Q2 2023 Acadia Realty Trust Earnings Call

August 2, 2023

Yeah.

Good day and thank you for standing by welcome to the Q2 2023, Acadia Realty Trust earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising that your hand is raised to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Mackenzie Tepper. Please go ahead.

Good morning, and thank you for joining us for the second quarter 2023, Acadia Realty Trust earnings Conference call. My name is Mackenzie Pepper, and I'm, an insurer and in our marketing Department.

Before we begin please be aware that statements made during the call that are not historical maybe deemed forward looking statements within the meaning of the Securities and Exchange Act of 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 August back at 2023.

And the company undertakes no duty to update them.

During this call management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see <unk> earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.

Once the call becomes open for questions. We ask that you limit your 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 will begin today's management remarks.

Thank you great job Mckenzie. Thank you to you and all of this summer and turns it's Ben.

Sure to work with all of you and welcome everyone.

A few comments, then I'm going to turn the call over to Stuart and then for John .

As you can see in our earnings release, we had another solid quarter same property NOI growth was a strong 5% and our earnings were ahead of forecast as well.

And this is not just one good quarter in isolation.

For more than two years now our same property NOI growth has averaged just under 7% and we've raised our earnings forecast six times.

Notwithstanding the most anticipated recession in my career.

And the fact that retailer quarter over quarter performance has been choppy retailers are continuing to look past any short term shifts in consumer demand.

And are continuing to pursue key locations.

On our last couple of earnings calls I discussed the likely drivers of this continued growth and while I run the risk of this feeling like Groundhog day, let me briefly reinforce a few key drivers.

In terms of macro trends first of all the threat of the retail Armageddon has passed.

While online retailing is here to stay.

Retailers recognize that physical stores are their most profitable channel in an omnichannel world.

Second tenant demand.

Especially in our key corridors is quickly outpacing existing supply and retailers are stepping up to secure these must have locations, whether it's brands establishing their own stores.

Or luxury retailers continuing to double down on key streets. The demand is there.

And the rental growth is following.

Then more micro or specific to our portfolio. The combination of increased tenant demand coupled with several hundred basis points of potential occupancy gain in our street portfolio positions us for several years of above average growth.

And while they are solid growth throughout our portfolio both suburban excrete.

A further differentiator for US is the continued strong growth we are seeing in our key streets.

As Stuart will discuss this growth contrasts significantly within narrative of shoppers moving out of key cities or the negative impact of hybrid work on retail in markets like New York.

In fact over the past year as vacancies have been spoken for market rent growth, but the majority of our street portfolio was continuing to accelerate Soho Williamsburg M Street Rush Walton Armitage Melrose place Henderson, Greenwich, Westport, these corridors or not.

Only performing better than pre COVID-19.

But notwithstanding macro headwinds tenant demand for our locations is not declining.

If not leveling off it is increasing.

And when demand increases.

Along with adding occupancy there are additional ways, we can further drive growth.

One example.

In Soho at one of our locations on the corner of Princeton Broadway, we signed a lease for that space in October of 2021.

At a rent that exceeded pre COVID-19 rents and was a positive indicator for the rebound of Soho.

However, recently, we were able to negotiate the recapture of the space.

And last week less than two years later, we executed a new lease.

At a 45% spread through the priority.

John will discuss the significant economic impact of this lease but all of this bodes well for our continued growth.

Another driver of additional growth.

Is from fair market value resets, which is a feature unique to the street portion of our portfolio.

Not only do our street leases.

We have higher annual contractual growth.

<unk> provisions work is.

Upon a tenant exercising its renewal option.

The rent resets to the greater of fair market value or fixed percentage.

This year the fed.

First time in a while we have achieved resets ranging from increases of about 20%.

Up to nearly 50% increases above prior rent.

All of this simply reinforces our view that not only are.

Our our internal growth forecast of 5% to 10% on track, but as John will discuss we see upside potential beyond simply remaining on track.

And to be clear.

Our growth assumptions also include a sober outlook.

For our re tenant things in slower to recover markets, such as San Francisco or North, Michigan Avenue, as well as conservative credit loss, if and when the looming recession becomes a reality, but even after taking this into account we expect our leasing progress.

To more than compensate for any of these retailers.

Yes.

Turning now to external growth in the transaction markets.

Given the volatility in the capital markets and borrowing cost significantly higher than two years ago transactional activity remained muted last quarter as many sellers are still on the sidelines. Nevertheless.

We are starting to see a gradual increase in deal flow and we are hopeful that we'll be able to close on some compelling and accretive opportunities this year.

Since it doesn't take much volume to move the needle for us even a few acquisitions whether on balance sheet in conjunction with capital recycling.

Or utilizing our institutional capital relationship.

This can be add meaningful meaningfully to our external growth.

In July fund five acquired Cypress Creek in Tampa, Florida, but just under $50 million consistent with our other fund five investments going in yield was in the low <unk> and we expect levered mid teens IRR on this transaction.

This center is well leased with anchors, including Burlington coat factory total wine Homegoods and overtime. There is the ability to add value through re leasing opportunities as well.

The team remains active with several deals under review and we will be successful in deploying the remaining capital in fund five even in this quiet market more importantly through.

To the extent that additional opportunities arise.

We're in a position to leverage our institutional relationships for continued growth.

So to conclude.

We recognize that macro news headlines continue to create uncertainty and concern for commercial real estate in general <unk>.

Nevertheless, our leasing fundamentals remain strong.

And our internal growth is exceeding our expectations.

And even though this strong growth has been showing up for a couple of years now.

We still have several years of tail winds on internal growth in front of us.

Along with this strong internal growth the uncertainty in the capital markets is beginning to create interesting investment opportunities.

That will enable us to add external earnings growth to our strong internal growth.

And 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 can I will spend a few minutes addressing the narrative and press reports, suggesting that a new hybrid work paradigm is impacting street retail there is a view held by some that there must be headwinds for urban retail in places like Soho in New York or Melrose place in La <unk>. Since these cities are experienced.

Being weak office attendance or changing commuting trends.

Such views gained momentum with reports and articles linking the stall return to office in hybrid work with negative implications for all urban retail without specifics.

These reports generally conflate amenity oriented retail located in office dense submarkets, which are dependent on office workers of commuters.

With dynamic retail quarters, which have completely different traffic drivers.

Office attendance is just not relevant for the vast majority of our portfolio under 5% of our annual base rent is from tenants, which we believe are office worker dependent.

Now the data does show that as a result of hybrid work foot traffic is still significantly below pre pandemic levels in office oriented central business districts, such as Midtown Manhattan.

At the same time, what we see in our key retail quarters does that one foot traffic is virtually unchanged and to tenant demand and rents are stronger than pre COVID-19. We are seeing diminished availability and we are benefiting from multiple tenants competing for spaces.

We have a highly differentiated street portfolio in key high growth quarters, such as Soho in Williamsburg in New York City.

Armitage Avenue Rush Walton in Chicago, Greenwich, and Westport, Connecticut, Georgetown in DC and Melrose MLA.

We have exact examined statistics, which are segmented by sub markets. For example, we looked at foot traffic data and for New York City, Submarkets, Midtown the financial District, Soho and Williamsburg.

Year to date compared to the same month in 2019 pre pandemic foot traffic was down 27% in Midtown and down 32% in the financial district, but over that same period foot traffic was only down 1% in Soho and was up 6% in Williamsburg.

And while the foot traffic is about flat in Soho as Ken highlighted demand for our space is stronger than pre COVID-19.

According to Cushman and Wakefield the occupancy rate in Soho has increased over 10% from pre Covid at <unk> 19 also despite reports of migration away from New York City apartment rents and occupancy are at near peaks with rents up over 6% from June of last year.

And this strength is not limited to New York City.

And the gold coast of Chicago anemia, being an aspirational luxury brand had a very strong opening in the past few weeks with the highest sales volume in its 20 store chain.

In Washington D. C. Allo yoga had a very successful opening of its flagship store in our M Street Georgetown portfolio as an aside we have a signed lease for another flagship allo yoga at our fund asset at 717, North Michigan Avenue in Chicago, which will open soon.

Also in Georgetown at our Wisconsin Avenue redevelopment, we completed the retail leasing and have reached 100% lease up.

In la on Melrose place in the past four months, we have had three leases with these fair market value rent reset and the average increase was 29%.

One final point, not all occupancy and not all occupancy pickup is created equal.

While our overall portfolio is 92, 2% leased and 95, 2% occupied.

Let me rephrase it.

Q2, 92, 2% occupied and 95, 2% leased our street portfolio is currently 85% occupied and 88, 5% leased the NOI gained through this lease up will be disproportionately impactful to our bottom line. Our average in place Street rent is 80.

$4 50 per square foot as compared with our overall portfolio average in place rent of $32 50 based on our current leasing activity, including the street leases within our signed not open pipeline. We expect this differential to widen out further and now I will turn the call over to John Thanks.

Thanks, Stuart and good morning, we had another outstanding quarter with each of our key operating metrics exceeding our expectations.

Resulting in another strong beat for the quarter and raising our full year earnings guidance.

This call marks the seventh anniversary that I've been fortunate enough to sit in the seat and I can say without hesitation and by a long shot that this is a strongest leasing environment I've experienced during my tenure tenure the demand for our space is extraordinary whether it's in Soho, Our Williamsburg in New York City Georgetown in D. C. Melrose place in a lab or arbitrage avid or the <unk>.

In Chicago.

And with that demand is pushing rents in our portfolio is well positioned to capture that growth whether it's from multiple tenants bidding for the same space such as what we saw with the opportunistic re tenant in that we completed and Soho last week.

Or through our ability to capture outsized growth for fair market resets such as we did on several occasions on Melrose place in la.

And this is enabling us to not only gain further confidence in our multiyear growth projections, but seeing real opportunities to exceed them.

Now I'll dive into the quarter, starting with our second quarter <unk> before special items, we reported <unk> 36, which significantly beat our quarterly model.

The outperformance was driven by better than anticipated operating results within our core portfolio for both an improvement in tenant recoveries, along with a robust and strengthening leasing environment.

And along with cash recoveries, primarily within our fund portfolio coming in above our expectations.

As highlighted in our release our quarter results included <unk> <unk> noncash gain associated with the termination of the below market bed Bath <unk> beyond lease at 555 ninth Street in San Francisco.

As we have discussed on our first quarter call. This gain resulted in an incremental <unk> <unk> of our budget at <unk> as we have conservatively assumed <unk> <unk> of earnings throughout the year within our initial guidance.

Now, while I'm not suggesting this gain deserves any outsized level of prominence it is worth highlighting that the accounting does capture the economic reality.

As it highlights the value created now that we're able to capture market rents well in excess of what bed Bath was previously paid.

Now moving onto our full year guidance.

For the second consecutive quarter, we increased our full year earnings outlook.

And on an apples to apples basis with stripping out the incremental <unk> associated with the on budget again.

This gets us to $1 25 at the midpoint, which.

Which represents an increase of about 3% above our initial guidance.

And in terms of our assumptions for tenant credit given the macro backdrop backdrop and lingering risks of a recession. We are continuing to hold what we believe are prudent and conservative levels of reserves within our updated guidance for the balance of the year.

Turning now to same store NOI, our second quarter same store NOI of 5% was in line with our expectations, particularly given the headwinds from cash recoveries in the comparable quarter from the prior year.

And with year to date same store growth of just under 6% along with profitable lease up commencing in the second half of the year. Our model has us trending towards the upper end of our initial 5% to 6% full year guidance.

With an opportunity to exceed it.

In terms of spreads, we reported GAAP and cash spreads of 22% and 13% respectively for the second quarter.

And as highlighted in our release it was our street portfolio that drove this growth with cash spreads in excess of 30, 30% for leases on Armitage Avenue in Lincoln Park in Chicago, and Melrose place in ally.

It's also worth pointing out that if we were to measure the cash spread since inception on our street leases the 30% cash pad from the street increases to over 60% when factoring in the contractual rental growth that we received during the lease term, which range from 3% to 4% annually.

Along with a compounded annual growth rate or CAGR in excess of 6%.

And as we start the third quarter, we are seeing the same trends continuing if not actually accelerating in our key streets.

As Ken mentioned I will provide some of the economics of the Broadway in Prince Street lease that we signed in Soho last week.

The 45% cash spread translates to an incremental annual NOI of approximately $900000 when compared to the prior lease that was side less than two years ago.

Additionally, inclusive of the payment to terminate the prior lease as well as the upfront cost associated with tenant improvements and leasing commissions or payback period is less than a year.

Additionally, so far during the third quarter inclusive of the Soho lease I just mentioned, we have already signed or renewed nearly $4 million of street leases within our core portfolio.

At an average cash spread of about 40%.

To put this in context, given our size of 40% cash spread on $4 million of ABR generates about 100 basis points of same store growth and adds more than a penny a share about a 1% of incremental <unk> growth.

Next I wanted to provide a quick update on our multiyear internal growth projection and reaffirm that we continue to see 30% to $40 million of incremental core NOI growth over the next several years.

And I'm, often asked whether we have any potential upside to those projections and the short answer is absolutely and in fact, it's played out.

Within those projections, we had assumed conservative assumptions on market rise. Thus, we didn't assume opportunistic re tendering such as we can accomplish last week in Soho, nor do we assume the extraordinary growth for fair market resets within our street leases as we have experienced several leases in the past few months on Melrose place in la.

Yes.

Now moving on to core occupancy and.

In terms of occupancy or leased occupancy increased 60 basis points to 95, 2% at June 30th.

During the quarter, approximately 40 basis points of occupancy commenced contributing approximately $1 $7 million of ABR predominantly from street leases.

Additionally, our leasing team further increased our sequential signed by that opened pipeline to 300 basis points at June 30.

And this 300 basis points represents $6 $8 million of ABR at our share or about 5% of our in place core ABR.

And in terms of anticipated rent commencements on the $6 $8 million, we expect that about half of it will commence in the second half of the year with the vast majority are expected to commence during the first quarter of 2024.

This represents an acceleration from our prior quarters estimates, primarily due our tenants' strong desire to expedite their openings along with the resolution of supply chain issues.

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 want to highlight that the $6 $8 million of signed but not yet opened leases relates solely to our core operating portfolio.

Thus it excludes any core assets, our redevelopment as well as our share of any lease up within our fund portfolio.

Which if both of these were included it would double the ABR and are signed but not open pipeline agenda area.

I don't want to provide a quick update on city point from a leasing perspective, we remain well on track with our stabilization plan.

At June 30, we have approximately 60000 square feet of leases signed but not yet opened including Photoshop CT 16 dig the expansion of Alamo and several others and our leasing pipeline continues to expand with several new and exciting retailers in advanced stages of negotiations.

I also want to give an update on the projected <unk> accretion, we expect to achieve upon stabilization of the asset.

As a reminder, we currently own about 60% of city point with a potential to increase our ownership to nearly 100%.

As we've said in the past, we anticipate increasing our ownership in city point over time.

And while we don't have any specific update at this time, we don't expect a significant impact if any to our 2023 guidance.

And keep in mind, the incremental cash outlay should we have the opportunity to acquire all or a portion of our remaining partners' interest is not overly significant.

If we were to acquire all of the remaining ownership interest additional outlay would be about $15 million after taking into account the $65 million of previously funded partner loans from last year's recapitalization.

And upon stabilization the anticipated earnings accretion.

Relative to our current <unk> run rate ranges from about six six if we were to acquire all of the remaining interest or approximately four if we maintain our current 60% ownership.

This 4% to six a projected net accretion factors in all the components of the investment, including the projected NOI growth upon stabilization the interest income on our partner loans future funding cost et cetera.

Please keep in mind that the timing of a partner's decision to convert their interest prior to stabilization of the asset may create some short term earnings implications given the structure, but nonetheless in the near term, we are projecting 4% to <unk> incremental accretion representing growth of nearly 5% of our current earnings.

Lastly, I wanted to touch on a few items on our balance sheet.

Our balance sheet remains strong with no meaningful core maturities for the next several years and virtually no exposure to base rates within our core until 2027, given our nearly $900 million of interest rate swaps.

And within our core portfolio, while the reset and rates was particularly painful we are optimistic that the worst is behind us in fact during the second quarter, we successfully completed about $250 million worth of refinancings and extension of fund loans and.

And as you'll notice within our supplemental the all in borrowing costs within our funds remained virtually unchanged from the prior quarter.

So I'll ask all else being equal given the duration of our debt and interest rate contracts and our core coupled with the reset of rates within our funds, we expect nominal impacts from interest rates on our earnings over the next several years.

In summary, we once again had another very strong quarter with momentum continuing to build as tenant demand for our locations remains elevated.

Fueling further confidence in not only achieving but are exceeding our multiyear internal growth goals.

We will now open up the call for questions.

Okay.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please limit yourself to two questions and one follow up each.

One moment for our first question.

And our first question will come from Floris Van <unk> of Compass point LLC. Your line is open.

Okay.

Good morning, guys. So nice nice results.

Encouraging on what's happening in Soho.

Maybe if we can.

If you can provide us with a little bit more.

Detail on the.

The demand you saw from tenants for this space I believe it was a fever that was in this space before.

If you could also give a little bit of.

Okay.

View.

What's happening to lease terms in terms of bumps are you seeing any.

Your peers are all talking about raising bumps in their suburban portfolio. What is how does that look like.

Your Street.

Spaces.

And maybe also touch upon in particular in the India.

One of your office one of the office Reits you sold an asset I think in spring Street as well, presumably youre looking at some of these opportunities as well where do you see the.

The potential for external opportunities in your in your street retail portfolio.

Alright, well technically Florida, I think that was more than one question, but let me at least start taking effect.

Let's start with contractual growth.

I do think that it's going to be a multiyear education process in terms of.

In suburbia, getting especially junior anchors.

<unk>, perhaps a higher growth rate and given the duration of those leases. Even if we are successful. It takes about 50 years when you take into account the options to turn a shopping center. So.

And in favor of it and I think depending on your view of inflation I think it would be healthy for us to get higher bumps to keep up with whatever our view of inflation and growth is but I think that will take a while contrasting that with street retail that for historic reasons and otherwise has.

Generally had.

About 3% annual contractual growth, which is about 100 basis points higher just in terms of contractual growth.

<unk> has had fewer.

Option periods, and where the option periods show up as I mentioned in my remarks, we often can get.

Fair market value resets.

All of that enables us to have more what I have referred to as bites at the App.

Now I can see it over the last five six years, none of that really mattered Zika as we went through a global pandemic rents were declining the retail Armageddon.

And now that's beginning to turn.

And so.

I do think we will see higher contractual growth in our street portfolio than in our suburban we will see more bites at the Apple and thankfully increased tenant demand.

Is resulting in pretty significant rental growth. So let me use the Soho example.

We signed a lease a couple of years ago with Vela, we were very excited about that at the time we.

Not only mentioned that it was at a rent that was better than pre COVID-19 at a time when people were still very concerned.

But we also thought it was a healthy spread and made all the sets in the world.

<unk>, we're still working through a bunch of its design decisions.

And I give our leasing team credit because they were aware of several retailers.

Both retailers looking to relocate but as well as new retailers coming into the Soho market that we're interested in this space and they were able to negotiate a termination at a fair price with the payback period will be very short.

And then signed a very accretive lease.

That doesn't happen every day.

But those kind of opportunities tend to show up in places like Soho.

Where the rebound and rents have happened quickly at a time when as Stuart mentioned the overall narrative is still negative so I credit our team with creating that incremental close to 100 basis points of growth.

And we're working on other situations as well again, no promises as to when it shows up in which quarter, but when you have a rebound like that.

<unk>.

We spent a lot of time, making sure that we're positioning ourselves for it.

I'll get into the acquisition market.

Conversation for US later in the Q&A I want to give some other people.

To ask their questions.

If I can follow up perhaps.

With.

On the funds I noticed that you.

You acquired an asset in Tampa.

How much more dry powder do you have and remind US again I believe it's end of the third quarter or certainly before the end of the year that you have to invest that do you think all of your.

Dry powder will get used up before before that goes away.

Yes, we do as it relates to the existing patent dry powder to fund five.

And so I don't think it will go away I think it will go to good use we're seeing just enough opportunities and then as I mentioned before to the extent, we see additional opportunities just because it doesn't fit into the existing investment of <unk> five we're going to find good ways to do those as well.

Yeah.

Thanks, Ken.

Sure.

One moment for our next question.

And our next question will come from <unk> bin Kim I'm curious your line is open.

Hi can you hear me.

Yes.

Morning.

Okay.

Hi.

So you guys made.

Some favorable remarks about street retail picking back up I was wondering if you can just make those comments a little bit more tangible to us and maybe try to quantify.

Define how much improvement you're seeing from tenants.

Sure. So and there is two ways that we think about this one is tenants long term sales trajectory call that tenant health.

And then the other is obviously supply and demand and tenant demand.

And Soho is just one example.

But also Stuart and Jon talked about in Melrose place.

The fair market re set in one case, 20% in another case, 50%.

But whether you use a 45% increase in Soho over two years or a 50% increase in Melrose place over five years, you are seeing a very nice trajectory now remember there's contractual rent growth of three.

Percent to 4% on top of those spreads.

But in general I think what you will start reading.

In the next year or so because it takes a while for the narrative to change is that market rents in these must have markets have grown disproportionate to many of the other markets in our suburban portfolio or otherwise that's after several tough years.

But it is a very healthy and welcomed rebound any rebound frankly that is in excess of what we had anticipated.

Okay. So when you think about that as it pertains to your Soho lease rate of 81% or M Street at 89% both of which saw a nice pickup in leasing.

I guess.

How does that strengthen demand translate into wendy's.

Retail quarters can see.

Much more occupancy is that at 24 event I'm just kind of curious about how long it takes.

What's frustrating in all cases is the amount of time it takes from that point that a retailer says they want space to the point that they get open some of it is within our control some of it is within the retailers design control.

And so we are actively negotiating.

Every space and every one of these Carter. So my guess is it's a 24 event I am not changing John guidance that he walked through in terms of rent commencement dates or otherwise.

But if you were looking.

For new space in Soho as a retailer you would find most of the spaces are spoken for and you got to move fast. So my guess is there's active dialogue and it's not just so we're now thankfully seeing Madison Avenue as well.

There is active dialogue on most spaces, our portfolio should see that as well.

Okay, and when you say Madison Avenue are you talking about the Sullivan center type of area.

No Madison Avenue in New York City.

Brian Madison Avenue, Thank you guys sure.

Our next question.

And our next question will come from Todd Thomas of Keybanc capital markets. Your line is open.

Hi, Thanks. Good morning first question I guess just quickly following up on on Soho and the lease transaction that you discussed at 565 Broadway are you seeing other opportunities across the street and urban.

Portfolio to maybe get back space from tenants that are.

In place paying rent and operating where they're either underperforming or looking to close and in situations where rents have now risen.

Where you could profitably backfill and then sorry, if I missed this but whats the whats the timing for the commencement at $5 65 Broadway.

Yes, I'll take the easy one first so it'll be in the first quarter of next year.

So first quarter 2012.

And now yes, Todd we are constantly reviewing.

Both also for a tenant health perspective. So this is not just about capturing upside. This is also about curation.

And making sure we have the right tenants and the right locations and when we don't.

Making these shifts now we do that in the suburbs as well, it's just much more difficult much more expensive.

To replace the T J maxx with Burlington coat and it kind of spread we need there to make it impactful just.

Just had a different outcome, but tenant review and then the ability to profitably monetize on it requires.

Both strong tenant interest thankfully, we saw that in the case of Soho.

Rental increases and the ability to capture those so the short answer is yes. The leasing team is actively.

Doing that it's the pivot that has occurred over the last 12 months.

After several tough years, where we are seeing market rent increases and you will see them too. This is not just unique to Acadia in these key streets.

That is enabling us to meet the needs of those retailers who want to get in.

And then when retailers say you know what maybe this is not the right space for us being able to let them out as well.

Okay.

And then.

Second question, John can can you discuss.

I'll provide a little bit of detail around the impact.

In the 'twenty three guidance and also maybe discuss some considerations around the model for 2024.

As it pertains to 664, and <unk> 40, North Michigan Avenue, just in terms of the lease explorations at those assets and tentative plans around the redevelopment of those of those assets.

Yes, so so Todd in the December 24, that's the easy one that are both of them are actually pretty pretty are very straightforward 24, we're not assuming that we get get those leased up those are very concerned really pushed out into the later years, what I would say in Chicago and again this isn't changing my model, but we are seeing signs of life.

Tenant interest et cetera.

That's showing up but thats not one that I have in my model and our model that 30% to $40 million has has an incredibly sober expectation of what rents we get there, but similarly, we're seeing across other markets chance to beat that.

In terms of this model, it's the leases start rolling off in back half of the year and into the.

The first part of next year, but I would say with.

The growth we have from the signed but not opened and I also wanted to highlight that the signed but not open is actually double what the $6 eight I put in there given the other pieces of that as.

As Ken mentioned in his remarks, that's going to offset this this role and we're continuing to believe that we should be able to produce <unk> growth that's going to be our same store growth.

Okay.

That's helpful. So yeah I hear you about the <unk> pipeline, but for these two assets is there.

Is there any cost capitalization that that will we'll begin or that will offset the ABR coming offline as we think about 2024.

Youre going to make me dig out my CPA again, so Todd unless we are shoveling the ground doing active construction work, we are not anticipating capitalizing in our model any costs for the balance of this year and stay tuned for next year, we haven't put out guidance, but.

Conservatively My model does not have.

Flowing through whatever cost of the asset to the bottom line. So anything we would would you relate to that would be incrementally additive to our <unk>, but right now that's not an or.

The balance of 'twenty, three guidance and as I'm thinking about that statement, where we should have growth in 'twenty, four and thats not assuming.

Were capitalizing all of the other costs associated with it.

Alright, great. Thank you.

Thanks.

One moment for our next question.

Okay.

And our next question will come from Craig Schmidt of Bank of America Securities. Your line is open.

Hi, this is with Deutsche <unk> on for Craig.

I just wanted to clarify.

Apologies if I missed it.

The exact credit loss impact.

Just the assumptions for reserves further.

For the full year.

Percentage of revenue again.

And how much of that was recognized last quarter.

Yes, so <unk>, we're in the call. It the low 200 range of of revenues for the year and we've maintained I think we were at 270, we've maintained that heightened reserve for the balance of the year so call it.

Low two hundreds is a percentage of revenue against the six months revenue and we have a heightened we've kept that in our numbers. The 275 that we put out at the beginning of it.

Okay, great Thanks and.

Just on the you mentioned earlier on.

5% same store NOI growth achieved this quarter.

Ill.

That also add.

Factors then.

Still headwinds from prior periods.

Collections and.

We can see that impact outlined in the supplement.

Just curious.

I guess, if you could.

Quantify more of that impact.

How could we see that.

Start to burn off going into the.

The rest of the year.

Maybe maybe if you could just discuss expectations around that level of impact.

So I think the first half we really saw the credit loss start to burn off first half of last year. It trickled in so lazy I would think that that headwind is largely behind us which is in my remarks.

I suggested that we are trending towards the upper end, if not not exceeding it is that's.

That's largely behind us.

Okay, great that's it for me.

Thanks Louis.

One moment our next question.

And our next question will come from Craig Mailman of Citi. Your line is open.

Hey, good afternoon.

Maybe I just wanted to drill into the $30 million to $40 million of NOI growth expectation that you guys.

Talk about here in a 75% of that is coming from.

Street, and urban but just given the positive commentary around demand and rent growth.

Could you walk through maybe some of the basic assumptions there on.

Kind of absorption timeframe versus what you may start to see given the demand.

Some of these unanticipated bumps like what Youre getting.

At Broadway and just kind of give us a sense I mean this is through 2026.

Should we expect I know John you said, there is potentially room above this but at least from.

Timing perspective, I mean do you.

You guys anticipate that this could come sooner than in 2026, given the momentum that youre seeing on the demand and rate side.

Let me first address this kind of bigger picture John while you gather your thoughts because we have in prior calls kind of walk through each of the different drivers of the 30 to 40, but just big picture.

And Craig Youre spot on we are seeing improved retailer demand we.

We're seeing rents coming in higher than we expected.

Counter balancing that.

It still takes a long time to get tenants open.

And <unk>.

Economists, which I am not one are still forecasting a recession at some point in the next 12 months. So we're going to continue to stay very focused on what we think will be exceptionally strong growth. If we simply stay on track and we have certainly given indications of ability.

<unk> to beat that more so on the rent per foot.

As opposed to timing because timing is very dependent on a variety of issues.

But with all of those pros and cons in mind, John that key drivers and we will have this in our investor deck, we have had it in the past, but the key drivers of that 30% to 40, yeah. So so Craig key drivers it again of that $30 $40, starting with just the contractual growth. So we have the contractual growth which <unk>.

Average to above 2% over the over the next several years.

That's that I think as we that's the easier part in terms of lease up so in terms of and this is net lease up and this is after we have a well known rollovers that we have been talking about for the past couple of years.

The net lease up in the earlier years of the model.

Where we have.

The north, Michigan and the bed Bath Rolling that is going to in terms of 24 24 is going to be in terms of the growth period, while still we are seeing that north of the 5% 24 is going to be one where thats going to be where that we're going to feel the offset from the rollover, but significantly somewhere happening. So I would say if I had to do and we're not giving too.

For guidance that 24 will be toward the lower end of the 5% to 10% as the leases that we've already signed are going to offset the rollover and then I would say 25 is really the year of acceleration Craig, whereas as we were seeing the impact of the rollovers behind us with the lease up that we still have in front.

US in getting the rent Commencements up I would say, if anything where I get more comfortable on.

My commentary around growth upside I think it's in 25, I feel much better about than I would've last last quarter. So thats lease up is a good component of it and then a handful of redeveloped redevelopment. So when I say redevelopment. This isn't a redevelopment that we're not assuming that we're doing ground up for incurring capa.

So these are a starting with <unk>.

City Center in San Francisco already leased whole foods that we've spent the capital on.

No a several million dollars of growth there that we think shows up by the time they get their permitting and opening is a 25 events. So a little bit of a redevelopment. That's that's that's part of that but not one where we don't have as capital redevelopments in there that would be incremental to the 30 to 40.

$40 million and then the last piece of it is fair market value and alluded to this in my remarks.

We did this $30 million to $40 million assumption that was a spot estimate of market rents at that point in time. So when I went to our leasing team wasn't saying hey on a very good day and multiple.

We rent it was guys. If I said you have to get this lease normal course, what would it be and this goes back a couple of years. So Craig that's where we're seeing the upside of this is that we are beating that.

Those those projections and that's where I see that upside happening and again I think thats, a 25 event as we get to the 88% that we have at least in Soho, we have some great space and in the Gulf Coast of Chicago that that's where I see the upside really kicking in is from from these market rates both in terms of total.

Increasing the $30 to $40 million, but also but also timing so.

Why don't you shut it down and there are no its rollout at you, but as Ken mentioned, we will lay this out more articulately than our in our Investor books.

That's really helpful. I'm, just kind of getting at the fact, you guys have a different I would differentiate strategy right and these assets relative to just traditional open air right. The capex as a percent of NOI is lower I'm, just kind of curious is that trending even lower given that.

The rise in branch and it just sounds like one of the issues.

That has been as your same store has been good it hasn't necessarily translated to.

Commensurate <unk> growth given your leverage it sounds like by 25, that's when the <unk>.

Switch flip here and you should start to see that commensurate <unk> growth relative to your same store growth is that a fair way.

To think about this given.

Proportionately.

I'd say that we hope it <unk>.

Sorry, I was talking over there, but I would say I would I would hope to say that.

We're going to start seeing that in 'twenty, four certainly but 25 absolutely.

Okay, great. Thank you.

One moment for our next question.

And our next question will be coming from Carlos can swagger of Jefferies. Carlos Your line is open.

Again, Carlos your line is open.

Oh, Hey, Todd this is Linda.

Linda.

Hi.

My question was on.

City point.

Discussions with your partner progressing and at what point would the decision need to be made.

I think it is going to be a multiyear process Linda as John walked out walked through is the delta between our current ownership, 60% and 100 in terms of the.

Earnings positive earnings impact is 4% versus 6%.

So it's not like there's this huge difference I would expect some of our investors are going to stay in long term and others will cash out.

John also mentioned not a significant cash outlay, so our quarter to quarter it might have some impact.

Thank you.

Really should be thinking about this in a multi year context over the next 135 years and we will keep you posted as to that more importantly.

Is the positive leasing traction that John mentioned and getting that open because whether we owned 60% of our 100%. It's an important asset and it is nice to finally see this tailwind.

Thanks, and then can you talk about what drove cash recoveries above expectations this quarter.

Yes, sure within our funds under so we had a couple of you were able to collect on some some old accounts within our our funds to the diligence of our legal team. So this was really really really focus on our funds not not within our core and certainly not within the same store.

Thanks.

Okay.

And one moment our next question.

Yes.

Our next question will come from Michael Mueller of J P. Morgan Your line is open.

Yes, hi.

Apologize if I missed this at the beginning of the call but for the <unk>.

The acquisition opportunities that youre, starting to see more of are.

Are they predominantly in the funds or are you seeing somewhere the math is working for.

On balance sheet acquisitions.

So in.

In terms of opportunities out there I'd say, it's more across the board then just when we say funds. The what we've been doing the last several years in terms of fund five.

So we're starting to see opportunities in street retail, we're starting to see opportunities. We're continuing to see some opportunities in power Center, how we fund them, Michael and making the math work is either dependent if we're trying to do it on balance sheet, it's probably in conjunction with capital <unk>.

Cycling because our stock has gotten beaten up and it's hard to make that math work on just a straight up fashion.

But we have over the cycle always found ways that theres, good accretive opportunities to either capital recycle or leverage our institutional relationships.

Let's see where things play out I do give our team a lot of credit because they are beginning to see opportunities, where theres significant rental growth and yet the market is not there yet so where we can see those type of outsized opportunities.

My job, it's John's job to make sure we find the right way.

Two.

Add them to our portfolio, while not increasing our leverage and making sure that they are accretive.

And that math is always tough at this point in the cycle, but theres also outside returns at this point in the cycle.

And that's why we're kind of looking forward to figuring this out.

Got it okay. Thank you.

Sure.

And one moment for our next question.

And our next question will come from Paulina Raws Schmidt of Green Street. Your line is open.

Good morning.

I hope I didn't miss.

Regarding the softball.

Net effective rents.

Paul will claim strengths in household for asset.

Okay.

The point of your question is the net effective rent of this compare to the other assets. The other assets in the name I'm trying to have a sense of the mark to market.

Yeah, So I'll start with a limited cost.

EMEA, a little bit easier and I would say that the the cost it in my remarks, it's under under a year and this is a a 10 year lease so.

Tenure.

From a payback so we get payback within a year. So I would say mark to market can maybe help you out I think as we think this will go to the rest of our.

Portfolio, but.

Yes, I'm going to say, how we extrapolate this to our two week.

We picked up.

About 45%.

The net effective was very similar to that because it's not an expensive lease as opposed to in the suburbs or.

By contrast, we celebrated a few years ago getting back a kmart in Westchester putting in Bj's.

The net effect of incremental gain and this one lease is very similar to our share of that large re anchoring in westchester. So the net effective gain.

Is <unk>.

Just under $1 million and that feels pretty darn good that 45% increase in market rents and this is our best practice, because we signed at least two years ago that 45% over 24 months is a pretty clean number there is no real cost movement.

So whether you say rents have increased by 40% net effective on that corner 42, I think that's all open for debate, but it's a meaningful rebound.

We are starting to see in multiple locations and that makes us feel pretty good final point around that.

There were three tenants vying for this space.

We can only accommodate one in this location. The other two are not going to go home, they're going to go find other spots in Soho. So I think youre going to see this continued trend.

And it's a very nice healthy rebound I don't think nor am I, even encouraging us to believe that you could see this kind of market rent growth for many many years that wouldn't even be healthy.

But it is very encouraging after several tough years to see a rebound like that.

Yes.

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