Q1 2023 Acadia Realty Trust Earnings Call
Speaker 1: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the first quarter 2023 at KTRT's Earnings Conference call. At this time, all participants are on a list in lonely mode. After this presentation, there will be a question and answer session.
Speaker 1: To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automatic message advising your hand in space.
Speaker 1: Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Jay Martin. Please go ahead.
Speaker 2: Good morning, and thank you for joining us for the first quarter of 2023 Acadia Realty Trust earnings conference call. My name is Jay Morton and I am an analyst in our Asset Management department.
Speaker 2: Before we begin, please be aware that statements made during the call that are not historical may be 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.
Speaker 2: 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, May 3, 2023, and the company undertakes no duty to update them.
Speaker 2: During this call, management may refer to certain non-GAAP financial measures, including funds from operation and net operating income. Please see Acadia's earnings press release posted on its website for a reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures.
Speaker 2: Once the call becomes open for questions, we ask that you limit your first round to two questions per caller. Give everyone the opportunity to participate.
Speaker 2: You may ask further questions by reinserting yourself into the queue and we will answer as time permits.
Speaker 2: Now, it's my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.
Speaker 3: Thank you, great job Jay. Welcome everyone. I'm going to give a few comments then I'll turn the call over to Stuart Seely and then John Gottfried. As you can see in our earnings release, our first quarter results represented another strong quarter. Operating property NOI growth was ahead of our expectations at 7%.
Speaker 3: and our earnings were ahead of forecast as well. It's worth noting that this is not just one good quarter in isolation.
Speaker 3: In fact, following the painful drop during the pandemic, same property NOI growth.
Speaker 3: has now been above 5% for six of the last eight quarters and during that eight quarter period.
Speaker 3: The quarterly average growth rate has been over 7%.
Speaker 3: This multi-quarter trend reflects the strong recovery we're seeing at our properties and bodes well for our prospects not just this year.
Speaker 3: But more importantly for our multi-year goal of 5 to 10 percent annual internal growth.
Speaker 3: And to be clear, this long term growth should also show up in earnings growth.
Speaker 3: Out withstanding this continued progress, we're certainly keeping an eye on the headwinds in the broader economy and the potential impact on our portfolio performance. Thankfully.
Speaker 3: when looking at our current leasing pipeline.
Speaker 3: Activity remains on track with our prior forecast and we haven't seen any fallout in tenant demand. Furthermore,
Speaker 3: We believe our reserves for our tenant watch list and our credit reserves currently in place are adequately conservative to address any potential short term disruption.
Speaker 3: most importantly.
Speaker 3: even after taking into account the implications of a potential recession this year. We expect our leasing progress to more than compensate.
Speaker 3: for any economic slowdown. Thus, we anticipate eight steps forward.
Speaker 3: even if there might be two steps backwards.
Speaker 3: On our last earnings call, I walked through in detail the likely reasons.
Speaker 3: why our operating results are holding up despite near-term economic pressures, but let me emphasize three factors.
Speaker 3: First, the secular headwinds over the last several years from the rise of ecommerce have passed.
Speaker 3: Fears by both retailers and investors that online shopping and the so-called retail Armageddon.
Speaker 3: will devastate the physical store. Well, that fear has abated, and this multi-year headwind is now a tailwind, as retailers recognize that stores are their most profitable channel in an omnichannel world.
Speaker 3: Second.
Speaker 3: There's a scarcity of high quality space and vacancies are quickly being absorbed, especially in our key corridors.
Speaker 3: quality space and vacancies are quickly being absorbed, especially in our key corridors. Third,
Speaker 3: As Stuart will discuss, we still have high quality space in our leasing pipeline to drive meaningful growth.
Speaker 3: over the next few years.
Speaker 3: And while there's solid growth throughout our portfolio, both urban and suburban, the rebound we are seeing is most significant.
Speaker 3: And while there's solid growth throughout our portfolio, both urban and suburban, the rebound we are seeing is most significant in our key streets.
Speaker 3: Remember, our street portfolio comprises about half of our overall portfolio value. And given a tough couple of years during COVID, many folks questioned whether a sustainable recovery would ever occur.
Speaker 3: Given the significant distinction between the type of street retail that dominates our portfolio compared to street retail more dependent on return to office, it's clear to us the recovery in our street retail portfolio is still not fully understood.
Speaker 3: So it's worth highlighting a couple points.
Speaker 3: First, the vast majority of our street retail portfolio is not an amenity to office workers.
Speaker 3: Residential statistics are proving much more relevant. Where you have seen a residential rebound.
Speaker 3: Our retail has rebounded as well.
Speaker 3: retail has rebounded as well. And for those corridors.
Speaker 3: Retail fundamentals are now stronger today than before COVID.
Speaker 3: are now stronger today than before COVID. That means tenant demand.
Speaker 3: Tenant performance and market rents are now stronger today than in 2019.
Tenant performance and market rents are now stronger today than in 2019. Second
This is not just a rebound. The growth appears to be longer in duration and stronger than just a reopening. In fact, over the past year as vacancies have been spoken for, market ramp growth is continuing to accelerate. As possible in my work with Canon L palate data, my TholTown ArchFred
for over 70% of our street portfolio.
Specifically, Soho, Williamsburg, M Street, Rush Walton, Armitage, Melrose Place, Henderson Avenue, Greenwich, and Westport.
These corridors are not only performing better than pre-COVID, but notwithstanding macro headwinds.
Rental growth is accelerating.
on average in these corridors and from Melrose Place, Soho and Williamsburg market rents have grown over 20% over the past year.
luxury is expanding, or in other markets where foot traffic and tourism is returning.
expanding or in other markets where foot traffic and tourism is returning. And while the rebound doesn't mean...
Nor has every corridor recovered. The positives in our portfolio.
are far outweighing the negatives. Corridors like North Michigan Avenue are still in early stages of recovery, but even there.
We're seeing green shoots.
And while we should always be prepared for vacancies created by bankruptcies like Bed, Bath & Beyond since they're an inevitable part of our business.
Tenant demand seems to be outstripping supply coming from these tenants.
John will discuss the economic details of Bed Bath and Beyonds Bankruptcy, but as it relates to our two locations in our core portfolio, I'll briefly touch on it here first. Brandywine Town Center in Wilmington, Delaware.
We have leased the entirety of the Bed Bath & Beyond space there. It is being taken by the adjacent tenant Dick's Sporting Goods.
which plans to expand into the combined space as a flagship house of sport.
its newest comprehensive format. And as part of this profitable expansion, the Exporting Goods executed a new 15-year lease covering the combined space.
Our second location is 5559 in San Francisco. The property is a well-located, two-level urban shopping center that is undergoing an important transformation.
The street level includes a thriving Trader Joe's and an oversized two-level Bed Bath and Beyond that has rents that are well below market.
We are turning the second level of this property into its own self-contained center with dedicated parking. We have signed a lease with the container store to anchor the second floor space adjacent to the Bed Bath and Beyond. And upon the recapture of the Bed Bath space,
We can now activate the balance of the second level.
This repositioning has been planned for several years and is always hinged on getting at least one of the levels of the bed bass and space back.
Finally, as it relates to City Point, the opening of Primark in December , anchoring our presence on Fulton Street, continues to meaningfully increase the energy for the whole project. Primark opened much stronger than anticipated and the foot traffic continues to be strong. This strength, as well as the impact coming from significantly expanded residential footprint from all over the world.
an equivalent amount of leases in advanced stages of lease negotiation right now with several exciting retailers that will further energize this irreplaceable asset.
So as it relates to our internal growth.
Looking at our leasing activity and in our conversations with our retailers, they indicate that they're looking past the near-term cyclical headwinds and executing leases on their preferred locations based on their medium and longer-term expectations. All of this simply reinforces our view.
that our internal growth forecast for this year and beyond remain on track.
Turning now to external growth and the transaction markets. Given the volatility in the capital markets, transactional activity remained muted last quarter as most sellers are on the sidelines. Nevertheless, our team remains very active underwriting and executing a variety of opportunities in it's bitter Let Game of parking because it makes sense.
It doesn't take much volume to move the needle for us. First, as it relates to on-balance sheet acquisitions, our cost of capital kept us on the sideline last quarter, and given the public market dislocation, we're exploring areas where we can sell assets opportunistically or reduce our concentration in certain markets and do so on an earnings neutral basis.
In terms of Fund 5 acquisitions, while that market is relatively quiet as well, the team remains active with several deals under review, and the pipeline is robust enough that we will be successful in deploying the remaining capital, even in this quiet market.
In terms of Fund 5 acquisitions, while that market is relatively quiet as well, the team remains active with several deals under review. And the pipeline is robust enough that we will be successful in deploying the remaining capital, even in this quiet market. More importantly.
To the extent that larger opportunities arise.
We are confident that we'll be in a position to successfully leverage our institutional relationships.
This quarter we added one transaction to Fund 5 Mohawk Commons, which we discussed in detail last quarter.
So to conclude.
We recognize that macro news headlines continue to create uncertainty and concern for commercial real estate in general.
But even in this challenging environment, our leasing fundamentals remain strong and internal growth is intact.
And once we get past this period of Fed tightening and potential consumer slowdown.
We're in a very good position to continue to drive internal growth and then capitalize on the external growth opportunities.
that should arise. With that, I'd like to thank the team for their hard work this last quarter, and I will turn the call over to Stuart.
Thank you, Ken. I am really delighted to be part of the team here at Acadia, the group of new colleagues with whom I work every day are exceptional and highly professional. The vast majority of whom the investment community doesn't have any exposure to and their expertise and dedication is not always transparent externally.
They have also been very patient with me as I dig into a lot of details on how things work and I ask a lot of questions. I suppose it's fair to say that when looking towards the inside from the outside, which is what I've been doing for the past two decades, it is hard to fully appreciate the variances and subtleties that companies say are important.
particularly when you are looking at over 100 companies. But when you are highly focused on one company, the important differences resonate quite a bit more. And in that regard, I'll make a few observations and provide a few anecdotes and then turn the call over to John . Our diverse core portfolio is very well balanced and includes our street assets.
retail assets with varied open-air formats.
The overall average rent in the suburban portfolio is about $1750 a square foot, including anchors, but the shop space has in-place rents of about $29 a square foot. The top tenants in the suburban portfolio include TJX, Lowe's, and Dix.
The suburban portfolio provides balance and it is very complimentary to our urban and street assets and has an overlapping tenant base with retailers having exposure to two and sometimes all three of these portfolios.
Now what does get a lot of attention and deservedly so is our focus on high growth, high barrier to entry markets which has led to a very concentrated portfolio of street retail assets. These assets do have and will have higher growth for the next several years due to a few identifiable specific items.
First is occupancy gains.
All occupancy gains are not created equal. While the entire core portfolio is about 93% occupied, within that, our much higher dollar rent street portfolio is only about 85% occupied. And we believe the street portfolio can get back to 95%. Furthermore, our street assets have an average in-place rent of over $80 per square foot.
leases have average bumps of 3%, which is about 100 to 200 basis points higher than what is typical for other open-air lease formats.
This structure results in internal growth over five years of about 13%, which is about double the 6% for a typical suburban lease.
Third, is we expect above average rent growth on the market rent growth on the streets, particularly if inflation runs hotter. And we expect to be able to more frequently capture the growth as lease terms are typically shorter. Currently, the greatest market rent rebound is now occurring in our street and urban corridors and John will give some examples.
I want to turn to our progress on two recent acquisitions. First, our Henderson portfolio acquired in early 2022. This was a project that envisioned both minor short-term and major medium-term repositioning. The team is executing as planned, but escalating market rents have been a tailwind to our expectations.
The team is signing rents about 20 to 30 percent higher than underwriting. As planned, we recaptured a large space, physically reconfigured and redemised that space, and are signing leases over 50 percent higher than the prior rents. Note that these leases will be non-comp, so they won't be reported in our spread.
These results are being achieved at Henderson even before the most significant planned asset upgrades have been commenced. Second, at Melrose Place, which was an asset acquired in 2019.
No near-term repositioning was either planned or necessary. The investment thesis was to get the benefit of the growth from both below-market rents and market rent increases driven by our expectation that the luxury tenants would come into the market. And they did.
AJ and his team just renewed several tenants in April and John will walk through some of those details. It's worth noting that Melrose was a pre-pandemic acquisition. With the full year impact of these recent rent resets, the 2024 NOI will represent a 6% CAGR over the 2019-2019-2019-2019-2019-2019.
pre-pandemic NOI level or a 33% increase.
One final observation is that Street Retail is not a widely held institutional asset class. Ownership is highly fragmented and we are one of the few institutional owners with expertise that is recognized by both retailers and capital markets players.
Also, basis matters and the importance of micro-submarkets and concentrated ownership in the correct micro-submarkets cannot be overstated. And now that I have a chance to walk more of these assets and markets and meet with our leasing and asset management teams, I have a much better appreciation for our Street portfolio and just how distinctive it is.
a strong quarter, surpassing our expectations across all of our key operating metrics.
achieving FFO of 40 cents a share, along with a 7% increase in same store NOI, both of which came in stronger than what we had anticipated.
Additionally, and consistent with our expectation of multi-year NOI growth, we are signing new leases at rent spreads in excess of what we had budgeted.
including those that we publicly report, but likely even more impactful of those that we don't report due to their nonconforming nature, but have the equivalent impact on our earnings and same store NLI growth. And even with the economic headwinds that are likely still in front of us, we remain confident in our multi-year internal NLI growth. And even more importantly, the translation of this growth into above trend FFO.
and increase dividends for our shareholders. And I'll provide some further color on each of these.
shareholders, and I'll provide some further color on each of these, starting with our first quarter FFL.
In light of these results, along with the positive trends that we are seeing across our portfolio, we conservatively increased our full year guidance to $1.19 to $1.26.
but the strength and resiliency of what we are seeing from our business and from our tenants dictated otherwise.
And contrary to what you might expect from the macro headlines, we are continuing to see record levels of tenant sales, along with continued demands for space, particularly in our street and urban markets, and at rents in excess of what we had budgeted.
Furthermore, we have yet to see any meaningful signs of tenant distress beyond what we had anticipated. Our cash collections remain strong, with our credit loss for the corridor coming in better than what we had projected.
As a reminder, we incorporated approximately 270 basis points of annual credit loss into our FFO guidance.
And when using this annual 270 basis points against our Q1 rents, we only needed about half of it for the court.
In terms of Bed Bath's bankruptcy filing last week and the anticipated rejection of our two core leases, I wanted to provide an update. First, as we had outlined on our last call, we would not have any down-burdered revisions to our guidance as a result of Bed Bath.
And in fact, we raised our guidance. Secondly, as we have been discussing for a while, the 555 9th Street lease in San Francisco is significantly below market. And assuming it gets rejected, we preliminarily estimate a one-time incremental non-cash gain of about 5 cents. Please note that this potential gain was not factored into a single-time incremental non-cash gain.
Presumably, it would be included in our headline NAIRIT FFO.
But stay tuned and I will provide updates as they become available. And as it relates to our second bed bath location, as Ken discussed, we have already profitably retended the space and I will provide further economics on that deal shortly.
Turning now to same store NOI. We exceeded our expectations for the quarter with growth of 7% and we are currently trending above the 5-6% 4 year same store NOI range that was outlined in our initial guidance.
It's also worth highlighting that we achieved the 7% quarterly same store NOI growth despite over 200 basis points ahead wins from prior period cash collections.
And if we were to exclude these headwinds, our same store growth for the corridor would have been in excess of 9%.
As you may recall from our prior call, we anticipated that our straight assets, which comprise about half the value of our portfolio, were projected to increase 6-7% in 2023.
And we outperformed this expectation with same store growth in excess of 8% coming from our streets during the quarter. While the entirety of our street portfolio achieved 8% growth this past quarter, I wanted to drill down a bit further into our high growth markets.
which as a reminder, comprise about 70% of our street assets. And we are projecting about 10% annual NOI growth from these key street corridors between 2023 to 2025, which equates to aggregate incremental NOI over the next couple years in excess of $7 million or 7 cents a share.
but we are starting to see evidence of similar trends in these streets.
including State Street in Chicago, which as we've said on prior calls has been slower to recover coming out of the pandemic. But for example, one of our significant apparel tenants on State Street reported monthly sales that were 25% higher than any previous month on record.
Moreover, this momentum continued throughout the quarter, with reported sales figures that were 30% higher than those reported in the corresponding period in 2022.
Now turning to our total core NOI. In addition to the 7% growth from our same store pool, we also achieved total NOI growth of about 6.5% inclusive of our assets and redevelopment and recent acquisitions.
growing to approximately $36.2 million in Q1 2023, as compared to the $34 million that we reported in Q1 2022.
In terms of redevelopment, as we've discussed over the past year, we placed our core North Michigan Avenue assets into redevelopment during the quarter as our team embarks and plans to reposition these iconic assets.
And as Ken mentioned, we are starting to see some encouraging signs of tenant activity on North Michigan Avenue and we are in the early stages of some really exciting concepts so stay tuned. Moving on to spreads, as highlighted in our release, we reported solid leasing spreads of about 10% cash and 22% gap on new and renewed leases. And consistent with Stuart's remarks, in our expectations of 10% of the annual
from a significant lease in Williamsburg Brooklyn.
an investment that we acquired a little over a year ago.
It's worth highlighting that this 20% mark to market was not included in our reported rent spread this quarter, as it was neither a new lease or a renewal, as the length of the lease was unchanged following a fair value reset in rents.
The 20% in rent rose from a contractual fair value adjustment to rent that was calculated based upon the tenant sales performance.
The increase in rent exceeded our underwriting as we viewed this lease to be at market when we initially acquired the asset.
In addition, during the second quarter, we will be reporting a cash renewal spread of nearly 50% for one of our tenants at Mile Rose Place, LA that arose from a fair market value reset upon renewal.
And to further highlight that not all spreads are created equal, this lease generated the 50% spread even after being subject to 4% annual bumps over its initial term, which is above the 3% growth that we typically receive from our street assets. Lastly, I wanted to touch on some of the details of the
involving the profitable retendanting of Bed Bath & Beyond at Wilmington, Delaware that we signed during the quarter. As Ken mentioned, the former Bed Bath space was leased to Dick's, which when combined with the adjacent space, will be converted to a new 15 year lease for a 100,000 square foot house of sport.
As this was an expansion, it wasn't reflected in our reported spreads, but when looking at the deal across both spaces, it resulted in a 15% cash spread on the combined 100,000 square feet when comparing the new rents on the House of Sport to the prior rents received from Bed, Bath & Dicks. To determine how the new Gonzo Graphics
at a cost of about $100 a foot. And we anticipate rent commencement in the first half of 2025. Moving on to occupancy. In terms of occupancy, we retained our physical and leased occupancy at 92.8 and 94.6% respectively, with ABR of approximately $1.3 million commencing during the quarter.
As we have discussed in the past, giving the range of rents between our street and suburban assets, movements in occupancy percentage are not often the most relevant metric for us.
But, we are on track to increase our physical occupancy by another 100 basis points or so by year end.
In terms of our core assigned, but not yet open pipeline, we sequentially increased it to $6.8 million of ABR at March 31st at our pro rata share, as compared to the 5.6 million that we reported last quarter. And of the 6.8M dollar pipeline.
we expect that approximately 25% of it will commence in the second quarter, followed by another 30% in the second half of this year, and the remaining 45% in the first half of 2024. 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 period.
I also wanted to highlight that the $6.8 million of signed but not yet open pipeline is entirely incremental.
Meaning it excludes leases signed in advance of an expiration, such as the executed DIX lease at our Bed Bath and Beyond location in Wilmington, Delaware, and also excludes any leases executed on assets in redevelopment. Lastly, I wanted to touch on a few items on our balance sheet.
The good news, particularly in light of the current capital market environment, is that our update this quarter is pretty boring. We have no meaningful core maturities over the next several years, nor do we need to rely upon the capital markets to fund our internal growth, as we are able to fund this growth using the cash flow generated from our business.
In terms of core interest rate exposure, over 97% of our debt is fixed at an all-in rate of about 4.25%. And through the use of interest rate swaps, we have limited exposure to base rates until 2027.
And on the fun side, given the strength of our lending relationships, even with the challenging capital markets environment, we are continuing to source new debt, whether it be for refinancing of an existing asset or securing financing for new opportunities. In fact, over the last several weeks, we have successfully secured a $1.5 million loan to
to five-year non-recourse loans at spreads of about 200 basis points over the base rate. In summary, we started the year incredibly strong, and even in light of the economic uncertainty, we have cautious optimism as we look forward to the balance of the year. Our multi-year internal growth strategy remains on track, and we have increasing visibility that this growth is poised to drive bottom line FFO and cash flow growth.
We will now open up the call for questions. Thank you. Ladies and gentlemen, to ask a question, you will need to press bar 11 on your telephone and wait for your name to be announced. As a reminder, please limit yourself to one question and one follow up. If you have additional questions, you may re-enter the queue, time permits.
Please stand by while we compile the Q&A roster. And our first question coming from the line of Flores Van Diskem with Compass Point, Illinois, open. Thanks. Morning, guys.
Looks pretty good, pretty encouraging. Maybe if you could.
touch upon, I mean, one of the things that that's particularly appealing here is the occupancy upside, the least or the occupied occupancy upside in your street portfolio. And I think Stuart might have mentioned it was 85 percent occupied at the end of the quarter.
And you think that's going to get back to hopefully 95%. What will be the impact of that on your earnings? Obviously, some of that is in your S&O pipeline, but how much more...
incremental rent would you be able to get from that piece of your portfolio?
Yeah, of course, John , so I think what I would I would point to is if we look over the next several years. We have about 5 to 10% growth and that street lease up. Both the lease up of that that call that the incremental. Um, 10% as well as a fair market value that we get to mark to market. There's going to be a big, big chunk of that 5 to 10%, which we think is North of 30Million dollars in total for our entire portfolio. So.
you know, good chunk of that growth is coming from that portion of our portfolio. Probably half. Great. Yeah, so it's over half, right? If I think about it, it's like, you know, close to, you know, it's more than almost more than two thirds. Is that the right way to think about it?
I think that makes sense. You'll have to get a little bit more granular in order to do that, Floris, but I think it's a good chunk of it for sure. Great. And maybe, you know, Ken, you mentioned something about larger opportunities, and that sort of got me thinking.
what potentially could be out there and you talking about, is that for the core or is that for the funds? And presumably you would use some of your LPs for co-investments. Maybe if you could expand on that and what you see in the.
as potential things that could be interesting to you, including obviously there's presumably a lot of New York Street retail that's got some hair on it right now.
as potential things that could be interesting to you, including, obviously, there's presumably a lot of New York Street retail that's got some hair on it right now. Outside of your markets, clearly.
So let's separate capital structure, which is highly dependent on a variety of factors ranging from availability of debt, cost of capital for us within the REIT.
separate capital structure from where we see opportunities. And what we have always done over the years is not be overly beholden.
to the public markets if the public markets were not available. But also recognize that there are going to be a variety of opportunities for assets.
right structure, right time, that belong in our core portfolio. So I see opportunities falling into three categories. One is it is likely, given what's going on with the regional banks, it is likely for a variety of other reasons that we're reading in the headlines, that there could be complicated but highly profitable debt restructuring, debt purchases.
Things that are more consistent with what you've seen Acadia do in its fund or joint ventures over time, whether it was our purchase of Mervins and Albertsons or some of the more complicated restructurings that we get involved with. That's certainly a possibility and I would expect us to utilize our
institutional relationships for something like that. While some assets might be at the property level consistent with our core portfolio, we need to be open minded and opportunistic on that side. Then for the street retail, as you mentioned for us, I do think there's gonna be opportunities. The number of previously institutional owners.
who now are focused elsewhere could create opportunities. In both instances, I think we're talking many months before this all plays through, but in a couple quarters we could see opportunities there. And again, whether we do these on balance sheet or in some form of structure, time will tell. The good news is...
retail and retail expertise and retail platforms are finally once again getting the attention from institutional investors. So the inbound inquiries of ways to partner with us are very encouraging.
Thanks, Ken. Thank you. Now, our next question coming from the line up, Keebin Kim with Truist. The line is open. Thanks. Good morning. Our first question, the North Michigan Avenue mortgage is maturing in 2025. The North Michigan Avenue mortgage is maturing in 2025.
with the borrower, with the lender, Keeban. So, stay tuned, but one we have, we're seeing some interesting things happening on North Michigan, but stay tuned.
Okay, and a couple of things happened since the last earnings call. In Chicago, they elected another mayor that appears to be soft on crime. What do you think?
What's your forecast for, I guess, your Chicago urban street retail portfolio? You're earning about a third of your street and urban income comes from Chicago. Just kind of any high-level thoughts on how that might impact your business or tenant demand. What's your forecast for, I guess, your Chicago urban street retail portfolio?
Sure, so without delving too much into politics.
Big picture, we have more than enough exposure to Chicago. So almost irrespective of how bullish I might be, what I would guide you to expect is that we will decrease our percentage of revenue.
in Chicago relative to other areas just in terms of prudent balancing. That being said, Chicago has a lot going for it. It has challenges and the elected officials, I think, across the board understand this. Let's see over the next several years.
how this all plays out, but it wouldn't be productive for us to say that a new incoming administration is not going to be effective before they have even started. So, in short, we're going to manage our Chicago exposure prudent relative to the overall size of our company.
But Chicago is one of the great cities and I would not rule it out. Okay, thank you.
Thank you and our next question coming from the lineup. Thomas with Key Bank, your line is open. Hi, thanks. Good morning. Can you know, 1st, just wanted to follow up there, I guess, on the street and urban portfolio, the Chicago Metro specifically, which, which does look like, you know, there's a fair bit of upside there. You know,
Center and Roosevelt Gallery and Clark and Diversity, which are some of the assets that have lagged in the recovery, whether you're seeing an improvement in those submarkets. And can you talk about the timeline to sign additional leases?
Sure, let me give some overview and John , you may want to touch on and you did touch. Somewhat on state street, so each market's recovering at different points. Some of the market Todd are performing as well as any of our other. Street retail markets armadage Avenue rush Walton are 2 of those examples, which.
Don't seem to be in any way hampered by any of the other concerns that slowed have slowed down the recovery of North Michigan Avenue or have slowed down the recovery of state street. Stay tuned, we're already...
seeing a nice uptick in retailer sales. So that's encouraging, because I still consider that also early stage. Similarly, Clark and Diversity finally signing leases and getting traction there. The one that I think we're all gonna watch most carefully is the return of North Michigan Avenue.
And as I said, based on some of the conversations we're having with a variety of retailers who are intending to open, I think we will be pleasantly surprised over the next year or two as to the return of North Michigan Avenue. John anything you want to add to that? Yeah, that's what I'll say is you highlighted that we did sign a new lease in Rush & Walton and what I'd like to point out just as a reminder...
the uplift and opportunity there. And then when we look at our leasing pipeline, either those that we refer to as at lease, meaning we're in the final stage of lease negotiation, our LOIs, we're seeing both in terms of Clark and Diversity, which you've mentioned, we have a couple leases in Clark and Diversity that are at lease that we hope to get executed.
As well as even stay tuned very early stages, but a potential large opportunity on state street. So we are starting to see that show up in our. In our leasing leasing pipeline, and, you know, as I mentioned in my comments, we're seeing some encouraging signs of we talked about the 70%, but that other 30%, which, you know, we'll put some of those streets of Chicago clearly into that. We're starting to see some early.
One final point on that, Todd. I don't want anyone on this call to think that our thesis is contingent on a rebound to the upside in that 30%. We are being very conservative in our view. We will navigate through, we will dispose of some of those assets.
as soon as we fix them. So this is not us counting on the recovery there as much as is us appreciating the significant outperformance and growth we are seeing in the 70% and the stability we're seeing elsewhere in the portfolio.
redevelopment pipeline there, you know, that's over, you know, $250 million of value, you know, I guess at your basis. Can you talk a little bit about the potential timeline for those projects and, you know, how we should think about the value creation opportunity?
whether that's going to, you know, materialize in 23 or 24, what we should be anticipating.
So assume, this is Ken Firsten and John Feelfreedata. Assume the downtime associated 23 a little bit, 24, is in our numbers and we're not expecting a quick.
rebound, a quick retenanting, because it takes time even in the highest demand of spaces to get tenants open, occupied, paying rent.
and assume that that is in our numbers, when I say eight steps forward, two steps back, assume that's part of our two steps back, and is still part of our 5% to 10% growth notwithstanding.
John , I don't know if you want to add more specific color, but the bottom line is it is in our numbers and we continue to have a conservative outlook while still starting to see some new tenant interest, which is very encouraging. Yeah, and Todd, I don't want to go lease by lease and exact RCD dates for a variety of reasons because there's, as you expect, with 1,500 leases in our portfolio, there's somewhere we've done three numbers Eruts off our Master Bas sheet and look for some $6,000 assets growing out of those increases. Thank you very much.
There's lots of puts and takes but in terms of NOI impact given when the lease is mature some of them they're recorded this year some first happen next year the rollover impact year to year is is going to be split between
split between the years and just reiterating what Ken said, in our growth expectations this has been very conservatively factored in. Okay but if we look back to last quarter supplement you know it's almost 12 million dollars of ABR between the two properties it sounds like
between later this year and through 24, that's gonna go away and then there'll be downtime before you retent and reposition those assets. I mean, is that the way we should think about it in the model?
That's how we thought about it in ours as well in terms of when those leases come out.
Again, don't want to get too granular, but think of real estate taxes as part of that. And once we get that spaces back, you should assume that we'll be aggressively challenging real estate taxes, which are a good portion of where that NLI is. So just stay tuned, Todd. I think like I said, it's been in our numbers and has always been in our numbers. This is not a surprise.
Okay, got it. All right. Thank you. Thank you and our next question coming from the line of Linda side with Jeffrey. Hi, Katie sticking to street retail. When you consider the street retail portfolio and some of the sub markets that have been flowing.
slower to recover like North Michigan, San Francisco, Mercer Street, and Soho. Taking into account your basis, how would you rank them in terms of the most potential upside over the next several years? Three somewhat different categories. So keep in mind, for our core portfolio in San Francisco, we own two shopping centers.
shopping centers with parking there in the markets, but those are more necessity focused and a little different than the high street retail that you would experience in SoHo. And then North Michigan Avenue, somewhat larger format, more tourist driven. So,
apples, oranges, and tangerines. San Francisco shopping centers, they have a fair amount of NOI growth. It's pretty straightforward. It is in no way dependent on.
return to tourism or any of those things. San Francisco street retail, which we have in our fund, that may take a little while longer to see tourism fully embraced back there, see folks come back to living in San Francisco, and that may take a little.
So it's case by case as to when do we get Whole Foods open, when do we and how do we deal with the thriving Trader Joe's and assuming we get the space back adjacent to our container store in 5559.
Very different, more traditional shopping center leasing there. Soho, by far the most upside in terms of percentage of rent growth, rent per foot.
John , you could give by order of magnitude where we see Soho growth versus some of these others. Mercer Street, specifically Linda, is one store, so that in and of itself is not going to be the same as the growth that we see as we complete the redevelopment in San Francisco, Soho.
overall is gonna have probably be the largest contributor to growth within our street portfolio because of a combination of contractual growth. Remember, we tend to get 3% contractual growth in all of those stores.
Then fair market value reset, something we only see in our street retail portfolio, and we have some nice ones teeing up in Soho. And then as you pointed out, we have a vacancy on Mercer Street, and thankfully we're getting good activity there. The way lease ups work in these markets, we've seen this through several cycles in markets like Soho. Retailers like to cluster. You first see the movement.
based on whoever's making the most significant push this cycle, it's been luxury. Luxury has doubled down in our street corridors. So it's those streets in the case of Soho, that means Green Street first and foremost, Prince and Spring, all where we own and are active, that is seeing the first list and then the other corridors follow. And so,
Feels to me like Mercer's, next up at that for that.
Thanks for that context. And then, John , the unchanged 270 bits of annual credit loss, you said you only needed half of it for the quarter. Maybe to just further clarify, how much bad debt did you realize in 1Q as a percentage of 1Q base rent? So you'll think of like 135, 1, you know, have about a little less than half of the 270.
We used about half of what we thought the annualized 270 was.
Does that make sense, Linda? Yes. Thank you. Thank you. And our next question coming from the line of Lizzie Doiken with Bank of America. Your line is open. Hi, thanks. Good morning. I just wanted to clarify out of period collections once more.
the impact expected for the full year if that's meaningful. Thanks. Yeah, so Liz, I think the 200 basis points, if you look at last year, the comparable period, we had in our press release, you'll see there's about $600,000 of prior period cash collections, which is the 200 basis points that this year we had virtually none of it.
in each quarter and this year as you'll see in our guidance we have, you know, that's largely behind us.
Okay, thanks. And I know you said you're seeing no signs of tenant, further tenant distress. Just wondering how your most recent discussions have been with particularly the small shop retailers in your portfolios. Any signs of credit concerns or maybe you've seen any signs of credit concerns or maybe
changes around lease negotiations. Still early. Remember, our small shop tenants show up primarily in the suburban portion of our portfolio.
They tend to hang on until they can't. It's what we refer to in the industry as midnight moves.
in that they'll do their best to hang in there. So far they are, so far we're not seeing any problems, but certainly when we think about where we might have vulnerability in the event of a hard landing, it's usually in that segment that we see a quick movement. Haven't seen it yet, hopefully we don't see it.
It's a very small portion of our portfolio. Great. Thank you. Sure, thank you. Our next question is coming from Michael Miller with JP Morgan. Your line is open.
Oh, hey, a few hopefully quick ones here for you. First of all, I guess in the comment about I think it was 85 percent occupancy on the street portfolio, where could that go to, say, by the end of 24 on that trajectory up to 95? Yeah, I'm thinking through space by space.
space, Mike, but I think it's fair to assume we think we get back to, call it, 93 to 95 percent in the next.
18 months, 18 to 24 months, right? So it's because some of that's in Dallas, which we outlined in both Stuart and myself and our talking points where we're doing some pretty exciting things there, that'll be a big boost to it. So I think 18, 24 months, we get back to low, mid 90s. Got it, low to mid 90s. More than halfway there.
Okay. By that time period, by. Got it. Okay. And then, Ken, your comment about Chicago exposure and kind of maybe balancing that or reducing it relative to the overall pie, do you see that being more of a function of deploying capital elsewhere and shrinking it?
Well, you know, not really swapping out the assets or maybe accelerating some asset sales to sell down your exposure in the market. Either, but I'm not waiting for us to deploy more capital to do it just in light of the last couple of
So I think you should expect us to periodically fix and sell assets because they still trade pretty well there. Got it. Okay, that was it. Thank you. Thanks for watching.
you should expect us to periodically fix and sell assets because they still trade pretty well there. Got it. Okay, that was it. Thank you. Check that out on Techried. chirop backward slash
Thank you. And as a reminder, to ask a question, please press star 11. And our next question coming from the line up.
Thank you and as a reminder to ask a question please press star 11. And our next question coming from the line up. Craig Melman with City. Your line is open. Your line is open.
Hey guys, just John quickly I know you said there was a 50 base point difference in core and a wide growth in same store I mean is that what the drag would have been just for putting the North Miss assets into redevelopment and you know maybe how much of a drag would have been also five five five nine through the same short pool yeah so I think it's everything
Treg that's in there right because I think there's so no I think it I would not just say it's it's all It's all North Miss or all of that. It's just that that's our aggregate portfolio, right? So you know like for excellent like Henderson the growth in Henderson, you know So there's puts and takes throughout it but point is is that our total core grew 6.5% Right, so it's strong growth. It's strong growth either way
whether it's same store or total. Okay, and then just separately, Ken, maybe just with the news about Whole Foods pulling out of San Francisco, Nordstrom's now pulling out of San Francisco, just kind of curious if the conversations you all have changed.
For the backfill 5559, they're just in general with tenants being a little bit more hesitant to take more exposure in the city at this point. So what I'll point out is our two shopping centers are not at the downtown.
and in conversation specifically with our retailers, including Whole Foods, full speed ahead from their perspective. This is a downtown phenomenon that doesn't apply us to our shopping centers, but is one that the city's going to have to focus on.
and they will, and San Francisco will come back, it may take a while. So thankfully, we're not part of that. But it is certainly a challenge that business leaders, political leaders are focused on.
I know the question about San Francisco, I just asked, people ask about Chicago on the call. Just as you guys look about deploying capital, assuming normalization of the transaction market, where would you put incremental capital on the street retail? Would it be in existing markets only, or are there a couple new markets you guys would look to enter?
Yeah, and there are certainly new markets. I think the way we do this, the way we have done it historically is we sit with our retailers and understand what markets are they focused on. And five, ten years ago it was clear to us that Soho was one of those markets. And there were a handful of key markets. And that's exactly the area in which we were able to dope on that indo- comP stories like that.
As we've discussed with Melrose Place, Soho, we're seeing that kind of validation. We would be happy to own more. But when you see our stepping into Henderson Avenue in Dallas, and there are a bunch of other markets, we won't spend today's call on it, where our retailers are saying, yes, these are now likely to be forever markets, and if it can meet our criteria, right barriers to entry.
right supply constraints, right value, we are more than happy to add additional markets. And I think I've been abundantly clear, there are a handful of markets that we currently own that we are going to subtract not add.
constraints, right value, we are more than happy to add additional markets. And I think I've been abundantly clear there are a handful of markets that we currently own that we are going to subtract not add. Rebounds ofombie rate and high gaps that we have
Thank you. And again, if you'd like to ask a question, please press star one one on your touch phone phone. I'm showing now for the questions at this time, I will turn the call back over to to candidate for any closing remarks. Great. Thank you all for taking the time and we look forward to speaking to you again next quarter.
Ladies and gentlemen, that's all for today. Thank you for your participation. You may now disconnect.