Q4 2022 Acadia Realty Trust Earnings Call
Good day and thank you for standing by welcome to the fourth quarter 2020 to Acadia Realty Trust earnings Conference call at.
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 the session you'll need to press star one one on your telephone.
Youre, an automated message advising your hand is raised.
To withdraw your question. Please press star one one again.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to Romeo Reyes.
Good morning, and thank you for joining us for the fourth quarter of 2020 to Acadia Realty Trust earnings Conference call. My name is <unk> and I am a property you're kind of in.
Our accounting Department.
We begin please be aware that statements made during this call.
We are not historical maybe deemed forward looking statements within the meaning of the Securities and Exchange Act of 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 February 15, 2023, and the comedy takes undertakes no duty to update them.
This call management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see our kids earnings press release posted on its website for reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures.
What's the golf began to 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 as time permits now it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will be.
Today's management remarks.
Ramiro.
We didn't tell you about having to do this when you joined us and he did a great job and welcome everyone.
As you can see in our release, our fourth quarter results represented another strong quarter with operating fundamentals coming in above our expectations and same store NOI for the year exceeding our guidance.
Looking back our leasing activity for the year was strong in terms of both volume.
And rent levels achieved and this momentum continues in.
In the fourth quarter, we increased physical occupancy by 150 basis points and this occupancy gain is worth noting because over the last year due to supply chain issues getting tenants opened on time and on budget has been a significant industry challenge and our team rose to the occasion.
Notwithstanding this progress we are certainly keeping an eye on the macro data, which has been recently sending mixed signals about the consumer.
And the retail environment for the next year.
In a world where good news bad news and Bad news is often well bad news also landlords and tenants alike.
Our trying to prepare for the most anticipated consumer recession in a generation.
While reconciling this with the strongest job market in our lifetime.
And while well, let the economist in the financial markets debate, whether this is the best of times or the worst of times in the interim.
We're staying busy leasing space.
In fact, when looking at our current leasing pipeline activity remains on track with our prior forecast and we haven't yet seen any fallout in tenant demand.
This does not mean that retailers are ignoring the potential macroeconomic challenges over the next year and Norway.
And while we are expecting that there will be a higher level of tenant disruption in our portfolio in 2023 compared to last year, most specifically bed Bath and beyond we have conservatively incorporated this into our guidance most importantly.
We also expect our leasing progress to more than compensate for this disruption and thus should lead to continued internal growth.
So given the near term economic pressures why do fundamentals feel more resilient today.
Then at this point in prior cycles.
And there's a few likely reasons for this first of all the headwinds from secular concerns of the so called retail Armageddon that past as we have been discussing for several years now retailers have universally recognized that.
The physical store.
Especially in mission critical locations is the most important and profitable channel for their execution in an Omnichannel world.
Second reason.
There is a scarcity of high quality space.
The combined impact from the lack of new development and then the growth of DTC direct to consumer stores means that retailers, whether they are luxury brands or more mass market are increasingly choosing to add their own individual stores to enable them to connect with their customer directly.
Third and somewhat specific to our portfolio our continued internal growth.
Is being driven most significantly from that portion of our portfolio that is still in the early stages of recovery and thus has room to run.
This above average internal growth is driven by a combination of occupancy gains.
Lease structure.
In market rent improvements.
As we have said in the past our occupancy gain or not of equal economic impacts. So while overall were about 95% leased.
Within our much higher rent than dollar value Street, and urban portfolio physical occupancy is still only 89% and based on the increasing demand and leasing progress on most of those streets, we are well positioned for multi year growth here.
With respect to lease structure as we have discussed in the past our street leases typically have about 100 to 150 basis points higher annual contractual rent bumps than our other retail formats, and if rental growth run hotter than in the past our street leases will capture.
More of that growth sooner both from contractual growth.
As well as for more frequent fair market value resets.
Then in terms of future growth from improving market rents.
While scarcity and tenant demand is true throughout the majority of our portfolio, both urban and suburban.
The greatest market rent rebound is now showing up on our street and urban Carter's where after several challenging years.
Tenants are aggressively pursuing space.
Furthermore, the strong sales performance of those stores is once again leading to competition among.
Desirable retailers for their best locations.
While retail rents effectively rebounded to pre pandemic levels in many of our streets in some cases beyond rents remain well below prior peak levels of five to 10 years ago, even though many retailer sales are starting to approach those prior peaks.
Now.
Even within our street portfolio the trajectory of future growth.
It's going to vary and really depends on where in the recovery stage. The various streets are some markets such as Greenwich Avenue in Connecticut, actually got a Cobra top other quarters, such as Melrose place in Los Angeles were hit hard during Covid, but quickly rebounded past pre COVID-19 rats.
As there is very limited vacancy due to new tenants entering that market.
Now other carters are still fighting to recover but even in those markets. We are seeing signs of green shoots on North Michigan Avenue in Chicago last quarter, we signed up high demand on trend retailer Allo Yoga at 717, North Michigan Avenue for their flagship store in Chicago.
Ago.
This lease is weather as well as other current activity is a very strong sign of support for this important corridor that has been struggling.
Then in San Francisco, another market slow to rebound in the fourth quarter, we signed an important lease with the container store at our 505 ninth property.
You may recall that the property is a well located two level shopping center and given the current tenant lay out shopper access to the stores has been historically limited to just the street level.
The container store lease will anchor and activate the upper level converting it into its own self contained open air shopping center with its own dedicated parking and shopper access fair.
Furthermore, as John will discuss.
In contemplation of recapturing all or perhaps a portion of our bed Bath <unk> beyond store, there, we should be able to activate the balance of that second level.
In short as it relates to our internal growth in our conversations with our retailers. They indicate that they are for the most part looking past the short term uncertainties and remain focused on 2024 and beyond.
All of this simply reinforces our view.
That our internal growth forecast for 'twenty, three and beyond remain on track.
Turning to external growth in new business.
Given the extreme shifts in the debt markets last year, the spread between bid and ask is gotten very wide and so far there have been fewer actionable opportunities in the private markets.
While the investment sales market is currently relatively quiet, especially for larger transactions. Our team remained very active underwriting a variety of opportunities and sooner or later the bid and ask spread is going to narrow and we want to be ready.
First in terms of our core business as it relates to core acquisitions.
Our cost of capital kept us on the sidelines last quarter.
It is still too early to predict on balance sheet acquisition activity for the year, but the public markets often lead sentiment and pricing on the way down.
But then are often quicker to bounce back. So we'll make sure we are positioned if and when accretive on balance sheet opportunities arise.
But in this market what we can do it.
Is periodically harvest gains with opportunistic and accretive sales and example of this is last quarter, we were able to sell a stable urban asset in Boston at a sub five cap rate and thus was a very good and accretive source of capital and while we don't expect the disposition market to be particularly deep.
Where we can opportunistically monetize assets will continue to do so.
Now looking at our fund business.
In terms of fund investment activity last year, we were able to both putting new dollars to work and then successfully sell several assets. In fact, we sold just under $200 million fund properties and bought just over $165 million.
Continuing these efforts last quarter, we completed the fund for disposition promenade at Manassas, generating a 17, IRR and a 2.2 X multiple on the funds equity investment.
Terms of New fund investments, we made a fund five acquisition post quarter end for $61 million and we believe that the strong going in yield on Mohock comments, a grocery anchored community center with a solid credit tenancy reflect very attractive pricing in a period of relative.
Uncertainty.
With the remaining equity in fund five we have about $250 million of gross acquisition activity and while things are a bit quiet right now and thus we have plenty of dollars for the deals. We are seeing signs that there could be good opportunities in front of us and expect to add to the strong gains already.
Embedded in our fund five investments.
Furthermore, in addition to focusing on profitably deploying the balance of <unk> capital.
We are actively exploring additional sleeves of capital and partnerships.
That could be additive to our current dual platform and drive further external growth opportunities going forward.
In terms of our funds asset operating performance bond five shopping centers continue to perform consistent with our expectations and as the capital markets heal.
This should provide us with some interesting monetization opportunities.
<unk> of fund four and fund three assets the team's busy both stabilizing the few remaining assets like 717, North Michigan Avenue.
And monetizing others like the promenade in Manassas.
In terms of city point.
We continue to successfully execute on our business plan, there and our lease up and stabilization targets remain intact.
Mark a new anchor facility opened in late December with both foot traffic and sales volumes exceeding our expectations.
The energy from the strong Prime Mark opening contributed to December shopper traffic at city point approximating pre pandemic levels and we're seeing this energy throughout the center in November sales at Alamo Drafthouse exceeded pre pandemic levels.
And with their expansion now underway as well as the build out for courts <unk>. The upper levels of the property are approaching stabilization, we are about 60% occupied but 90% leased on the upper floors.
The final and most significant push will come from the street level leasing, where we are making strong progress with several exciting new leases executed.
Or in the final stages of negotiation.
Finally, as a testament to the strength and depth of our senior and junior management team.
We issued a press release last week detailing the annual promotions.
Of our professionals in that release, we noted that Amy rack on Allo, who you know from her reporting on these calls as to fund operations has moved on and we wish her the best of luck.
The press release also gave a snapshot of promotions of several of our most senior members as well as the addition to our team.
Stuart Seely, who many of you know well Stewart welcome to the shelf.
Thank you.
And significantly we had almost 20 promotion of rising stars throughout their organizations throughout our organization congratulations to all of you.
Watching team members advances by far the best part of my job.
So to conclude.
While we recognize that macro news headlines are not all positive or leasing fundamentals remained strong and internal growth intact, while we wait for exciting external growth opportunities, which we are confident will eventually rise.
Our leasing team will continue to provide record levels of internal graph, making any future external growth that much more additive.
And with that I'd like to thank the team for their hard work this quarter and turn the call over to John .
Thanks, Ken and good morning, before diving into the results I want to reflect on a few of our team's key accomplishments during 2022.
First we grew our <unk> in excess of 7% in 2022.
Raising our guidance three times over the course of the year as the rebound in our street and urban portfolio began to take hold.
Secondly, we increased that physical occupancy in our core portfolio by 270 basis points with solid rent cash rent spreads.
Resulting in six 3% same store NOI growth, which exceeded the upper end of our guidance.
Lastly, and in a turbulent capital markets environment, we completed both profitably and accretively over $800 million of transaction volume.
Comprised of over half a billion dollars of new core and fund investments along with nearly $300 million of dispositions.
As I'll touch on later in my remarks, we see these trends continuing in 2023 and beyond.
Now starting with the quarter, we had another strong quarter with earnings of 27 cents a share coming in above our internal expectations.
In terms of same store NOI, we reported growth of five 7% for the quarter and six 3% for the year with our annual growth exceeding the upper end of our initial 4% to 6% range.
And we achieved a 5% fourth quarter growth despite over 200 basis points of headwinds from prior period cash collections.
If we were to exclude these headwinds our same store growth for the quarter would have exceeded 8%.
In this fourth quarter growth was driven by both occupancy and market rent increases.
During the fourth quarter, we increased our core physical occupancy by 150 basis points to 92, 7% at December 31.
As compared to 91, 2% at September 30th.
The 150 basis points of occupancy gains represented $3 3 million of incremental pro rata ABR net of expiring leases.
And when we break down this incremental occupancy.
<unk> one of the total of $3 3 million increase represents a lease spreads or said differently market rent growth of about 50% over the prior in place tenant on a same space basis.
As highlighted in our release, we reported cash leasing spreads consisting entirely of renewals of four 7% in the fourth quarter.
This moderation in growth from prior quarters is simply a function.
Function of the population of leases that were up for renewal during the quarter.
Now in terms of leased occupancy.
I wanted to provide an update on our signed but not yet open pipeline.
We added an additional 60 basis points of leased occupancy during the fourth quarter <unk>.
Increasing it to 94, 9% at December 31.
As compared to the 94, 3% that we reported at the end of the third quarter.
Our signed but not yet open port pipeline of 220 basis points.
Represents about $5 $6 million of pro rata, ABR and $6 5 million of NOI.
And we expect that 60% of the pipeline will commence in the first half of 2023.
Followed by another 10% in the second half with the remaining 30% in the first half of 2024.
Please note that given the timing of rent of rent commitment commencement, we won't get the full benefit in our reported results until the subsequent full annual or quarterly period.
Now moving onto our 2023 guidance and starting with same store NOI.
As outlined in our release, we are guiding towards 5% to 6% same store NOI growth in 2023.
And I wanted to highlight a few things in our guidance first our same store guidance is unadjusted for the headwinds from prior period cash collections.
Which I estimate we will have a negative drag of about 200 basis points or said differently, our 5% to 6% of projected same store growth would've been closer to 7% to 8% absent the headwinds from prior period cash collections.
Secondly, our street and urban portfolio is projected to drive our 2023 growth.
With an expectation of 6% to 7% growth coming from our street and urban assets and 2% to 4% from our suburban portfolio.
Third I wanted to highlight our assumptions on tenant credit please.
Please note that I will give detailed guidance assumptions on both bed bath and beyond and Regal cinemas in a moment.
Our historical credit loss, excluding periods impacted by the pandemic has ranged between 50 to 150 basis points.
And while we have yet to see any significant signs of retailer distress or declines at our monthly cash collections.
Given the realities of the macro environment, our 5% to 6% projection of same store growth conservatively factors and 150 basis points of a general credit loss.
I also want to highlight that the 150 basis points is in addition to the known exposures within our portfolio, including bed Bath <unk> beyond in Regal cinemas, which I will discuss in a moment.
Lastly, our 2023 same store pool excludes the accretion from our 2022 acquisitions.
Which include Williamsburg, Soho in city point in New York City, along with Henderson Avenue in Dallas.
And our acquisition in Los Angeles.
These investments will not be included in our same store pool until the first quarter of 2024.
And are projected to add further accretion to our multi year growth trajectory.
And as previously discussed on our last call our coordinate with our core North Michigan Avenue investments will be placed in redevelopment in the first quarter of 2023, as we execute alternative uses and formats.
Now moving to our 2023 <unk> guidance as outlined in our release, we are anticipating 2023, <unk> before special items of $1 17 to $1 26.
While our 2000 22023 <unk> guidance at the midpoint is up moderately over 2022.
Worth highlighting that absent the impact of prior period cash collections, our projected 2023, <unk> would have increased in excess of 5%.
And as we think about the projected <unk> contributions from our core and fund platform I wanted to highlight a few things that we see playing out in 2023.
As detailed on the guidance assumptions that we provided within our supplemental you'll see that we've separately broken out the projected NOI and the related costs from our core and fund businesses.
Starting with our core.
We anticipate that our core cash NOI will grow about 5% in 2023, when using the midpoint expectation of about $145 5 million of NOI for 2023 as compared to the $139 million that we reported in 2022.
Our overall projection of about 5% core NOI growth.
Encompasses both those assets embedded in our same store, which as we've said is projected to grow at about 5% to 6% as.
As well as those assets included within redevelopment and excludes any assumptions for core acquisitions or dispositions.
Cash NOI growth is counterbalanced by anticipated noncash decline of about three to four from lower straight line rent and below market lease adjustments.
Now moving to our fund platform consistent with our strategy of operating a buy fix sell fund business.
Net net the contributions to our 2023 earnings are relatively flat year over year.
With the expected increase in profits from our ongoing monetization of fund assets.
Along with our investment in Albertsons being offset by additional interest cost and the positive event dilution from us from fund asset dispositions.
I now want to highlight our guidance assumptions for bed Bath <unk> beyond in Regal cinemas keep.
Keep in mind as I shared a few moments ago, our assumptions related to these tenants are separate and in addition to the 150 basis points of credit loss that I discussed earlier.
As a reminder, we have two bed bath locations and one Regal cinemas and our core portfolio with an aggregate exposure of approximately 3% of ABR.
First off each of these tenants are current on their monthly rats, meaning we have received February rents for each of these locations.
Secondly, we are fully reserved and have been for several quarters, Australia straight line rent balances for each of these tests.
Starting with Regal as we've discussed on our prior call we have a single location in our core portfolio.
And this has and continues to be a productive location for Regal.
And over the past few months they have confirmed that they intend to retain our lease at its current rent without modification.
And while we continue to report Regal on the cash basis of accounting, giving US bankruptcy. Our 2023 guidance assumes they remain in place and continue paying us throughout the year.
In terms of our two bed bath locations.
Our core locations are included on bed Bath recent store closure list.
As we have discussed in prior quarters, our bed Bath exposure is in prime locations at variable replaceable rents.
We were able to in fact demonstrate.
As reported in our release last night, we are excited to announce that we have successfully signed a new lease at our location in Wilmington, Delaware.
The tenant has requested that we hold off on identifying them. So please stay tuned but it is a high quality credit retailer that will be taking the entirety of the bed Bath space in conjunction with an expansion and at a rent that will exceed our current in place rents.
Although we have not yet reached an agreement with bed Bath on an early recapture of Wilmington, our guidance conservatively assumes that we get this space back as of the end of the second quarter and incorporates an expectation of about 12 months of downtime associated with the tenant build out.
As it relates to our second location in San Francisco.
Ken discussed the strategy of re anchoring and Accretively activating the second floor of 55 ninth Street.
We commenced this strategy with the signing of a lease with container store in the fourth quarter.
And as it relates to our plans for the bed Bath space, while still in the early stages given the recent announcement of its closure. Please stay tuned as our leasing and development teams continue to refine our plans to unlock the value of this below market space.
And if we were to have the opportunity to get control of the space in 2023.
It will not result in a downward revision to our earnings guidance as we have conservatively built in reserves to reflect an early recapture.
So in summary, when factoring in the 150 basis points of credit loss as a general reserve, we have an additional reserve baked into our guidance of about 125 basis points related to known exposures for a combined credit reserve of about 275 basis points.
Lastly, I wanted to touch on a few items on our balance sheet.
We have ample liquidity with no meaningful core maturities over the next several years.
In terms of interest rate exposure, approximately 97% of our core debt is fixed or hedged with long dated interest rate contracts and under 15% on a look through basis inclusive of the pro rata portion of debt from our fund business.
And we remain on track with achieving our near term balance sheet goals, which as a reminder involves moderately decreasing our leverage and targeting a low six core debt to EBITDA ratio.
And given the multiple levers available to us we should be able to achieve these goals without diluting our earnings to a combination of retained earnings.
Selective core and fund dispositions and proceeds from our investment in options.
So in summary, we ended 2022 with very strong results and momentum continuing into 2023 and beyond.
We will now open up the call to questions.
As a reminder to ask a question. Please press star one one on your telephone please.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Floris Van <unk> with Compass point.
Thanks, Thanks for the information guys.
A lot of a lot of details to us to sip through but.
Just want to make sure that I understand this correctly. So your same store guidance for 'twenty three of 5% to 6% incorporates.
275 basis points of credit losses is that the right way to think about it.
Laurence I would say the $2 75 apply that to <unk> right because some of for example, 555 ninth is not in there.
Got it got it okay.
The 150 basis point, presumably as part of your same store correct as it is the brand new one location. So.
It's somewhere in between those two so it's somewhere in between those two because they brandywine Wilmington that downtime is reflected in our same store pool.
So call it roughly 200 basis points and same store.
Great and then.
Obviously.
You talk a little bit about your 89% Street and urban occupancy and.
The potential to lease that space.
Right.
Wanted to get maybe a little bit more granular granular on that detail from you guys where is your remaining vacancy how much of that is at city point relative to some of your other properties.
And where and.
And how much of that is in Chicago and.
San Francisco and.
When can we expect I guess the timing of that.
Is that dependent on the market improvements or some redevelopment that are taking place.
So.
You've mentioned a bunch of different buckets and John I'll have you add some color to this but first of all Florida, you should understand that the 89% is within our on balance sheet core portfolio. So city point for instance is not in that number. So while there is significant lease up in city point that will start showing up in 'twenty.
For the embedded lease up of our physical occupancy for our core portfolio about half of that.
With leases already signed so there we just got to get those stores open as we did with 150 basis points before.
Final point before I hand, the details to John .
Is physic.
Physical occupancy is not a great metric for us NOI growth because some of these smaller stores can be much more impactful than our larger so it's one data point.
And the upside in NOI is pretty significant John any color or data you want to add I think you hit most of it and maybe add some more about what we're seeing in Soho, but Florida, it's sprinkled throughout but we have some opportunities where that are currently already leased. So for example in and Soho. We are sufficient at least that are ready to commence that's not yet.
Get started and we have some some as well that we have opportunities to lease that will drive attractive rents Chicago, we have some opportunity as well in prime locations. So we have a location in the Gulf Coast, which is is booming.
As well some in Lincoln Park, So sprinkled in Chicago, and then can you maybe talk about D. C. Because we have some room to grow in D. C and we're seeing rents recover there and we have some occupancy uplift opportunities in D C sure.
So one of the.
Final areas as the M Street, Georgetown Carter and D. C. As you know got hit hard during COVID-19, but even pre COVID-19.
M Street was suffering from getting a little stale.
Last year or so we've had several new retailers showing up the shopping experience has improved dramatically and now other retailers are following suit. So we should be able to drive both rents and occupancy there over the next couple of years at that early stage reopening plays out.
Thanks, guys.
Sure.
Our next question comes from the line of Linda Tsai with Jefferies.
Hi.
You think occupancy could end year end 'twenty three and then maybe just stepping back like how far do you think.
We are in the urban recovery from versus pre Covid for New York.
Say like Chicago, or San Francisco or D C.
Tom Why don't you take the first part and then I'll add some of that color, yes. So Linda.
I'm going to go back to the caveat that Ken just mentioned that not occupancy is is created equal given the street, we have to lease up but having said that I would expect that our occupancy is going to further increase physically net of explorations, probably 50 to 100 basis points off of where where we are today.
But at the same point that we have to look at what we actually do but I would say I would target I'm targeting about 50 to 100 basis points of an increase.
Now for where are we in the recovery for our various cities what we have seen over the last year.
Is probably the easiest metric for you to look at to gauge where we are in recovery is where residential rents and occupancy.
Is because what we found was new York recovered faster because even though return to work returned to Midtown.
Has been very slow.
Return to downtown.
In residential rents around there rebounded quickly ensure enough we saw that rebound in Soho, we certainly saw that rebound in Williamsburg, Brooklyn, So New York was earlier from that perspective notwithstanding.
Turn to work Chicago somewhere in between and they certainly have their challenges we have been clear about North Michigan Avenue on that front, but then the other components of our Chicago portfolio, The Gulf Coast, Lincoln Park, where they've had a stronger residential rebound.
There we've seen it in terms of sales.
You mentioned, San Francisco and its slower there.
I think we are seeing I know, we are finally seeing improvement there, but different type of workforce.
They are only beginning to come back now, but they are coming back and with that you will see an improvement but that would be that in the earliest stages some of our other markets.
Then on the beneficiary side, Greenwich, Connecticut, absolutely got to Covid left.
And what was a downward trajectory of rents on Greenwich Avenue for the five years prior to Covid got a COVID-19 lift.
Then down in <unk>.
Dallas Henderson Avenue.
Continued population growth there, we're seeing a lift there as well so it at different levels of trajectory. Some are going to post very strong growth off of a low point others are going to show consistent growth because they got a COVID-19 left.
What our retailers are telling us is they really want and need to be in all of these locations over the next five years. Because these are mission critical locations for their customers.
Thanks, and then the activity in your fund business. This quarter is this a byproduct of financing distress, just indicative of greater opportunities for your business going forward.
Probably it's a very confusing time for investors in terms of activity, so far things quieted down.
And they have quieted down in ways that we probably didn't anticipate.
Prior to the fed's move, meaning lower cap rate higher growth assets in many instances got hit harder than higher yielding assets.
And on a portion of value that reset is playing out I think we have better clarity as to where long term borrowing cost could be and I think youre going to start to see now sellers come back to the market either because they are being forced by their lenders being forced by their partners fatigue, but we're just starting to.
See that kick in after a period of a couple of quarters.
Relatively quiet activity.
Thanks.
Sure.
Yeah.
Our next question comes from Todd Thomas with Keybanc capital markets.
Hi, Thanks, Good morning, Ken first question I, just wanted to go back to your comments about acquisitions it sounds like.
Your cost of capital is not where you need it to be to make core investments pencil today.
You have dry powder in fund five but you also mentioned exploring additional sleeves of capital can you just elaborate on that comment a bit whether you're talking about the funds platform or if youre contemplating.
Sort of joint ventures, or some other strategic strategic capital that would allow for investments in the core.
Sure.
And I'm glad you picked up on that Todd because the world has been evolving if you think about back five years ago, when we launched fund five.
Best practice standard operating procedure, whether you were larger platforms are certainly smaller focused vertically integrated fund platforms with the half one vehicle.
And I would say over the last several years you have seen that evolution, whether it's the large folks or the other fund managers, where investors have a higher level of tolerance and expectation.
For multiple vehicles at the same time.
Now our first precise ability is to put fund $5 to work profitably and since our unlevered yield and we bragged about this on prior calls on fund five is quite good because we were buying out of favor retail.
At very attractive yield clipping, a very attractive coupon our responsibility is to continue that and get the balance of those dollars to work. So no. One should think we are distracted from that but as we think about the best way.
For Acadia Realty Trust.
Both.
Served the needs of outside investors, but most importantly create value for our shareholders.
Every time, we get to this juncture between one fund in the next we say has anything changed and this time it has and so maybe there will be multiple vehicles multiple sleeves. So that we don't have a one size fits all.
And those are conversations that we are undergoing some of this is driven by the fact that we acknowledged the fund business creates a lumpiness.
It can rates complexity.
Cause we have to fully consolidate all our ownership sometimes it causes people.
On the.
Shareholder investor side to get confused about our exposures.
One of our goals will be to simplify that but also continue to be able to be entrepreneurial and profitable because Todd as you started this conversation.
It is fair to assume.
That wholly owned rates cost of capital may be higher than alternative structures over time, and we want to make sure and we always have.
Wanted to make sure we are not simply the hold into one source of capital to public markets, if and when we see great buying opportunities. Good news right now there have not been great buying opportunities within our core competencies for the last one or two quarters, it's going to change and then we.
We'll make sure we have the powder available we do right now in fund five and then we will continue to work that in terms of what that might look going forward and we'll keep you posted.
Okay.
I guess similarly.
Along those lines, a little bit <unk> been working with DLC and fund five it seems like a 90 10.
Sort of JV format within within fund five is is that relationship.
Just asset by asset or is there something more.
<unk> and fund five with DLC and can you can you talk about that relationship a little bit there and sort of the terms who's sourcing deals asset management responsibilities and so forth.
I can get into some level of detail, it's a multi decade relationship and many of those assets were embedded into DLC and we were able to work with them to successfully recapitalize them I'm not going to get into the economics and structure. They are very <unk>.
<unk> team and.
And we work very well together and the deals are meeting and beating our pro forma so put everything else aside meeting and beating pro forma is always a great way to keep a strong venture stronger. So there is nothing.
Uniquely.
Theres nothing that we have that we are beholden to them, but when they have assets, whether it's ones that they currently own.
Or for other reasons, we are thrilled to do business with.
Okay and John just a quick question for you.
I appreciate some of the detail.
The five point.
The signed not occupied pipeline I think you said $5 $6 million of ABR $6 5 million of NOI.
Is that is that all.
Generally in the same store.
Only for the core portfolio.
If I'm not mistaken is that right or.
Yes.
Is there something else in there.
<unk>.
No Todd that is all same store, that's our core portfolio same store.
Okay, and then I guess, so you talked about some of your assumptions around bed Bath.
And Regal at some assets that are outside of the same store.
But what else is there is there any.
NOI or signed not occupied pipeline that's.
Worse.
Discussing at all.
In terms of assets that are in the redevelopment pipeline anything significant there that's that's sort of outside of that.
Same store <unk> pipeline that you provided.
No for sure Todd So I think we have in redevelopment, we have city center in San Francisco, which is the.
Target anchor with the whole foods, that's going through its approval process. So there is a several million dollars of signed but not opened and our redevelopment related to city center as well as 5559, So 505 ninth with the.
China and the container store lease is also on our redevelopment so.
Call. It a couple of million dollars that is not in that signed but not open but is part of our redevelopment signed but not open.
Okay, and what's what's kind of is there is there are you able.
To share some details around the timing of.
Those those rent Commencements and I guess the capitalization around those assets in general is everything sort of being capitalized or is it on sort of a suite by suite basis.
Yeah. So I think both are in terms of commencement. So we'll start with city center.
They're they're going through the lengthy theres a its called the CMP process in San Francisco, we're in the midst of that so there will not be around I wouldn't highly doubtful there'll be a rent commencement of of whole foods. There won't in 2023. So I think that's more more likely later to 2020 for it then they get through the process.
And hopefully move towards towards an approval.
And the costs are already embedded Kurt so in terms of the funding cost of the build out.
Citycenter we've occurred the costs and are just waiting for for the approval. There is a bit of capitalized interest that that we're doing related to the whole foods space itself not the entire building, but the whole foods space itself. There is a bit of capitalized interest, but not not not only not overly material.
505, ninth we are not capitalizing any any material cost at at this point until we start doing the large larger scale redevelopment.
Okay got it that's all flowing through the income statement today okay.
Great. That's helpful. Thank you.
Thanks Pat.
Okay.
Our next question comes from the line of Craig Schmidt with Bank of America.
Great.
Just wanted to congratulate Stuart on joining the team.
And then in.
In terms of your small shop occupancy is higher than it was pre COVID-19.
I'm wondering what was driving that.
What is the room for growth on that small shop occupancy number.
Yeah. So I think Craig we are seeing as Ken talked about the just the really the recovery that we saw on the street and urban market. So I think thats, a big big piece of it and then sprinkled throughout including.
Including our suburban we're seeing that's filling up filling up nicely as well so kind of if you have any room, but we are seeing in small shop, but that is an element where we do see further further growth coming from there.
Yeah without getting into the particulars.
How we define small shop lease via our street and our suburban.
Is.
The two things I mentioned in our prepared remarks that I think it's important that the investment community understand is first of all the secular shift.
That online shopping as opposed to physical stores is continuing to drive tenant demand, especially for important and mission critical locations and so.
They show up in the small shop data, it's going to show up in the junior anchor and the anchor data as well.
And I think you should expect to see that notwithstanding whatever speed bumps in the economy. Our existing then the second point then is in terms of.
Good news being bad news from a retailer's perspective, when they see strong January sales, they're not complaining too much. So so far the consumer showing up not perfectly not everywhere, but the consumers still showing up and tenants are still shining leases and my sense is that's going to continue.
Unless things unless the data get consistently worse than what we're seeing right now so whether it's small shop or otherwise.
Expect to see that momentum.
I'll point out is if we hit a hard recession, what we've historically seen is our small shop as the first two weekend. So thats certainly an area. We should can continue to watch because our smaller mom and pop retailers are often more fragile, but so far we're not seeing any signs of that.
Great and then in terms of the transaction market how long do you think it's going to take.
Sure.
The new normal.
Yes.
A meeting a good then ask on the on that.
Got it.
Yes.
So I think we're getting closer and again, let's start with the secular shifts.
Retail was an out of favor asset class heading into Covid due to the retail Armageddon investors had other areas of focus and what we're beginning to see.
Is the investment community, saying.
Other asset classes, we're now more worried about.
And retail.
Has actually proven itself getting through the Covid storm through some other recession physical bricks and mortar retail feels like a better investment so that's a positive.
And then just as you saw that momentum starting there was the huge shock to the capital markets in terms of interest rates.
What I would argue is for more stable asset classes in retail now is heading back to that.
We should stay more focused on five and 10 year borrowing costs.
Even short term.
There will remain very limited new development, which is dependent on short term interest rates and much more will be stabilized retail with superior growth to other asset classes. So I expect institutional capital to start gravitating towards that now Craig I'll defer to you and economists.
Two we're borrowing cost will end up over a five or 10 year fixed rate period, but we're starting to see spreads come in.
I think you can have some level of confidence that once we get through whatever 2023, Hasnt store, you will see a normalization of spreads.
And then there are a lot of smart people, who are debating whether.
The 10 year Treasury is going to be with a three handle or a forehand again, I'll, let them differ or I'll defer to them on that but I think you will see the bid and ask spread narrow once there is better clarity as to what five and 10 year borrowing cost today and remind everyone. If we.
We are in an environment, where borrowing costs for two thirds mortgage financing, which drives the majority of retail investment.
If two thirds financing is at 5%.
Or even sex that's not the end of our industry. So capital will start coming back bit frozen now.
Some buyers owners have been hesitant, but my guess is in the next few months there will be much better clarity and then better deal flow.
Thank you.
Sure.
Our next question comes from the line of Keybanc, Kim with Truest.
Thanks, Good morning.
Just had a couple of development questions going back to the 505 five ninth Avenue Ninth Street can you just talk a little bit more about the developed redevelopment plans for that asset.
When you look at Google Street view.
Very hard to appreciate what the ultimate outcome could be.
Yes, and we will post some better rendering shortly.
Because it is hard to describe.
But I appreciate you asking the question and I will take a stab at it.
Right now.
All of the access to the retailers is that the street level, whether youre going into a bed bath <unk> beyond or a trader Joe's.
Part of our vision is to have a very dynamic street level.
Retail shopping experience, but then have that somewhat separate from the second level, which has historically just been overflow parking people would park up there and then walk downstairs.
With the addition, first and foremost of container store as the first anchor.
On the upper level open air parking.
<unk> access people will be able to drive up there and walk into all of the second floor stores.
That is predicated on us getting back at least half of the bed Bath and beyond and what we have explained over the years as we've tried desperately to get back one of the two levels if not both of that very important bed bath <unk> beyond to them and they were unwilling to do so.
Think they are much more open minded now to say the least so if we can then add that second anchor on the upper level plus shops in between.
It will be and feel like a more typical open air community Center.
And on further calls, we'll get into how we're going to curate that.
It'll be pedestrian friendly it will make all the sense for where San Francisco is gone.
And then on the street level, we have a very strong recently expanded trader Joe's we will lease the street level retail off of that.
Think of it.
Almost as two <unk>.
Connected but different shopping centers and I think that will much better serve the needs of those shoppers and final point, though is our bed Bath <unk> beyond rent is cheap enough that we get to make money in this process.
Okay and on 717, North Michigan Avenue, you guys signed although.
Can you just help us understand what the.
Leasing demand pipeline might look like for that asset.
And in your supplemental you show a $116 million of incurred cost is that just you're kind of building basis or what does that represent.
Yes, that's building basis.
The demand thankfully.
Is starting to come back on North, Michigan Avenue, and I don't want to pretend that it's easy or mission accomplished but we're having retailers now show up.
Is that a year ago, we wouldn't have thought of.
So.
A rich year with probably the first mover or not with us, but just down the street.
And now with Allo, who has been pursuing North Michigan Avenue for the last six to 12 months, we were able to.
Get the space available for them in relatively short order signed a lease with them.
Their business is booming they wanted a flagship location and notwithstanding all of the challenges that Chicago has gone through it is still one of those Midwestern Mecca's and North Michigan Avenue, while it's going to take some work.
Is starting to attract those tenants again, so good positive sign step in the right direction plenty more work to do on North, Michigan Avenue to get it back to where it needs to be.
But then equally surprising.
One block away.
On Rush Walton Gold Coast Oak Street, those businesses those tenant sales are already stronger than pre COVID-19.
So.
While everyone is bitching and moaning about Chicago bunch of our retailers are pretty happy and when Theyre happy we tend to be happy.
And just high level I know the other projects are still not.
Completely finalize on la TBD, but how should we think about the yield expectations from your redevelopment pipeline.
John Yes.
Yes, it's going to depend asset by asset for for sure, but I think if we look at a city center and a $5 $5 night I would say, it's going to be in the mid <unk>.
Upper single digits upper single digits, there some of the others are going to be much higher.
That's something it's worth us compiling as we get a little bit further along.
But thankfully.
We feel as I'm running through in my head the list of them. They they the vast majority of fuel accretive.
Okay. Thank you guys.
Sure.
Our next question comes from the line of Michael Mueller with Jpmorgan.
Yes, Hi, John I think you talked about a $6 5 million.
NOI <unk> ramp.
I think thats, a cash comment so how much isn't already straight lined it to <unk> and what is the ramp on that remaining piece look like.
So the $6 four as cash Mike and then in terms of I want to make sure I understand your so how much of that has been already straight line is that your question.
From an <unk> standpoint, how much is in the current <unk> run rate already or is that all incremental.
Pausing to think through the question. So I think here, it's I would say not a big chunk of that is already commenced so I would say, Mike maybe 25% if not worse than that but let me compute that but it's not as big as a number as it was.
Last last year, given some of the bigger chunkier higher dollar leases. So I don't think it's going to be the same phenomenon. This year.
Got it Okay, and then Ken I think in your opening comments you talked about.
You said retailers for the most part we're looking past the environment and I guess, what's an example of a retailer that's not looking past it is may be pausing.
So.
And we had the benefit of couple of weeks ago are getting together with big chunk of our retailers.
For meetings in the West coast.
Yeah.
There are some retailers that.
Got a huge COVID-19 boost and probably are pausing think of some of the online home furnishing retailers and others.
But for the most part.
Retailers in terms of their long term expansion plans.
Our our full speed ahead does the struggles for the retailers.
Is getting stores open getting HVA CNS.
Dealing with supply chain issues and that was really more of their concern than slowing down openings, but if I were to if I were to guess where you might see some of that slowdown it could be in home furnishings, possibly electronics.
But then there is a lot of other folks shown up.
Got it okay. Thank you.
Sure.
Our next question comes from the line of Craig Mailman with Citi.
Hey, guys.
John I just wanted to confirm a couple of things you said.
25 basis points.
The boss and Hugo.
Above and beyond the 150 and if we go was already kind of when.
But again it seems like you're already released Wilmington, So basically about 125 relates to <unk>.
Just the 505 location is that a fair way to think about it.
Yes, Craig what I would say is that when we look through all of them and I wanted to make it simple if we look at all known exposures. We look at inclusive with a 5559 thing known exposures throughout our entire portfolio would make up that 125 on top of just the general general reserves, so inclusive of the $505 nine.
Those when we go through tenant by tenant in our portfolio for instance, Wilmington, Delaware, China still will have even though we have a signed lease Craig we're going to have downtime.
And that that's part of that number.
Okay. So alright.
Alright, because I thought that was a bad debt I guess I wouldn't.
Consider that bad.
<unk> downtime in that as well.
Yes exact credit risk.
Okay. So if I think about two 2% of ABR is.
Bed Bath in the portfolio at the end of the year kind of what's the breakout between FIFO and <unk>.
Okay.
And just to be clear it well.
To be clear and to make things a bit foggy here, it's not just bed Bath <unk> beyond we have a de minimis amount, but it adds up a circuit city and there are others. So.
I don't think it would be productive John you could take a stab at it but I don't think it's productive to point to just one or two of the properties it's spread it's spread it's managed.
And we're thankfully as evidenced by Brandywine, we have backup leases into it.
Well I guess I'm just curious what's the what's the breakout is it like 70 30 60 40 between two point to are the ADR in those two regions for bed Bath specifically.
John If you want I don't know that we want to get into that level of color bigger than a bread box, yes, no and I think Craig that just being elusive I would just say that within the $2 75, we are we view that as very conservative between between the two because we really don't know in terms of when we're getting it back but as we've said if we get it back we will not be in.
Lastly, our guidance sports I think will rather getting into lease by lease I think we're very comfortable at the 275. All in you should assume we have a conservative outlook, meaning we're going to recapture brandywine as soon as we can we are going to recapture the upper level, if not the entirety of $55 nine is that those are in our forecast.
Sure.
If there are unforeseen bankruptcies different story, but there we have 150 basis points, whether it's mom and pops or otherwise so.
We think we're prepared for whatever the next few quarters has in store.
Not to beat a dead horse I guess I'm, just trying to come back from different angle in same store right. Just trying to think of the headwind kind of bad debt write before 150 generic is baked it right that you said kind of think about 200 total so that means 50 basis points in four.
The balance right.
The above and beyond which you would think is mostly.
Wilmington, but I guess, not 100% right, but I'm just trying to think of if you get it through the first half of the year. It was in the back half 50 basis points.
Assume the majority of that is is Wilmington.
Yes.
Basis points.
I think as I highlighted and of course. His question roughly 275 total is everything and about 200 same store with a current expectation that bed Bath Wilmington, we get that back in end of June , but again thats great.
Estimate, but that's our current expectation so I think called out about 50 basis points for that.
So I think youre thinking about it correct.
Okay.
And so total though between that and the product collections.
Got it.
Essentially.
Correct, Yeah, I mean, I was a little bit more.
<unk> live in that but yes, I mean, I think again.
Would've had very strong.
That 5% to 6% would have been significantly stronger.
That's helpful I didn't mean to get to.
Too in the weeds there.
Okay, and then just separately I belief in front.
You talked about some of these urban markets coming back, but I guess, just higher level as you think about the ease of backfill.
Wilmington versus San Francisco, right movies to polar opposites, San Francisco be where it is today, but as retailers sit there today right like what's the good.
Yep.
Demand pool for some of those.
Ralph quite recover urban areas versus.
First ring suburbs or like a granite job you highlighted a couple of times, that's more of a suburban street retail kind of can you just go through the the difference of the depth of demand for those two types of product.
Yes.
And I think it's also worth.
Not ignoring what we'll call second ring suburbs, there's markets that pre COVID-19.
We really werent sure on our retailers were really werent sure that they wanted to be and they've got a COVID-19 lift because of work remote now how long that holds we'll have to see but there still seems to be diesel.
Decent demand even in secondary tertiary so, let's not even ignore that and you've seen that in other companies print you see that to the extent that some of our fund five assets fall into that category.
There is no doubt that the greenwich's of the world benefited and I'd say right now this week its a bit easier.
Robert Lee to lease space. If there is any worthwhile vacancy in Greenwich than it is in San Francisco, because San Francisco is still in the earlier stages of that recovery and my guess is you will see more stabilization in some of those assets that have done well.
But I am encouraged whether its north Michigan Avenue, with Allo, yoga or 555 ninth or elsewhere that our retailers are saying you know what.
We are seeing our shopper coming back.
And retailers have to think 135 years ahead.
Not necessarily where they are right now final point is I think we need to be prepared.
For the Midtown Manhattan's of the World for the places that do not have a strong residential footprint short term that those are going to be the heart itself, because it's going to take a while for people to get back in the office.
Well, New York, especially the neighborhoods is doing just fine, but those pieces then.
When we think about how to get retailers excited if it is really just a nine to five twos data Thursday environment, those going to be the toughest thankfully that is an insignificant amount of our portfolio and the pluses.
Outweigh the minuses.
Each of those different markets will rebound differently as I said secondary tertiary got a nice COVID-19 lift the primary suburbs, certainly did well and I think could hold on <unk>.
Final point that everyone needs to keep in mind, though.
The cost of putting tenants in business, what we talk about is net effective rent impacts properties very differently and so you might like those secondary tertiary markets and our retailers do.
But if the rents in those markets are 12 $14 the <unk>.
Hey back period could be much longer than in some of these.
Street retail market, where the rents are 10, and 20 ex that and so the payback period is shorter we're going to have to watch carefully at where net effective rents are and that would lead us to be more encouraged by our high rent.
Earlier recovery.
Property is notwithstanding everything I just said.
So thats, a mouthful correct, but.
Yeah. That's helpful. Thanks for the color.
Sure.
That concludes today's question and answer session I would like to turn the call back to Ken Bernstein for closing remarks.
Great. Thank you all for joining US we look forward to seeing you in the not distant future and hope everyone stays well.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
[music].
Okay.
Okay.