Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Q2 2019, Acadia Realty Trust earnings Conference call.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your telephone.
As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference Ms. definitely Nelson Ma'am you may begin.
Good afternoon, and thank you for joining us for the second quarter 2019, Acadia Realty Trust earnings Conference call. My name is definitely Nelson anime and in turn in our Finance Department.
Before we begin please be aware that statements made during the call are not historical may be deemed forward looking statements within the meaning of the Securities 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 July 20, Threerd 2019, 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 Acadias earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.
Now it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.
Thanks estimate great job.
Good afternoon everybody.
I'd like to start with a overview of some of our longer term goals and the drivers of growth for our business.
As well as then touch on how our solid second quarter results.
Reflect on that progress in advancing those goals.
Then John will discuss our quarterly results in more detail.
As well as our forecast and our balance sheet metrics.
Then finally, Amy will discuss our fund platform.
And our progress on that front.
As we've discussed on past calls there are a few key drivers of growth for Acadia.
First.
Comes from our core portfolio, where there are two broad drivers of long term net asset value growth and earnings growth.
Most importantly comes from the internal embedded growth in our core portfolio driven by lease up of some key vacancies.
Contractual growth.
And then a few redevelopment.
And these should combine to enable us to deliver.
3% to 4% annual and NOI growth.
From our existing core portfolio for the foreseeable future.
As John will discuss our second quarter results are consistent with this thesis with same store NOI growth coming in at the high end of our internal goals and we're also making continued progress with our key Redevelopments, most notably is city center in San Francisco, where we're working through the municipal approvals for adding whole foods to the property.
And then the leasing of our shop space is also beating our internal estimates.
Then complementing our core internal growth is the ability.
To periodically add properties to our core portfolio when the stars aligned.
The requirements and our goals here are pretty straightforward the acquisitions have to be accretive to net asset value.
Well as to our long term earnings growth and then they need to be consistent with our focus on street and urban properties in the key must have markets in other words.
These acquisitions.
Should have the ability to drive long term rental growth that is in excess of the current 3% to 4% growth embedded in our existing portfolio.
Now these acquisitions are not ignoring the fact that the retail real estate market is still facing significant challenges.
The highly disruptive separation of the haves and have nots amongst retailers, it's still playing out.
But on a selective basis, we're beginning to see a rebound.
Where the retailers are emerging.
We are reemerging, they're recognizing and appreciating the benefits of a physical location for reduction in customer acquisition costs.
Reinforcement of their brand.
And then most importantly, more profitable omnichannel execution.
And what our retailers are telling us.
Is that they are most focused and most passionate about their key locations in the critical cities and the critical markets that continue to disproportionately attract the young well educated well employed customer.
Thus, we are beginning to see in select markets and with careful analysis, what we have described as a bumpy bottom bumpy.
Because we can't ignore the challenges that our retailer space, nor the vacancies on many great streets.
Lumpy because we recognize that we are likely at the late stages of the economic cycle.
While still in the early stages of the future retail recovery.
But bottom because in many of the key corridors. We're we're active we're now seeing tenant showing up.
And showing up with more enthusiasm and clarity today than one or two years ago.
The bottoms are only obvious in hindsight.
And we won't create shareholder value by waiting for the Wall Street Journal to say that it's safe to go back in the water.
Thankfully.
We're seeing this rebound even in markets, where there is still significant vacancies such as our retail adjacent to the Carlyle Hotel on Madison Avenue here in New York.
After a quiet 2017 and 2018, we signed an important lease with Gabriela Hurst.
Than earlier this year with Monica Vinay later.
And then over the last week, we finished our final lease with all of our Brown a subsidiary of Chanel for our final vacancy at that property.
In each instance.
With improving economics.
Now some of this bounce on Madison Avenue might be due to the meaningful decline in rents over the past few years.
But this positive trend.
It's also playing out in other markets, where rents have not been as volatile.
As we have discussed on past calls on armored Armitage Avenue in Chicago, where our acquisition team has been able to acquire a nice concentration of buildings and our leasing team has been able to attract new emerging brands, while rents are growing in excess of our goals. The street is now dominated by digitally native retailers that started with Warby Parker and bonobos.
And then more recently, we added all birds and outdoor voices and last month, we leased our final vacancy there to a new exciting retailer lively.
And this activity over the past two years.
Has driven compounded annual growth of market rents by about 20%.
Then when we think about the retailers likely to populate our prospective acquisitions.
They will continue to be similar to the key tenants in our core portfolio today, a blend of necessity and value based retailers such as target or TJ Max.
But then also new emerging brands.
We're making sure that we're owning the kind of properties that are critical to great more established retailers, whether they be whole foods or Lulu lemon.
But also newer retailers, who recognize that physical stores.
Our a critical driver of their growth and their profitability.
And our team is ensuring that we are getting a significant portion of these retailers attention on those streets.
And those markets that matter.
What we have found.
Is that by having the right locations in the right markets.
Then combined with the strong tenant relationships and market intelligence that we have.
And then being able to own a concentrated cluster of buildings and use our team's capabilities to cure rate with the right mix of tenants, while that creates a powerful portfolio a portfolio where the whole.
Is more valuable than the sum of the parts.
We've successfully built this concentration on M Street in Georgetown.
On Rush and Walton and then Lincoln Park in Chicago, and now we're in the process of connecting the dots in Soho with our recently announced acquisitions on Green Street, and Mercer Street, where the leasing team can achieve the synergies it has elsewhere.
Also stars aligning means we have to have a cost of capital that enables us to compete with cash buyers.
And John will walk through how we have been successfully funding our acquisitions on a leverage neutral basis.
And finally stars aligning also requires sellers.
To be realistic.
And adequately motivated last quarter, we continue to add to our acquisition pipeline with sellers, who for a variety of reasons.
Our ready to move on.
Hopefully this growing pipeline then translates through into closed deals.
We recognize we're still early in the rebound process and we can afford to be patient, but that being said.
When the stars aligned.
We see no reason that we cannot double the size of our approximately $2 billion Street and urban portfolio over the next five years.
And with some appreciation in value, we should be able to own a $5 billion portfolio of street and urban properties in our current key markets of DC, New York, Boston, Chicago, San Francisco, and then perhaps a few other markets.
And we believe that this will enable us to continue to differentiate ourselves.
And drive our net asset value growth as well as our earnings growth.
Then complementing the growth potential from our core portfolio. The other key driver of our growth is and further differentiator is through our fund platform.
In the second quarter, we continued to add assets to our fund five portfolio. These acquisitions continue to be primarily out of favor suburban shopping centers that were adding on a very selective basis.
And we will discuss our recent transactions in further detail, but in short the driver of the thesis is acquiring very attractive yield.
Further enhance with nonrecourse secured financing, where we can leverage it on a two to one basis to create mid teens yield.
Our goal here is not.
Significant real in Hawaii growth.
We don't foresee significant net effective rent growth in this space and we don't need it.
To make our investments were nor do we need significant asset value appreciation.
Just stability.
If rental growth or capital appreciation shows up great.
But given the low interest rate environment and other macroeconomic factors.
These investments feel appropriate and they feel prudent.
In conclusion as supported by our strong performance in the second quarter, we see enough opportunities for growth that we can continue to drive solid same store growth in our core portfolio.
And begin to carefully and Accretively add assets to our core and then utilize our fund platform for opportunistic growth.
With that I'd like to thank the team for their hard work and success last quarter and I'll turn the call to John .
Thank you Ken and good afternoon.
As outlined in our release, we had another strong quarter.
We exceeded our expectations across all areas of our key operating metrics increased our full year earnings and same store NOI guidance and lastly between our core and fund businesses, we have nearly $400 million of transactions today completed or under contract.
Now diving into the quarter and starting with same store NOI.
As Ken discussed our second quarter same store NOI. Once again came in strong and ahead of our expectations at 4.8%.
As we had previously guided our street and urban portfolio led the way with quarterly growth in excess of 6% coming from a combination of contractual bumps lease up and mark to market along with some operating and other efficiencies. Additionally, our suburban portfolio also performed nicely and ahead of our expectations coming in at just over 2% for the quarter.
We are continuing to experience better than expected credit loss in tenant recoveries. This contributed over a 100 basis points during the past quarter.
As outlined in our release, we have raised our full year same store guidance to 3.5% to 4.5%.
So as we think about the variables that could impact our same store NOI results for the balance of 2019.
A couple of thoughts from a leasing perspective, we have already signed the vast majority of leases necessary to hit our 2019 expectations.
So unlike prior years, achieving our goals are dependent upon getting lease assigned a quite honestly, even the timing of rent commencement dates.
Keep in mind that as we had previously discussed our same store NOI metrics for the second half of the year, we will continue to be impacted by the profitable retenanting of H. and M. on State Street with Uniqlo, which we expect will commence late in the fourth quarter.
Our current model has us coming in between 3% to 4% for the next six months.
So the real remaining variable as to where we fall within the range involves our credit loss.
We have included a reserve of roughly 75 basis points of credit loss for the balance of the year.
While this is lower than we had initially projected it's consistent with what we have been experiencing over the past several quarters.
And based upon what we are seeing throughout our portfolio. We feel that we are in pretty good shape as we look forward over the near term and even better over the long term.
I would like to spend a moment to discuss how we think more broadly about tenant credit and the impact. It can have on our portfolio without a doubt disruption of Sina group Pier, one ER bed Bath and beyond will impact our short term metrics.
However, it's important to keep in mind, a few things in terms of FBR over 60% of the rents. We collect are located in high density Street and urban locations, including the south of market District in San Francisco, and North Michigan Avenue in Chicago.
These extremely dense urban locations have population and median household incomes well above national averages.
Which are the most important demographics that drive retailer demand.
Additionally, while we're always cautious to disclose our current view of market rents on a given space.
On average the vintage of these leases are in excess of 12 years old.
So while tenant disruption will have short term quarterly implications. We are confident that not only will strong retailer demand exist, but more importantly, a recapture of the spaces would be a profitable experience.
So in addition to the strong same store growth, we have seen for the first half of the year, along with an optimistic outlook for the balance of 2019, we reaffirm our projection of maintaining 3% to 4% annualized growth inclusive of redevelopment over the course of the next several years.
Additionally, and as I will discuss in a few moments our most recent acquisitions or further accretive to this growth as we anticipate a 5% CAGR over the next several years.
Now moving on to rent spreads as outlined in our release, we reported nominal conforming new leases.
Consisting of a single in significant suburban lease.
Given the strength, we're seeing in our results and as we look forward. This doesn't provide the full picture of our leasing efforts.
The vast majority of our second quarter leasing activity involved nonconforming leases as we profitably split and reconfigured space.
I want to provide some color on these leases they represented approximately 50000 square feet or 100 basis points of occupancy.
Generating approximately $1.9 million at annual base rents at an estimated cost under $30 a foot with a weighted average lease term of approximately 10 years.
A majority of these nonconforming leases came from our street and urban portfolio.
And included Monica Vinay later on Madison Avenue lively on Armitage and Reformation on Wall Street.
These three leases alone will contribute roughly a $1 million of annual NOI and as Ken highlighted not only did these leases bring us the full occupancy on these key streets.
We captured double digit rental growth during the lease up.
Now moving on to earnings our second quarter came in strong and ahead of our expectations at 36 cents a share.
Included in the second quarter is approximately a penny of transactional income for the monetization of a fund three investments.
So notwithstanding the temporary dilution from the Prefunding of our acquisition pipeline the strength of our internal and external growth enabled us to raise our 2019 FFO guidance.
And we are seeing strength across all areas of our business.
Our projected core NOI.
Is anticipated to come in the high end of our initial range driven both by profitable leasing and credit experience along with the accretion from external investments.
And as Amy will discuss profitably to pulling fund dollars, enabling us to earn incremental FFO from both the NOI and the related fees from owning and overseeing these investments.
As outlined in our release, we broke our FFO guidance into two buckets AFFO before and after transactional activities.
FFO before transactional activities is our recurring earning stream, which as I just discussed as coming in above the high end of our initial range.
The transactional component of our FFO typically represents 5% to 10% in any given year.
And our updated guidance, we are projecting 10 to 12 cents of transactional items.
Of which roughly eight cents has already been recognized.
Some of the transactional items that we had initially contemplated could move into 2020.
I now want to spend a moment on our on our recent core acquisitions based upon the pricing we are seeing and our current funding cost we are anticipating approximately a penny of FFO accretion for every $100 million of core investments that we put to work.
As Ken discussed we are now under contract to acquire seven properties in Soho at an aggregate cost of just over $120 million.
Of the seven Soho properties three have closed at a cost of approximately $50 million with the balance expected to close in phases over the next several quarters.
These assets are projected to generate a 5% CAGR over the next several years through a combination of contractual growth along with some mark to market opportunities.
The Soho portfolio has an average remaining lease term of approximately six years.
In terms of funding we have effectively funded on a leverage neutral basis, both the purchases to date, along with the remaining assets under contract through the $75 million that we raised under our ATM at an average gross issuance price in excess of $28.50 per share.
Now moving onto our balance sheet. It continues to remain exactly where we want it specifically our leverage profile.
Borrowing cost and our maturities.
We have no maturities for the next several years and Furthermore, given the low rate environment and flattening of the yield curve. We continue to lock our interest rates through the swap markets whenever we have an opportunity to hedge our exposure.
In summary, the strength, we saw earlier in the year has continued and our outlook remains strong.
Our business is well positioned for continued growth with a strong and growing core portfolio, along with an increasing number of accretive investment opportunities with that I will turn the call over to Amy to discuss our fund business. Thanks John .
Today I'll review, the steady and important progress that we continue to make in our fund platforms by fix sell mandate.
Beginning with acquisitions, we are pleased with our current transaction momentum.
During the first half of 2019, we completed approximately $190 million of acquisitions of which approximately $140 million were completed during the second quarter.
This compares to approximately $150 million of volume for all of 2018.
Since the beginning of this year fund size has invested approximately $175 million in four properties.
All for our open air shopping centers, and non Prime markets, and Utah, Florida, Rhode Island and Connecticut.
We have therefore, our high yielding that is entry cap rate of 8% plus.
In general we've been able to buy these higher yielding properties at a significant discount to replacement cost.
Since cash flow stability is key to our strategy.
We are extremely focused on co tenancy provisions and metrics such as rent to sales and rent to market.
With leverage these investments should deliver an attractive current return, enabling the fun to get most of the total return from cash flow impact. We are currently clipping an approximate mid teens with Capex return on our existing fund five investments.
And when it's time to sell our view is that the yield starved for capital markets will return to the stable assets and create an attractive exit opportunity far finite life fund.
In addition to these higher yielding suburban shopping centers.
During the second quarter fund five also made a value add investment, which was de risked by some p. leasing activity.
Overall fund side has made fewer value add investments than originally anticipated make no mistake, we have and will continue to carefully underwrite potential value add opportunities.
But while some value add opportunities are starting to pencil headwinds remain most significantly construction costs.
And full scale development remains an attractive on a risk adjusted basis.
Looking ahead, our fund size acquisition pipeline exceeds $100 million of high yielding shopping centers.
Our frustration here has been a high volume of deals that sale our screening process.
Regardless, we remain selective and to date, we've allocated about half a fund side capital commitment and has two years left in the fund's investment period.
Turning now to dispositions in June and four was fully repaid on a preferred equity investment that it made into congo's West loop in February 2016.
Earning a 16% internal rate of return and a 1.7 equity multiple.
This $15 million structured equity.
Investment enabled fund four to participate in an interesting retail redevelopment and a next generation Street retail corridor, while providing downside protection from construction cost overruns and fluctuations in market rents and a still experimental retail corridor.
Turning to our existing investment in July our new Lemon opened to much fanfare at 938 West North Avenue in Lincoln Park Chicago.
This is a super sized store that includes new elements beyond shopping such as a restaurant workout studios and meditation space.
And that city point in downtown Brooklyn, since the beginning of the year, we executed leases for 30000 square feet of space.
Of which 32000 square feet were executed during the second quarter.
On the upper levels be signed an 18000 square foot office lease with and why you Dental school and on Prince Street, and the concourse level, we signed a total of three leases aggregating 20000 square feet.
This includes leases with Casper as well as Mcnally Jackson independent event, driven Buck store that is operated on Prince Street in Soho for the past 15 years this will be their third location.
These stores are anticipated to open between labor day and year end.
Regarding our lease up strategy for the balance of city point Street level Availabilities, we remain focused on continuing to cultivate an eclectic and experience on merchandise mix to complement our food entertainment and value oriented anchors.
In conclusion, we had another productive quarter in our fund platform, we continue to execute on our opportunistic and value add investment strategy monetize our embedded profit and create value within our existing fund portfolio.
Now now we are happy to answer your questions.
Ladies and gentlemen, if you have a question at this time.
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Our first question comes from Craig Schmidt with Bank of America. Your line is now open.
Great. Thank you.
I Wonder if you could spend a little time on other potential opportunities to where you could pursue the clustering strategy.
Sure.
So simply clustering assets, Craig on the wrong card or with the wrong tenants I am not sure would accomplish a lot.
But there are a handful of markets that were currently active in.
And then there are several others that weve certainly been observing over the years.
So when we think about our activity in New York, It will be where we see tenants gravitating to first and foremost would be Soho. There are some markets in Brooklyn that are interesting.
And a couple others in New York City, but I'd say first and foremost.
Would be so.
In Chicago, we like the gold coast were active on Rush and Walton Oak Street could also present an opportunity then in San Francisco. There are also two or three other markets that we are spending some time on so it's really a matter of.
Listening carefully to our retailers understanding where the new emerging retailers want to show up.
Ideally with a combination of also strong existing retailers.
Being able to acquire enough density of buildings, preferably contiguous which is what we'll be doing in Soho.
But at least close to each other which was the case at least when we started out on Armitage Avenue in Chicago, So that the retailers the shoppers can.
All work together.
And enjoy a vibrant shopping experience and what we are seeing more so today I think than ever.
Is that that confluence really assist so wide variety of the retailers and we want to make sure we own enough on any given street.
That were benefiting from that.
And finally since that the digitally native may want to be clustered they actually want to be near the other names that are emerging.
Yes, and that's not a new concept.
Retailers wanting to be around other successful retailers has been around longer than Acadia has.
What is new this time.
Is these digitally native retailers for example, and it's not just the digitally native but in those instances when the shopper is going to.
Armitage Avenue and has a choice between all birds and outdoor voices, and but no Bose and unpack it and a variety of others. The sales that are generated from that street.
Are not simply four wall EBITDA, it's also attracting and familiarizing the customer with those brands and then the customer can choose when and how they want to shop, when they want to accept delivery and a variety of other.
Instances.
That type of retailers also then attracting food.
Transacting fitness.
And you're seeing that clustering benefit a wide variety of users and our goal is to capture as much of that as we can Amy discuss the new concept that Lulu Lemon is executing on North Avenue in Chicago.
Where we put them in the that's a prime example of the shoppers are there we need to make sure that they are getting as well rounded it experiences they can.
Great and then just a quick question on Capex.
It looks like it may be trending slightly less than than the year ago.
This is consistent with your expectation.
Given the second half.
Hi, Craig, Yes, so I would say that in in terms of a trend.
We did a bulk of the leasing we talked about last year, we had $8 million worth of leasing to accomplish which we accomplished last year, which created a heightened capex burden and.
And currently as we're releasing a lot of it is.
As we highlighted in our release Street, and urban which isn't a lot of square feet and from a cost perspective, and I laid out the cost of my remarks was coming in around $30. A foot. So yes, we are seeing those costs, becoming particularly with the spaces, we have to lease in a much more.
A much lower level.
Great. Thank you.
Sure.
Thank you and our next question comes from Christy Mcelroy Citi. Your line is now open.
Hi, good afternoon, everyone.
Ken I appreciate all the comments that you made in the opening remarks regarding the uptick in leasing you've seen in your assets.
Just want to.
Hoping you can address you've not seen a great trend in overall sentiment around street and flagship Steve generally you've had.
Topshop filing you've had concerns around forever 21 and barneys.
Adder crombie clothing from larger stores and others.
You know talking about occupancy costs in the larger flagships, just being too high how do you sort of reconcile that sentiment.
And the negativity that's out there with regard to larger space on fifth Avenue, another tougher locations with your portfolio and what you own and how you're buying.
So I think that.
There are a few distinctions that are worth watching one is there is no doubt that the larger format users, it's a more challenging time.
Now whether that's due to the increase in omni channel, where retailers can do more with less and thus there are fewer.
Takers of large format space or other reasons I think it will take a while to understand but thats. Why we were very excited for instance, when we announce adding uniqlo and replacement of aging them on state Street, because its large format and those are the ones that do concern me more so in the instances of large format users I think you will see continued challenges.
Long term you have seen in many instances large format users retreat from some of these grey card or as an alternative uses show up even more profitably. So if I had predicted 10 years ago that.
Lord and Taylor flagship would end up being an office use and it would have been a profitable trade people would have thought I was crazy and now it's factual so do keep in mind that some of this.
Will lend to profitable alternative views, but thankfully for our portfolio, we have minimal large format and we're talking about smaller format locations in those instances, we are seeing a net increase in demand notwithstanding some of the retailers you just mentioned and there the way I would divide it is if you have a retailer who is struggling to drive their topline sales.
Throughout the country throughout the world.
Well there is no way to make the math work in more expensive flagship locations. If your sales are declining.
It's going to be painful and you can imagine that decision, making that's going on in the board rooms, where the bankruptcy courts et cetera, and in those instances the sooner they can get out the better for them and frankly, the better for the streets.
So.
Those tenants will retreat.
They should.
And what you're seeing now are.
Whether they are digitally native or emerging retailers, who used to count on other channels to drive their sales, but now recognize they need stores that the retailers were adding for instance on Madison Avenue adjacent to the Carlyle hotel, they're not digitally native but they are recognizing the importance of the stores.
And the same is true for the digitally native who while they are able to.
Achieve some level of growth online only when they start looking at their SCPA their cost per acquisition of customer when they look at Brandloyalty when they look at brand identity, they're seeing that having the right locations in these key markets is essential.
To their long term growth to their pathway to profitability.
And they are beginning to show up.
It's why I described it as a bumpy bottom it's why the narrative, we will continue to be negative because.
On its base some of those age old brands that we all grew up with their going away.
And people to have to get used to it.
There's still a lot of vacancy, but what we're seeing and it's purely anecdotal and it is purely attributable to our portfolio, but I do think it's playing out is what we're seeing is these new brands showing up.
Some other existing brands, who are ready to go back on off fence recognizing the importance of these stores and so over the next 12 to 24 months expect to see this shift for the smaller format stores, where retailers can open powerful locations in the right markets.
Profitably.
And.
Then we'll be talking about that.
In a year or two but in the meantime those.
Retailers that are filing bankruptcy will go away.
Thanks for that and John just wanted to follow up on your comment regarding bed Bath and tier one and as Sina and recognizing the nature of your portfolio an opportunity to raise rents on recapture if you look at that sort of watch for the closure how much of that Hbr is putting in that 60% urban urban street versus the suburban portfolio and bed Bath and pier, one specifically or two retailers that are actively trying to renegotiate rents lower are you working with either on restructuring anything in sort of what kind of risk is coming down the pike in terms of expirations for those guys.
Yeah. So so christy in terms of the 60% when I threw that number out of my remarks that was 60% of the rents from from those note. Those names are in and street and urban so if we look at it.
Thats a good chunk of that is sitting in San Francisco.
And that is not a space that.
They are looking for for rent relief on and same with the scene on North Michigan Avenue, which is 80% of our seen exposure also has not have not come to us requesting rent relief.
Okay. So nothing happening on any of those spaces and with regard to expirations is there any risk in the next year or two.
Losing stores.
Yes and of those locations now I don't think so and given that they havent come to us on the others don't don't anticipate.
A follow up from that in the next few years and there is.
There is a decent amount of term and all those leases.
Okay. Thanks for the color guys appreciate it.
Thank you and our next question comes from Todd Thomas with Keybanc Capital markets. Your line is now open.
Hi, Thanks, good afternoon.
Ken in terms of the investment opportunities that you're seeing in some of your existing.
Street, and urban markets like Soho and some of the other markets. You mentioned that you're observing are you are you seeing any larger portfolios or sort of chunkier assets come to market and would you contemplate a larger scale transaction, maybe a partnership or some sort of consolidated joint venture in the core portfolio.
So first of all.
We have not seen any large portfolios that are attractively priced.
To our expectations yet.
I say that with the following caveat is there have been some very large transactions on fifth Avenue that.
Folks are probably pretty aware of one private and public.
And Thats certainly were multi billion dollar transactions the combined could there come a point in time, where we team up with.
Sovereign wealth capital or otherwise to fund, some but that very possibly.
Right now, though our main focus is doing more of what we're doing.
In Soho, where we our clustering a bunch of assets. So I don't want to rule that out but that is not.
Currently on our radar screen in terms of other large portfolios I think we're in the early stages, but we are finding that sellers are being much more realistic 2019, and they were 2018, we are seeing just enough new data points as to where market rents are today.
So if you have a seller who is willing to be realistic about cap rates.
Realistic about where rents are today.
Then we get pretty excited because what our retailers are telling us.
He is at today's rents for the right locations.
For the REIT format size at today's rents.
They can get constructive and the thought that we're somehow limited to one or two or even 3% market rent growth. When the stars align what we have seen Armitage Avenue, what we're seeing elsewhere is a pretty decent bounce back. So hopefully there will be enough realistic sellers hopefully the stars as I described before we'll align because then for these write corridors, we would like to buy more rather than less.
But what I outlined Todd of doubling the size of that portfolio over the next five years I think would be the realistic expectation not over the next five months.
Okay. That's helpful and then.
You know in terms of so Ho specifically previously you said that you are underweight.
So how and it does represent less than 10% of the core portfolio in terms of ally.
You seem emboldened by by the activity you're seeing there.
How should we think about that can you help us sort of size up the potential longer term opportunity in that sub market in that context of of doubling the size of the street and urban retail portfolio over the next five years, I mean, where do you think so how should should be from you know.
In terms of its weighting within the portfolio longer term.
So all partially answer that question because I don't want to.
I don't want to put out a definitive number for one specific submarket.
In the past when I said, we were underweight, New York and so while it was because the pricing just didnt make sense.
Pricing defined as what our going in yield was what the procedure growth was and what our retailers were telling us was the growth potential in terms of their brands. So we were underweight because we couldn't find good entry points. If we can find good entry points Theres, No reason that New York, and probably Soho wouldnt be a.
Larger piece of our ownership than DC or San Francisco or Chicago, So, there's a fair amount of room to run.
Within this five year plan without getting specific as to so let me take a moment to explain the process, how we think about our acquisitions.
Has to be on a match funded leverage neutral basis, we have multiple different ways. We can access capital, but I'd say the most important thing is listening carefully to what our retailers are telling us.
Are these stores important to them are they profitable.
Do they have room to grow in those markets and where do they want to show up so we spend a fair amount of time, our leasing team, but all of us listening carefully to where do we think our retailers want to show up and it changes overtime as Weve talked even earlier on this call about some retailers who used to be hot now, they're not and they're leaving so we're we're trying to listen carefully to where might the future be so far what we're here.
Is the kind of locations that were owning that are attracting that right blend of retailers, both emerging and reemerging, whether its M Street in Georgetown.
Lincoln Park, Chicago, and now Soho, which is more expensive so retailers have to get their act together before they show up but we are bullish on so for that reason, but I don't want to make it sound as though.
We should own everything in Soho at the expense of some of these other good markets, we will have to see where the.
Sellers are most realistic where the tenants are most enthusiastic and the capital markets has to make sense.
And then thus stay tuned over the next year or two to see how the percentages change.
Okay, and just one last one John .
You ran through some details around the nonconforming leases signed in the quarter and also.
Spoke about the timing of the uniqlo commencement at stake in Washington in the fourth quarter.
Can you help us sort of bring some of the leasing activity back to that $8 million NOI bucket.
Which you said is now closer to 9 million plus.
In terms of how much of that.
Signed now and how much and NOI on an annualized basis from that opportunity did you realize in the quarter.
Yeah sure Todd So I think just as a as a reminder, we had in 2018 put out a goal of getting $8 million worth of annual NOI at least and as we announced a few quarters ago. We accomplish that goal in 2018, so sticking with the $8 million $3 million of that $8 million was reflected in our 2018 results and the incremental five is showing up in 2018 2019. So to answer your question all of the 8 million is currently.
Currently commencing so that gives us an incremental five over where where we stood if we look at that that pull up.
Of leases compared to the prior year.
Then when we think about the.
9 million. So we as we started started leasing and our expectations of where we thought we'd be and where rents have grown too. We had saw the 8 million growing to $9 million and with some of the leases that that both Ken and I mentioned on the call those are well along our way to getting into the into the $9 million and would start to see those showing up.
Potentially towards the end of the third quarter, but certainly by the end of the fourth quarter, we'll see those.
In our results.
The other thing I'd point out Todd as well maybe the last point on this is that if you look at where our occupancy currently is.
With with in addition to that the nine that we've signed were at just under a physical occupancy of 94%. So we have some incremental room to grow. So it's not as if were Don is that we still have some analysts some some occupancy that we could capture and some good spaces remaining in that that it's not there's still some some growth in front of us on just on the occupancy level.
Got it understood so, but the 5 million that you were expecting to show up and 19, how much of that.
I was in sort of the run rate I guess as of the second quarter here.
All of it so yes, all of the 8 million is up and running so they have the full eight and 19.
Three of the eight was in.
I'm sorry, the full eight is in 19 three of the eight was an 18.
Okay for the full amount.
So an incremental five or the prior year.
Thank you and as a reminder, ladies and gentlemen that Star then one to ask a question. Our next question comes from Vince to bone with Green Street Advisors. Your line is now open.
Hey, guys can you bring some provide some additional color on the new development on Wisconsin Avenue and then also help me understand why that property was included on the acquisitions paid its all the footnote, but just anymore clarity would be helpful.
Sure. It was a small ground lease addition to our partnership HM So not a meaningful amount of capital being deployed it is.
A good addition.
To that overall.
Portfolio on M Street, we own couple dozen buildings there and this was one that was available we want to see that the REIT retailer comes in.
But what I'd highlight in terms of on the capital outlay was well under $2 million that that we actually outlaid as as part of that so.
Not a not a big dollar amount in several years in front of us.
Got it and then on the just I saw there was something wrong with content Avenue was added development page is there any more color for you on the $30 million and spend what you guys are going be doing there.
Yeah, it's still it's still in the early stages of that so not not at this point.
Okay. Thanks, My next one's probably for Amy I mean, how much of all in borrowing rates change for non recourse mortgage debt now that treasury rates are much lower than they were late last year like have spreads widened back out now to treasuries are lower.
Yes, so I think certainly in which I'll take that so I think on terms of all in borrowing rates that I think we're still seeing.
And just given the drop in rates still beating where we expected to in terms of financing. So when we're doing the high yield we are capturing that on the bottom line, but I would say that I'm not sure the spreads have changed all that much albeit the.
Underlying index has so I'm not seeing a big change in spreads no budge in spreads Vince and then to the extent that we can reach out into the three to seven year.
Range its a meaningful.
Cost savings.
Do you think Thats had a change in buyer appetite or just demand investor demand for the higher yielding assets.
Given that our volume is in fact ticking up.
We have not seen a change in cap rates, meaning we've not seen cap rates move in.
We have seen competition over the last few years.
I don't think there is a significant increase everyone's still spooked about retail.
And as long as.
As long as we can be disciplined and careful about how we are underwriting through him what Amy discussed about co tendencies and rent to sales and the other metrics. We think we can find low growth, perhaps no growth, but stable yields in the seven and a half to eight and a half range, sometimes higher theres more risk.
But not really lower and we're not seeing that compress we're just seeing a.
Increased volume on our side.
Interesting. Thank you that's all I have.
Sure.
Thank you and our next question comes from Michael Mueller with JP Morgan. Your line is now open.
Yes, hi.
In terms of doubling the 2 billion dollar urban infill portfolio.
Can you talk a little bit about.
Hi level funding components within cash flow, how are you thinking about dispositions equity interest.
How we should be thinking about that over the next several years.
Sure.
As we have.
For the past 15 of our 20 years, we've been very disciplined to make sure that we are realistically match funding and that means probably.
Two thirds equity one third debt.
But recognizing that we have other avenues for capital we touched on a little bit earlier, Michael the potential to utilize joint venture capital that's always a possibility.
But there is enough complexity within Acadia as we all know it today that I am not jumping up and down to add another layer of complexity secondly, if the public markets are not there for prudent match funding.
Then we do need to keep in mind that our capital recycling.
Component of our business, primarily through our funds affords us a fair amount of capital that comes back partially its the equity Thats return from our pro rata share in a given fund investment but also since these fund investments are two thirds levered.
Our net debt effectively is reduced as well disproportionately from any sales. So thats also a portion.
But I don't want to understate the importance of one form or another of equity I do not envision this growth being driven by us leveraging up.
Historically, we have found a certain percentage of sellers are interested in OPE units.
In the 2012 to 2014 15 period, when we were growing street assets about 20% of the transactions had OPE units involved so thats also a possibility.
But this is a.
Five year goal, we were I simply wanted to lay out we could double the size, we could have meaningful earnings accretion NPV accretion provided the stars aligned.
And we will check in every year or so to see how were doing relative to it.
Got it okay that was it thank you.
Sure.
Thank you.
And I'm not showing any further questions at this time I would now like to turn the call back over to Ken Bernstein for any further remarks.
Thank you all for joining us today and enjoy the rest of your summer and we look forward to speaking with you again in the fall.
Ladies and gentlemen.
Thank you for participating in today's conference. This concludes today's program and you may all disconnect everyone have a wonderful day.