 million.
So in conclusion, our fund platform remains well positioned.
Some side despite market volatility continues to post strong returns and has dry powder available for growth.
City point is poised for an extended period of strong growth.
And capital recycling activities, both profitable dispositions and new investment opportunities should keep this profitable platform on track now we will open the call to your questions.
Thank you and as a reminder to ask a question you will need to press star one one on your telephone in interest.
Joseph time as a reminder, we ask that you. Please keep your questions to one and one follow up please standby, while we compile the Q&A roster.
One moment for our first question.
It comes from the line of Todd Thomas with Keybanc. Please proceed.
Okay.
Hi, Thanks.
Ken first question I, just wanted to ask about the $30 million to $40 million of core NOI that you expect to come online over the next three to five years.
You've outlined future growth previously I realize it's a little bit of a moving target at times.
And.
I think John you outlined that there is a little less than $10 million of NOI currently in the.
Signed not occupied pipeline today can you just provide a little bit of additional color I guess around the breakout of that 30% to $40 million between lease up of vacant space in the portfolio sort of mark to market and.
Ongoing leasing activity in escalators, just to give us a sense for.
What you're you're sort of expecting around that that growth sure. So let me put some of the parameters and updates on that and then John fill in the blanks.
But first of all to be clear, even though the world is evolving.
Target that we forecast it remains absolutely on track if not stronger.
And that $30 million to $40 million is before you add in any additional NOI from our more recent acquisitions investments ranging from city point to Henderson, etc.
So the lease up is <unk>.
<unk> exactly as we had planned and John will fill in how much of that 30% to 40 is from net lease up but on top of lease up Todd what we have seen is.
Market rents growing faster than we had originally forecasted it'll take a couple of years for us to get those mark to markets, but that piece feels good and then keep in mind because of our street retail, where we have generally 3% contractual growth.
There is also just simply the contractual growth. So John why don't you fill in the different pieces that get us to that 30% to 40 over the next three to five years, Yeah, absolutely and Todd couple a couple of things to keep in mind. So one in terms of lease up you mentioned that we have just under $10 million of that in the signed but not opened thats.
Already leased and I think further driving that is going to be what we're going to see on our street portfolio. So we are about 92% leased today 87, 5% occupied so it's going to be the continued leasing of our of our streets.
And over this period, we think our street portfolio grows about 15% inclusive of everything entire streets, North Michigan grows 15%. So I think the leasing I would say is about probably half half of that roughly half of the $30 million to $40 million.
And another probably 10 to 15 of that is going to be the contractual growth and as a reminder, we get within our streets, 3% contractual growth so strong contractual growth so call that.
Another $10 million to $12 million and the balance of that is going to be on mark to markets and I think thats the differential between the $30 million to $40 million is do we continue to see the great growth that we clearly saw this quarter and we'll see what's in front of us, but I think thats, how we get to the upper end of that is through the continued mark to market of our St.
Okay. That's helpful. And then so Ken just to clarify so you mentioned that that that does not include recent acquisitions and that does not include any.
The incremental growth from city point, which which should transition into the core in 'twenty four is that right.
Yes, Tom I'll clarify that so it does not include city point and it does not include any potential future acquisitions, just right. So it's what we own today.
Okay.
Best we can Todd we are trying to make sure that we are comparing things on an apples to apples basis.
And so far things look very positive on that side.
Obviously in the next year or two we will be including John mentioned that city point comes online.
Expected to in 'twenty, four, but we will try to.
Measure that 30 to 40.
Over time, so we can see what we're seeing and what our tenants are telling of which is business is good and they want to be back in Soho. They desperately want to be on Melrose place for arm at age et cetera, and it's showing up in rent it will show up in NOI.
Okay.
Helpful and then and then Ken so the luxury retailers.
Doubling down and how.
How retailers are looking past the current cycle.
Potentially and what youre seeing in sort.
The Street.
Retail and some of the retail corridors.
There was a little hesitancy by retailers to lock in long term leases during the pandemic I think I think both tenants and landlords, we're looking for a little bit more flexibility.
So not to lock in terms during during some of those volatile periods. How are those conversations today around how retailers are thinking about these higher profile more expensive stores.
Their commitment to sign long term leases and invest in the build out of those stores.
How how are those conversations evolving.
Well, so theres a few things.
Playing out one is the notion and thought that once we get through this current storm.
That we may have a higher level of inflation certainly than we've seen over the last 10 20 years, what that generally means is that rents grow faster and so retailers are more inclined to lock in long term submission critical locations than they were in a period where.
<unk> everything felt deflationary and what the heck if you wait a few years everything will be less that sentiment has shifted so for those locations that retailers believe in long term.
Remember some retailers are buying their locations. So that's about as long term commitment is you can measure it.
Out of the Carter's were involved with that is the case, but where retailers are committing.
Long term to a location.
The issue then is much less about the ability to leave in two years. Additionally, what we're seeing especially at the luxury side, but this is true across the board.
Shoppers are coming back into the stores for a variety of reasons, we talked about they don't want a pop up experience. They want a store that speaks to who the retailer is in multiple ways and so the notion that you can do something inexpensively.
And short term there'll be some of that.
For the type of retailers that show up on Greene Street in Soho show up in Melrose place show up on Armitage Avenue in Chicago, or the gold coast of Chicago, they're investing heavily into the stores with their money. They want to know they have the lease term for that as well.
Yeah.
Okay, Great alright, thank you.
Thank you and one moment for our next question. Please.
And it comes from the line of keeping Kim with <unk>. Please proceed.
Thanks, Dan Good morning.
I guess, we can start off with just kind of bigger picture thoughts on longer term. How you wanted to finance some of their fund investments. Obviously, you guys had been using a lot more variable rate that any any changes to that going.
Going forward.
Well.
In a few different ways and if it is a critical.
Yes conversation that Amy John and I have on a constant basis.
First of all the fund business is in general a buy fix sell business and while occasionally.
One can benefit by putting long term debt.
Long term short term asset more often than not and we've been at this for a while that doesn't work.
So if we are buying assets with a view that we're going to dispose of them monetize in the next few years, we're somewhat limited on our hedging within that and that's fine because we better be buying them right and Amy walked through for fund five over the last several years, we've been buying out of favor retail.
The Nancy it commensurate with our expected hold and so far so good very good.
But we're at a unique point in time in terms of the debt markets.
And we need to think through and for reasons I'll get into later.
What's the best way to buy and what's the best way to finance the debt markets are backed up right now.
Causing the acquisition markets to be backed up right now.
And thus the way we finance our next deal probably will look different.
Then way, we financed a few years ago.
It's very dependent on in.
In fact, what the kind of opportunities are.
Okay. That's a long way of saying, we can afford to be flexible in the fund business in terms of floating rate financing. It may cause some headwinds to John's earnings on any one quarter, but as long as we invest profitably flexibly successfully it ultimately comes out and transaction promote.
Its fees otherwise.
Okay, and sorry, if I missed it but.
717, North Michigan.
Avenue project.
Looks like the development project Winter TBD, you guys already spent $160 million on it I'm just curious from a economic standpoint, so not the write offs. So from an economic standpoint, how much of that 116 is.
Still usable for whatever life that project takes.
And how that all shakes out.
Yes, and we are in the middle of a potential transaction, so I'm not going to get into the details right now, but hopefully over the next quarter that will become clear on what our.
Vision and planned execution for that.
Okay. Thank you sure.
Thank you and one moment for our next question.
It comes from the line of Seth.
Seth.
With Citi. Please go ahead.
Hi, it's actually Craig Melman here.
Yeah.
<unk>.
Just kind of curious on the commentary around bed Bath beyond.
In San Francisco, just curious how receptive the company has been.
And that has been too.
The approach is there to try to get the space back early.
So.
I would call the situations fluid defined as for the lab.
Five years.
We have tried with different administrations.
Different paths to rightsize that store because it and hopefully some of you will get a chance to visit it.
It's on two levels with parking on both levels.
It is oversized, but very productive, but that that and we have tried to convince them to operate out of one level.
And historically.
They have said interesting idea.
But we kind of like the status quo their rent is low.
And there the tenants so they get to make that decision fast forward to the last six to 12 months they seem more open minded receptive.
And we are in the middle of negotiations.
So stay tuned we tend not to like to conduct our negotiations over quarterly conference calls.
But I have every reason to think that.
Yeah.
On the conversations we're having there being very rational there's strong demand there, even though again at San Francisco, we're signing leases.
So I am more confident today however.
I have been confident that different points in the past <unk> been unable to get the space back.
Again, the marketplaces, where he is.
If we get the space back my concern is what if we don't I've been through this before you all watched US go through this with <unk>.
Kmart in Westchester It took us forever to get that back Thankfully, we did Bj's just opened last week and they are crushing it so sometimes it takes a little patience, but this is valuable space and a valuable property.
I believe we will get to a profitable and rational conclusion for us in bed Bath.
Okay. That's helpful and then I.
Thank you.
I don't want to presume, but clearly.
The stock's off a bit here.
I don't know how much the impairments.
As to deal with that and not necessarily those specific assets.
Kind of concerns about asset values here in the absence of transaction.
You kind of try to square that with your commentary on rent growth.
It seems to be a little bit of a disconnect between.
Where your stock is trading from your applied cap rate basis.
Versus where maybe these assets would trade back into more normal time I know again. This is more of an academic exercise at this point, but distributor standpoint from either an underwriting.
Or any kind of angle you could give us.
Yes.
Kind of movements in cap rates with the underlying growth you've seen.
And how that compares maybe to where the stock is these guys in the public market.
You're spot on in terms of some of this disconnect.
And it is hard unless you're walking the various different streets and hopefully many of you have that offer to tune it to do that to understand the disconnect between certain.
<unk> and others.
The most glaring contrast.
Is one block away from North Michigan Avenue.
We own on rush Walton, but Russell.
Walton is doing better today than pre COVID-19.
Not only in terms of rents and sales, but also in terms of the quality of tenants you have luxury doubling down there for instance, we expanded sale around a couple of years ago, the or just expanded and the list goes on.
So it's not like Oh. This is a Chicago problem. This is a north Michigan Avenue micro climate issue, but it's a real issue and because we have two moment in time account for it.
What we got to do.
North Michigan Avenue is suffering headwinds.
That other parts of Chicago or already rebounding from why well unique too.
That major corridor. It is saddled with three and closed malls right across the street from US is a water tower, which was once upon a time, an iconic asset and it needs to be reinvented I am highly confident that well.
But that may take some time and for a moment in time accounting, we need to recognize that shift so in the longer run.
I am confident that you will see a rebound on North Michigan Avenue.
But I don't want to hitch.
Our trailer to count on just a recover in North Michigan Avenue is what we have said is we've got enough growth, whether its down the block or across the country.
Net out the net negatives of North Michigan Avenue for Us.
So let's move past that we've got some interesting ideas in terms of how this gets redeveloped, perhaps gets redeveloped by others.
But if you walked rush <unk> Walton and then hand, it over to north mist you'd understand the distinction if you want to predict that north mist rebounds quickly great. If you think it's going to take time, so do we one way or another the balance of our portfolio more.
More than counterbalances that and that's where the disconnect is is right now the marketplace has got to figure out where do they see rebound long term and what feels like a melting ice cube.
Thankfully, we see this growth on a net basis and Thats what were focused on.
Okay.
I guess.
You have a follow up.
Greg.
Yes, sorry, sorry.
Just cut out there for a second I guess I was getting trying to get at more broad thoughts about.
Just investment returns kind of where the market could go versus your implied 773 particular you guys are.
Talking about this could spur some opportunities here, so how youre thinking about kind of the values that you think the portfolio's worth yet while there'll be opportunistic on the acquisition side and so youre going after you adjust your underwriting for that I guess I'm just trying to.
Kind of get a holistic view on in that environment, everyone wants to be opportunistic, but no one wants their assets to be revalued.
In the interim so I was talking rents you were talking values and cap rates I get it.
Here's what I'd say.
Right now.
The dislocation on value.
Spread.
Between buyers and sellers in bid and ask is fundamentally that driven and it's a double whammy issue double whammy, meaning that not only our base rates going up but spreads are gapping out.
In order for opportunistic dollars to come in we need to see some normalization of that and that could take weeks it could take months.
But my guess is spreads normalize.
You tell me where base rates are.
And then on <unk>.
Normalized <unk> of spreads will give opportunistic buyers an opportunity to show up where and what cap rates do they show up to a lot of that will depend on one's view of <unk>.
Growth.
And inflation and thus exit caps.
And Thats, what everyones scratching their head around now.
Right now you've seen a pivot towards everyone still wants positive cash flow and so actually higher cap rate assets are holding up better than the more valuable assets.
Over any extended cycle, we've seen it go the other way, meaning location matters value matters and lower cap rates return what does that mean for our North Michigan Avenue.
Well My guess is it remains iconic over any extended period of time and cap rates remain lower there than they do just somewhere in America, where do rent settle.
That's what we were talking about before and that could take a year or two in terms of value I wish I could tell you it should be a five cap versus the forecast versus a seven cap.
It's just not that simple because a lot of what we're talking about is what do these redevelopments look like and.
That's where the marketplace is trying to figure all this out so thats a long way of saying.
I would expect high quality leased assets in places like Soho or Melrose place or rush and Walton.
With strong embedded growth to hold on to much of the cap rate valuations that they previously had and I would expect that heavy lifting redevelopments requiring that requiring a lot of uncertainty probably gap out.
It's going to take a while for that to sort through but thats My best guess.
Great. Thanks.
One moment for our next question please.
It comes from the line of lean that Tsai with Jefferies. Please proceed.
Hi.
Ken can you discuss luxury retailer store opening plans and maybe how that plays out in your street retail portfolio.
Sure and I don't want to <unk>.
Make it seem like we are dependent on that one.
Ankur.
But luxury retail.
In Soho.
In Russia Walton corridor in Melrose place.
In the Knox Henderson card or longer term.
It's pretty clear I don't have specific names and if I did I'm not allowed to say them and I don't have specific numbers.
But you can glance and see its about twice the square footage that existed there pre COVID-19 why because those brands are gravitating towards direct to consumer which a few years ago. We confused to think that meant online.
And now what we realized is that direct to consumer for a lot of our luxury.
Is.
Their own store doesn't mean that department stores go away doesn't mean that online disappears, but it's really about the store that they can connect.
So what you should expect is about half of our markets are going to have luxury Williamsburg, Brooklyn is getting luxury.
The other half equally exciting are some of the newer younger names or richa is crushing it on M Street in Georgetown M Street in Georgetown is not going to be luxury, but it's got so much more energy today than it did pre COVID-19.
So look for luxury to be a piece of this I don't have specific data, but then expect other exciting shopping experiences and so far we're seeing it show up in tenant sales those Carter's that have activated are working.
Yeah.
Thanks, and then maybe just as a follow up there was a discussion on another earnings call about how a lot of retailers experienced the pandemic related lift to margins and now we're seeing greater normalization given cost pressures do you think the same dynamic is playing out in luxury retail or are they better protected.
Well there are better protected in the sense that their cost of goods relative.
To what they are selling for.
They are they.
They have a better margin.
But this is going to be an issue that will play through for a variety of our retailers.
And what our retailers are telling us when I speak to them is.
Those pressures that feel more short term more supply chain inventory management oriented they're confident they can work through those some that feel like they are longer lasting wage growth.
We're going to have to price in.
At the luxury level, you see high levels of pricing elasticity that consumers willing to show up we're seeing that elsewhere as well.
So what our retailers are concluding is there will be some margin pressure depending on who their shopper is in the short run.
But over any extended period of time, it probably will come back to the age old discussion negotiation, which is top line sales.
And most of our retailers are forecasting solid topline sales growth, perhaps the COVID-19 lift become a flattening, but compared to pre COVID-19, we're seeing very encouraging numbers.
It will be about topline once bottom lines normalize than they think they will.
They won't normalize for all retailers all segments. The the lower end shopper is perhaps going to feel more headwinds and thus their retailer might.
But it's in the come back to top line sales growth.
And supply and demand and because of this shift.
From the end of the retail Armageddon, the supply and demand metrics on most of the Carter's that were involved with have shifted significantly over the last 12 months and our retailers are stepping up thinking past any of these short term margin issues.
And thinking about what the next five or 10 years old.
Got it thank you.
Thank you one moment for our next question. Please.
He comes from the line from Jeff Spector with Bank of America. Please proceed.
Great. Good morning, Ken I have my first question just ties to the opening remarks.
Just I guess, the skeptical view on retailers in there.
Historically, I guess, let's say the lack of discipline in terms of store openings I know you have a lot of experience in.
And clearly you laid out a lot of the reasons why theyre still pursuing store openings.
Are you, saying at this point.
You would normally see retailers start to pull back on future concerns or is it still too early to say that or it sounds like you have a lot of confidence.
In the demand will be resilient.
Over the coming months.
So the short answer Jeff is.
I would have thought we would have started to see a slowdown.
If our retailers were hyper ventilating over the current economic conditions.
So far they are not now that does not retailers by their nature needs to be somewhat optimistic.
And the industry is very darwinian.
The difference this time my sense is talking to our retailers compared to other cycles call. It before the global financial crisis.
There used to be a lot more pressure from wall Street.
On our retailers.
To open stores to meet plan period full stop.
And that caused the open to buys at time periods, where it felt a little more like a head scratcher. So retailers were opening stores in anticipation of population showing up somewhere in America. The housing crisis occurred and they got caught in a bad spot.
We are seeing retailers now again, they are optimists, but they are opening in places where shopping demand exists today and when you are talking about some of the markets. We're involved with like New York City.
Starting today before international Tourism has kicked in before full return to office before a whole bunch of other factors. So they're looking at their sales. They are looking at sales 2019.
Not 2021.
And they're saying how do I forecast over the next several years and things are screening attractive so.
A hard recession will absolutely have an impact but it does not feel like this is a bunch of overly optimistic undisciplined tenants. This feels like software retailers recognizing the shift away from online the importance of these iconic locations and the attractive rents that there.
And in it.
Thank you I appreciate the comments and then my second question on opportunities I guess.
Look back through the last I don't know call. It couple of years through the pandemic as you said.
<unk> have really changed for brick and mortar.
Or are there new opportunity sets for Acadia.
When you think about the five year plan, let's say, a particular product type I mean is there any change in.
<unk>.
What you would desire to own versus the current portfolio or regions.
Yeah, so without having our annual strategy session on this quarterly call.
I would tell you there are shifts that we are either open minded too or executing on think about our recent addition down in Dallas that would fall into regions, our demographic shifts and it's not a either or or win lose Soho can do great Williamsburg can do great and.
So can the Knox Henderson corridor, and Thats, how our retailers view, it theyre, not saying, Oh, well, maybe I should not open in Soho and instead open in Austin, they're saying, we now have other markets that we can serve.
That extends our brand.
And we want to do that with responsible landlords who are capable we have a proven track record of that so there are a host of new region. If our retailers want to show up can do the business and pay the rent then you should expect us to consider that that's one small piece when we think about things from a region perspective than there are pricing dislocation.
As we touched on our mervyn's albertson's involvement there.
Times like this will create dislocations and we will spend a certain portion of our time.
Thinking about where those opportunities show up but to be crystal clear that will not be at the cost of us laser focused on our leasing laser focused on getting that 30% to $40 million plus city point plus of everything else.
In online so we can do both at the same time and it's going to be a interesting five years as you say in terms of where this shakes out.
Bottom line now is retailer strength.
We will get us I think through the next five years in ways that the retail Armageddon was just headwinds.
Great. Thank you.
Thank you and I'm, Sorry reminder, to ask a question simply press star one on your telephone.
Our next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.
Yes, hi, its on for Mike I think in the past you've talked about expecting a certain level of tenant rollover next year. I was wondering if you could give us an update around that I think you specifically mentioned in <unk>, Michigan.
Not renewing middle of next year for example.
So I think as we said we're on track for the 5% to 10% growth next year inclusive with the largest being don't you referred to a north Michigan. So on on track with that nothing.
Nothing meaningful beyond those which is has and continues to be baked into our expectations for 'twenty three.
Got it and could you remind us what.
What your traditional credit reserve is and where do you think it could trend for next year, given where you sit today.
Yes, I think traditional defined into the last three years would be would be will be tough, but I think pre pre pandemic normal times. We were you know 52 to 100 basis points and as I sit here today. Our watch list is pretty pretty nominal we talked about the couple of credit credit issues.
Regal in bed, Bath, but where.
And we think we have those well controlled we have a pretty slim watch list. So I would I would say just in light of just the uncertainty in front of us that we may revert back to them, we've had virtually no credit loss.
Besides cash basis noise throughout the year for the past.
Throughout these results, but I think next year I would preliminarily targeting maybe a return to normalization.
You know in the 50 to 100 basis points I think is right, but I will know more as we get into when we issue guidance, but not seeing the distress in our quarterly results and our monthly cash collections. We don't have a big small shop local tenant exposure, which is where I think there could be fallout.
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