Q3 2024 Acadia Realty Trust Earnings Call
The End
Speaker Change: Hello and welcome to a Radio Realty Trust 3rd Quarter 2024 earnings conference call.
Speaker Change: At this time, all participants on a listen only mode.
Speaker Change: After the speaker's presentation, there will be a question and an answer session. To ask the question during the session, you would need to press star one on your telephone. You were there and here an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press start one more and again.
Speaker Change: I would now like to hand the conference over to Alec Erson, Development Amolus. So you may begin.
Alagherenson: Good morning and thank you for joining us for the third quarter 2024 a Katie Real Detrust earnings conference call. My name is Alagherenson and I'm an analyst in our development department.
Alagherenson: Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meeting of the Security and Exchange Act of 1934 and actual results made different material leave from those indicated by such forward-looking statements.
Alagherenson: Due to a variety of risk and uncertainties including those disclosed in the company's most recent form 10K
Alagherenson: and other periodic filings with the SEC for looking statements speak only as of the date of this call, October 28, 2024. And the company undertakes no duty to update them.
Alagherenson: During this call, Management may refer to certain non-gap financial measures, including fun from operation and net operating income. Police, the Acadias, earnings press release, posted on its website for reconciliation of these non-gap financial measures with the most directly comparable gap financial measures.
Alagherenson: Once the call becomes over for questions, we ask you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue and we will answer as time permits.
Speaker Change: 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.
Ken Bernstein: Thank you Alice, well done, good morning everyone
Ken Bernstein: We had a ferry active and productive third quarter with a lot to discuss so let's jump in.
Ken Bernstein: As we've discussed on prior calls, there are three critical drivers of our business.
Ken Bernstein: The first is delivering continued strong internal growth most significantly, coming from our street retail portfolio.
Ken Bernstein: AJ Levine will provide more details on our continued success on this front.
Ken Bernstein: But as you can see from our earnings release, we had another strong quarter and have averaged over 6% same story on a wide growth for the past three years.
Ken Bernstein: Most important thing.
Ken Bernstein: We see this growth, continuing.
Ken Bernstein: The Second Driver.
Ken Bernstein: is maintaining a strong balance sheet, which provides us the liquidity and the capacity to thoughtfully grow our portfolio. John Gottfried will discuss these important steps that we've taken this year.
Ken Bernstein: to get our key metrics and our liquidity where we want them.
Ken Bernstein: and then the third drive.
Ken Bernstein: is to provide external growth through a creative acquisition, both with respect to our on-balance sheet of death sentence.
Ken Bernstein: as well as through our investment management platform.
Ken Bernstein: This third driver is kicking into gear so let me spend a few minutes discussing our progress on our external growth initiatives.
Ken Bernstein: First, we respect to our on-balance ed activity for our poor portfolio.
Ken Bernstein: Our goal here.
Ken Bernstein: is to add assets that are consistent with our highly differentiated portfolio dominated by high growth, street retail properties, and critical shopping carters.
Ken Bernstein: As we've discussed, we are focused on acquisitions.
Ken Bernstein: that are a creed of tarnished.
Ken Bernstein: A Creative Tenet Asset Value
Ken Bernstein: and that enable us to continue to deliver pure leading growth.
Ken Bernstein: Long after full stabilization of our existing portfolio. And after several years of the Read Industry in general, An Acadia specifically facing a challenging capital market backdrop for on-balance sheet acquisitions.
Ken Bernstein: Conditions have finally begun to shift.
Ken Bernstein: This is enabled us to move to offense.
Ken Bernstein: and allow us to amplify our focus on street retail properties in key must-have high-growth markets.
Ken Bernstein: Starting last quarter and today we have closed our under contract for a total of $270 million of acquisitions for a cohort folium.
Ken Bernstein: We have closed approximately 120 million of them with the balance closing over the next couple of quarters. I'll let AJ give more color on the leasing trends we're seeing in these carters, but here's a quick overview of the transactions.
Ken Bernstein: As previously announced, we closed on a four-property retail portfolio along the bleaker street retail corridor in the West Village of Manhattan.
Ken Bernstein: Over the last several years, Bleakerstreet has begun to emerge as a coveted land expot for many of our younger advanced contemporary brands and reflects the same curation, same fundamentals that we've seen in our other
Ken Bernstein: Hi Grove Street.
Ken Bernstein: We have an attractive going in yield.
Ken Bernstein: and the ability to significantly grow Rans overton.
Ken Bernstein: We have also expanded our Williamsburg assets by adding four buildings on North, sixth street in Williamsburg, Brooklyn.
Ken Bernstein: What we have seen in Williamsburg over the last several years, since our deadford Avenue acquisition.
Ken Bernstein: is tenant demand and tenant performance continues to grow.
Ken Bernstein: and Wooddaq Ralph, North Sixth Street, has emerged as a must-have corridor for leading retailers and Williamsburg.
Ken Bernstein: Our investment there is a combination of lease up and redevelopment opportunities combined with the low market leases that provides us with long-term growth and attractive returns.
Ken Bernstein: We have also acquired a three-tenant building that will further enhance our presence on Green Street and Soho with Lisa's substantially below market in arguably the highest demand corridor in Soho.
Ken Bernstein: This building is adjacent to the building we own on the corner of Prince and Green currently occupied by Dang and Austin
Ken Bernstein: This edition now gives us two contiguous clusters on Green Street.
Ken Bernstein: Lastly, we have approximately $150 million in assets under contract primarily in Georgetown and DC.
Ken Bernstein: and in Sopa. We anticipate closing the balance of these transactions early next year and we'll discuss them in more detail as we close.
Ken Bernstein: Terms of pricing while we're not going to discuss individual pricing of deals.
Ken Bernstein: These Day One, A Creative Acquisitions.
Ken Bernstein: Have an initial gap yield in the mid-sixis with a cash yield in the mid-five with compounded annual growth rates north of 7%.
Ken Bernstein: and growing to...
Ken Bernstein: A cash yield also north of 7% in the next few years.
Ken Bernstein: in terms of earnings accretion as we said in the past.
Ken Bernstein: Give in our size.
Ken Bernstein: Relatively small amounts of external growth can really move the needle. And that's certainly the case here.
Ken Bernstein: As we previously discussed, we had been targeting transactions that on a leverage neutral basis provided approximately one penny of earnings growth for every $200 million of acquisitions, with further growth then, upon stabilization.
Ken Bernstein: These $270 million of acquisitions are slated to meet or exceed that goal and should contribute over 1% earnings accretion upon closing and close to 3%.
Ken Bernstein: Upon stabilization in 2027 and 2028.
Speaker Change: Ben O'Wang with these on-balance sheet acquisitions, we expect significant long-term growth.
Speaker Change: Through some of our recently announced expansion plans for our court portfolio assets on Heedenderson Avenue in Dallas. I'll let AJ discuss this further in his comments.
Speaker Change: But we have patiently watched the demand for this card or grow over the last few years, and now is the right time to begin this expansion, which is penciling out to stabilize to north of an 8%
Speaker Change: Yield Arcoft.
Speaker Change: While we are doing this expansion in stages, assuming we do the full expansion is contemplated, with an incremental cost of approximately $100 million, this could contribute in access to 2%.
Speaker Change: and incremental long-term earnings upon stabilization.
Speaker Change: So this accretion was the estimated 3% accretion upon stabilization of the onvalent sheet investment I discussed sets us up very nicely.
Speaker Change: over the next few years.
Speaker Change: Then complimenting these on-balance investments, we're continuing to see opportunities in our investment management platform where we can leverage our institutional capital relationships for a broad of variety of investments.
Speaker Change: First, as we had previously announced in July, we completed a new acquisition in Tampa, Florida.
Speaker Change: of an open air community center for approximately $31 million. Recently, we formed a partnership with Cohen and Spears where we retained an interest in the investment.
Speaker Change: Plus retain the management as well as upside potential.
Speaker Change: Beyond this, we end a global alternative asset manager are very close to finalizing a potential investment for approximately 275 million dollars that would fall into the opportunistic bus bucket.
Speaker Change: and we'll give more color on that as it progresses.
Speaker Change: As for the accretion of the investment management platform investments.
Speaker Change: The metrics remain about the same as our onviolent down sheet investments. Meaning we expect roughly one penny per $200 million of gross acquisition value. But for now.
Speaker Change: We think it's probably more prudent to think about this bi-fix cell platform as a capital recycling vehicle.
Speaker Change: Where our current goal is to maintain approximately 2 billion in AUM.
Speaker Change: and maintaining a stable and profitable revenue stream equal to what we have today.
Speaker Change: with Maysee opportunities to grow this platform, but now just pencil and stability.
Speaker Change: So, look in the head.
Speaker Change: We remain very bullish on our ability to continue to add value.
Speaker Change: by driving internal growth.
Speaker Change: by maintaining a strong and flexible balance sheet.
Speaker Change: and by adding additional growth through strategic noon vessels.
Speaker Change: and New Investments, including on-balance-ed acquisitions that are consistent with our high-growth portfolio that we own today. A creation from redevelopment and expansions.
Speaker Change: of existing assets such as what we have begun.
Speaker Change: on Henderson Avenue and then also opportunistically adding assets to our investment management platforms.
Speaker Change: So before I turn the call over to AJ for his remarks, I'd like to thank the Acadia team for their incredibly hard work as we have been waiting not so patiently.
Speaker Change: for the stars to align.
Speaker Change: and this quarter they finally did.
Speaker Change: with Strong Internal Graph.
Speaker Change: and Solid Balance Sheet Matrix and now...
Speaker Change: Impact Philips' journal growth, we are hitting on all cylinders.
Speaker Change: with that I'll turn the call over to AJ.
AJ Levine: Thanks for joining us. So we have a lot to go over this morning, so I'll start with an update on internal growth, and we'll finish things off with an exciting update on our Henderson portfolio down in Dallas.
AJ Levine: So jumping right into leasing an internal growth, in the third quarter we signed a record $7 million in Core leases, and we've already exceeded the total volume of leases signed in 2023 with another quarter of leasing ahead of us.
AJ Levine: We've increased the S&O pipeline to $10 million, and with no signs of a slowdown, we have several more leases in advanced stages of negotiation.
AJ Levine: in terms of fundamentals.
AJ Levine: Our tenant sales continued to grow and remain well above where they were in 2019.
AJ Levine: and when we speak with our tenants, they're telling us that positive performance in relation to 2019 continues to outweigh any concern around short-term chalpenous and they remain focused on long-term growth.
AJ Levine: A direct to consumer or DTC, Rick and Mortar Strategy is priority number one for our retailers.
AJ Levine: that includes categories that may have historically relied more on wholesale and apartment stores like luxury, advanced contemporary, and aspirational.
AJ Levine: and that sentiment is reflected clearly on our high growth streets including Soho, Williamsburg, M. Street and Georgetown and at our newly acquired bleakestreet portfolio.
AJ Levine: DTC allows our tenants to better control the brand narrative and how they interact with the consumer. It allows them to better control pricing and have better control over which other retailers to cluster with to create the most productive ecosystem to drive sales.
AJ Levine: and with the data that's available to today's tenants, they are making informed, disciplined decisions around where to open stores and the rents that they can afford to pay.
AJ Levine: More than any time in the past, tenants know very clearly where their customers are and where they can operate a profitable store.
AJ Levine: A healthy tenet, along with a very favorable supply demand dynamic allows our leasing team to continue to improve the merchandising on our streets with more dynamic, higher volume tenants, which will in turn drive sales and overtime increase rents.
AJ Levine: We continue to watch this dynamic playout on streets like Armored at Javanu, where rents have increased 20% over the last year and 50% since 2019.
AJ Levine: In the third quarter on armamentage, we signed new leases with Levine Bakery and the contemporary fashion-tenant rails, both at healthy double-digit spreads.
AJ Levine: In terms of merchandising, Rails is just one of the many contemporary tenants.
AJ Levine: that have shown up in our markets like Soho and M.S.S. as they shift away from wholesale and towards a direct to consumer strategy.
AJ Levine: and Levine who has been a long-term tenant of ours in Williamsburg and has a presence on a number of our streets.
AJ Levine: will add a new F&B component to Armaditch and drive a new layer of traffic that will benefit the entire street.
AJ Levine: We've already seen it happen firsthand in Williamsburg, on M. Street and Georgetown on a new very street in Boston and elsewhere, and it's that depth of experience and insight that tells us who we can add to our streets to drive overall market performance in another word curation.
AJ Levine: On Michigan Avenue, we are increasingly encouraged by the interest and activity we're seeing on the street.
AJ Levine: and this past quarter at 664 North Michigan, we successfully signed a lease with the fashion brand Mango for the entire building, which includes approximately 8,000 square feet of ground floor space. And just a few blocks north on the Gold Coast.
AJ Levine: We completed a new lease, again for the entire building, including approximately 4,500 feet at grade, with an exciting New York-based fashion and lifestyle brand. And we are actively negotiating a lease with another leading fashion retailer for our final vacancy on Walmas Street, which we expect to have signed in the coming days.
AJ Levine: Elsewhere in the portfolio, we're seeing continued growth in both sales and rents. And we're especially encouraged by the recent additions to our existing high growth streets, doubling down in markets like Soho, Williamsburg and M. Street.
AJ Levine: and expanding its new markets like Blegrst Creek will continue to provide fuel for future internal growth.
AJ Levine: In so-how, for example, rents are up double digits year over year and 30 to 40% since 2019.
AJ Levine: Over the last year, an art portfolio alone, we've added great luxury and advanced contemporary brands like Zimmerman, Stod and Nadewell. And the market continues to see a steady influx of today's most relevant brands like Kate, Valentino, Jacques Amos and Totem.
AJ Levine: Now with the recent acquisition of two more storefronts on Green Street between Princeton Spring, along with the banging of Sim, we already owned on the block.
AJ Levine: We can control a meaningful portion of the most coveted luxury block in Soho, with neighbors including Louis Vuitton, Deor, Stella McCartney and Cardi A. This will give a 17 storefront in Soho, which is an essential market for our retailers.
AJ Levine: and the team is excited to get to work, prime loose those undermarket leases and taking advantage of the incredible growth we've seen over the last several years.
AJ Levine: Williamsburg is another market that has seen rents grow 40 to 50 percent since 2019 and 10 to 15 percent over the last year alone.
AJ Levine: William's Burke has firmly established itself as a must-have location for brands like Lulu Lemon, Aloyoga, Sephora, On Running, Kiss, and Nowhere Med.
AJ Levine: by purchasing older vintage leases with short-term explorations we can get to work extracting that embedded rank growth.
AJ Levine: and again because of our history in the market, we can see firsthand how demand continues to outpace supply and drive rents.
AJ Levine: ay
AJ Levine: Turning to Bleakers Street.
Speaker Change: As Ken mentioned over the last several years, Leeker Street has emerged as a highly coveted landing spot for many of the same advanced contemporary and luxury brands that we've seen in markets like Madison Avenue, M Street, Nero's Place and the Gold Coast.
Speaker Change: and while we're entering bleak or street in the relatively early innings, it already shares many of the same attributes as our other high growth markets.
Speaker Change: High demand and extremely tight supply, a noticeable improvement in sales performance, resulting in healthy tenants, and is recently emerged as one of New York's premier shopping destinations.
Speaker Change: With where we see sales and rents today on Blieger, it's clear that we're entering the market at the opportune time to capture significant rent growth moving forward.
Speaker Change: and to entry, we're in the third quarter we successfully signed two new leases, including a new 5000 square foot Tesla flagship.
Speaker Change: The story in Georgetown continues to be a pivot away from older Walgreens and towards more dynamic, higher-value retailers. We know from our portfolio that year over year sales growth is north of 10%.
Speaker Change: and several of our tenants have experienced over 40% sales growth since 2019.
Speaker Change: Demand on M.S.S. has never been stronger, and with the addition of several great brands like Alio Gaviori, Skims, Sazon, Veronica Beard, we expect to manned to only accelerate as we continue to curate the street.
Speaker Change: and last but certainly not least.
Speaker Change: We are excited to announce that in partnership with Mark McCenter, Tristan Simon and their team at Ignite Rebeez, we have kicked off the next phase of our Henderson portfolio in Dallas.
Speaker Change: We first entered Dallas in 2022 by purchasing 15 retail buildings on Henderson Avenue, with younger tenants in place like Tacobas and Warby Parker, a sprouts market, as well as a fully entitled Blan parcel.
Speaker Change: At the time it was clear that the center of gravity and Dallas had for years been shifting towards the Knox Henderson corridor.
Speaker Change: Additionally, there was a noticeable void in the market for a walkable, open air shopping district where today's most relevant and contemporary tenants could cluster and thrive.
Speaker Change: Henderson Avenue was clearly a diamond in the rough.
Speaker Change: Since that time, we've seen firsthand rents grow between 40 and 50%.
Speaker Change: Sales today on Henderson are on par with markets like Armada, Javanu, but Rense are half as high.
Speaker Change: Now we have to hear years of patience and planning. We are adding the next phase of retail on Henderson.
Speaker Change: The project will consist of 10 architecturally distinct buildings and will be completed in several phases with an incremental project cost of approximately $100 million.
Speaker Change: This highly curated retail is designed to appeal to the same tenets you'll find on our other high-growth streets, like sovo, entry and armamentage.
Speaker Change: Those tenants have been eagerly awaiting the next phase on Henderson, and just two weeks after breaking ground, we are already in negotiations with over a dozen retail brands.
Speaker Change: Upon completion in 2027, Henderson will emerge as one of the most vibrant stretches of walkable street retail in the country. And we expect rents on the street to stabilize at levels on par with our other more established high growth streets.
Speaker Change: In the meantime we will continue to keep you updated as we make progress towards stabilization.
Speaker Change: So, all of another exciting event for quarter
Speaker Change: and now I will turn things over to John.
John Gottfried: Thanks for your good morning.
John Gottfried: We have had a dozen dozen productive quarters. As I just had mentioned, three key things are becoming increasingly clear to us. First, our balance sheet is right where we want it. As a capital market's opened up, we move quickly, securing over a billion dollars if that in equity capital.
John Gottfried: and not only did this allow us to achieve our targeted ratios and liquidity, we were able to do it on a non-deluted basis.
John Gottfried: Secondly, our multi-year core internal growth remains intact. As our team continues to beat our leasing goals, both in terms of deal volume, along with the rents we are achieving. We have increased confidence and visibility on not only meeting, but exceeding our multi-year internal growth goal in excess of 5%.
John Gottfried: and just a highlight, this five-plus percentage growth is even before we layer in the creed of impact of the external growth that can just discuss.
John Gottfried: and finally external growth.
Speaker Change: As Ken mentioned, at the bid asked bread narrowed, our team moved quickly to lock up over half a billion dollars of a creative investment that we're in our pipeline.
Speaker Change: So when we put these three pieces together, our business is poised to achieve a powerful combination of internal and external growth, which is fueled by a strong ballad sheet that has both the liquidity and flexibility to fund it.
Speaker Change: I'm not going to spend the next few minutes highlighting on some of these key highlights starting with our balance sheet.
Speaker Change: in a short period of time and on a non-deluted basis, we completed approximately $1.5 billion of debt in equity transactions.
Speaker Change: Resulting in a reduction of our debt to GAB to about 30%. Along with reducing our debt to EBITDA ratio in excess of a full-turned to 5.6 times.
Speaker Change: and to be clear, the 5.6 times is our total debt to even a ratio, inclusive of our share of debt from the Ambassador Management Business.
Speaker Change: which means that on a standalone basis or quartet debt to EBITDA is about a half a turn lower.
Speaker Change: Additionally, with the strong support of our banking partners, we increased our revolver capacity again during the quarter, doubling it over the course of the year to $525 million, with virtually no amounts currently drawn on the facility.
Speaker Change: and we have no meaningful cord that maturity until 2028, along with a fully hatch balance sheet for the next several years.
Speaker Change: which means that our internal growth of 5% will drop to our bottom line.
Speaker Change: and a final point in the balance sheet, we have secured the capital that we need to close our pipeline.
Speaker Change: Thus our balance sheet has the flexibility and liquidity to continue to transact on the
Speaker Change: and his evidence by the equity issuance that we completed a few weeks ago, we will continue to match fund our external growth on a leverage neutral basis.
Speaker Change: to ensure that not only do we retain our balance sheet strength and liquidity, but that we proactively lock in our cost of capital to achieve the day one earnings and an A.V. accretion that we target on each transaction.
Speaker Change: Moving to our court of results, along with an update on internal growth.
Speaker Change: Consistent with the quarterly run rate that we laid out a few calls ago, we reported FFO of 32 cents a share, which reflects the quenchable growth of a penny, along with your earnings growth that 5 cents a share are 20% when excluding the real-life gains on our Albert's and shares.
Speaker Change: We have also successfully maintained our four-year guidance and this is even in after taking into account the 320 million dollars of equity representing over 10% of our market cap that we issued over the past few months to pre-fund our acquisition pipeline.
Speaker Change: Thus, we continue to reaffirm a projected range of 32 to 34 s for the fourth quarter.
Speaker Change: Moving to the same story in a while, we reported core, same story in a while, the 5.9% for the quarter and 5.7% for the year, which has us trending towards the upper end of our 5 to 6% annual same story guidance.
Speaker Change: Additionally, during the quarter, our street portfolio, I'll perform our suburban assets by approximately 250 basis points.
Speaker Change: Moving on to leasing, we increased our signed, not yet open pipeline by over 20% bringing into approximately $10 million at September 30th.
Speaker Change: As a reminder, the $10 million is at our pro-Retoucher and represents core, same store only, meaning it excludes any leases that were signed in our core redevelopment pipeline, as well as within our investment management platform including city point.
Speaker Change: Additionally, the entire $10 million sign that the open pipeline represents incremental ABR as it excludes any leases that we have not executed on space that is currently occupied.
John Gottfried: As AJ discussed it as outlined in our release, we had a strong lease in quarter, signing $7 million of new releases representing about 5% of our ABR.
Speaker Change: The $7 million is comprised of $3 million on bacon space.
Speaker Change: and $4 million on space that is currently occupied.
Speaker Change: and regards to the $4 million of occupied space, our team was able to successfully pry-lose several below market spaces across our portfolio and we were able to recapture these spaces at a nominal cost of under $500,000.
Speaker Change: Further, as outlined in our release, the capture of these spaces were resolved in incremental ABR of $1.6 million upon commencement of the new leases.
Speaker Change: So when we combine the $10 million in our sign, not yet open pipeline,
Speaker Change: With this $1.6 million, we have approximately $11.6 million of incremental, CoreBR representing Core Growth approximately 8%.
Speaker Change: For those modeling, giving the magnitude of growth, I thought it would be helpful to walk through a bit of granularity on the timing of this incremental $11.6 million.
Speaker Change: We anticipate approximately 25% of the ABR will commence in the fourth quarter of 2024 and will contribute an incremental $2,200,000 during the quarter.
Speaker Change: with the remaining 70% expected to commence in 2025.
Speaker Change: Contributing an incremental $3 to $5 million throughout the year, skewed towards the second half. Now keep in mind that this incremental amounts in 2024 and 25 are net of the downtime associated with the profitable recapture of $2.4 million of occupied ABR that we highlighted on our release.
Speaker Change: Thus, the full impact of the incremental $11.6 million will show up in our 2021 results.
Speaker Change: In summary, our core portfolio continues to exceed our expectations.
Speaker Change: and give her an our highly differentiated retail portfolio. We continue to see this playing out over the next several years.
Speaker Change: Driven by a powerful combination of 3% contractual growth, double digit spreads on expiring leases and fair market value resets and ongoing lease up.
Speaker Change: Kenneth's already laid out the earnings accretion that we expect from our recent acquisitions. So I won't repeat his remarks, but when we layer in that accretion, along with our internal growth, we are well poised for several years of strong bottom-line earnings growth.
Speaker Change: and with that we will now open up the call for questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, as I'm reminded to ask the question, please press star one more on your telephone and then wait to hear your name to be announced.
Speaker Change: Two with your question, please first start one more again. We asked you to let me just set up the two questions and they are feel free to keep you with you.
Speaker Change: Our first question comes from the line of Monday, with Jeffree's, the line is open.
Speaker Change: I, Des Moines, Exciting Quarter, I know that acquisitions you've announced didn't happen overnight, but just given what you've accomplished here today, is this indicative of the pace and level of opportunities you see going forward in your term?
Speaker Change: Short answers, yes.
Speaker Change: Obviously, the stars have to align and has to check.
Speaker Change: is a box that I've outlined.
Speaker Change: Frankly, over the last year, Linda and your right. It may feel like it's overnight, but our team has been working all year to tee up these kind of deals. But provided we can find deals.
Speaker Change: that are a creative to earnings, creative to net asset value, and that extend the strong growth that has come primarily from internal growth the last few years. As far as we can extend that, we feel pretty good that we're in a position.
Speaker Change: to establish a KDA as the highly differentiated street retail owners in the public market. So that's the longer answer of yes we can do this.
Speaker Change: and then if street retail is back, how do you deal effectively with competition?
Speaker Change: Yeah, perfect world, there wouldn't be any, but it's never a perfect world and frankly, when there's no competition, sellers tend to go into hiding.
Speaker Change: So what's different this time than perhaps other cycles for street retail, we are seeing competition but it's highly professional competition that are thoughtful and good landlords.
Speaker Change: If they're opening across the street from us, we like that. It's the less professional landlords that are more problematic. And given our cost of capital, given the fact that this is what we do.
Speaker Change: We have a high level of confidence that we can move faster, we can identify the transactions. So even with competition, we certainly got our fair share this past quarter and we look forward to quarters in the future.
Speaker Change: Thanks, and then a question for John, what percentage of NOIs and YC currently and do you have an internal view of how high New York could become or any other urban MSA or is it all just a byproduct of individual opportunities?
John Gottfried: Yeah, so Linda I think it's right now, and I think it is about a third of our, a third of our N.O.I. Corridor Y comes from New York
John Gottfried: with the concentration in Soho and Williamsburg, and then the other kind of expand on the...
John Gottfried: You know how where we see that growing but I think what I would say is that to extend it checks as the checks those boxes, the day one earnings accretion, the long term growth and the nab accretion we're seeing those trans across all of our key markets whether it's in.
John Gottfried: Georgetown, certainly in Dallas.
John Gottfried: We're going to continue to do that in a diversify. I did get, you know, turn it over to Ken, but I think it's not a set target that we have, but just where can we know where our cost of capitalism, what we need to do to achieve our long-term strategy. We think we can do that amongst our portfolio on a pretty diversified basis.
Ken Bernstein: Yes, I totally agree with what John said in diversification, I think does benefit our shareholders.
Ken Bernstein: But I would...
Speaker Change: Say that as or more importantly is from AJ and the Leasing Teams perspective, it also by being geographically diverse and enables us to remain highly relevant.
Speaker Change: for a broad group of our retailers throughout the United States. Because a lot of the decisions of where we're seeing out performance comes from conversations with retailers of what's where are you doing best? Where do you want to be next? And bye.
Speaker Change: Adding assets as we've referenced in today's call.
Speaker Change: in Georgetown and DC, or our expansions and Henderson and Dallas, all of those boat well from a perspective of making sure that we're capturing the right growth amongst our retailers.
Speaker Change: Sorry, sneaking one last one in for AJ, just when you look at the pipeline of deals being signed, is it more domestic brands or international?
Speaker Change: Yeah, it's a nice mix.
Speaker Change: You know, certainly a market like so, was always been a preferred landing spot for international brands.
Speaker Change: and the other brands. I think Zimmerman is a great example of that. That's a brand that started in Australia and decided to go international and their first landing spot was in Soho.
Speaker Change: Linda, what's more encouraging to me is when you start to see these brands notice and show up in markets like M Street.
Speaker Change: and the Degen Voltaire, Lugano Diamond, those are traditionally solo tenants that are starting to focus on perhaps some of those next.
Speaker Change: and the next entry market. So that's when you really know you're turning the corner.
Speaker Change: Thanks, Linda. Thank you.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of floors van Dekum, with conference point, your line is open.
Speaker Change: Hey, thanks, God's for taking my question.
Speaker Change: Good Center results.
Speaker Change: and encouraging. Question I guess maybe for AJ or Ken you might apply on this as well. But I'm curious as to how you look at OCR and how does OCR...
Speaker Change: Compare across the various markets in a particular so-who versus bleaker versus one is Burke and maybe touch upon Chicago and then you talked about the upside potential in Henderson and how does Henderson compare to all of those other markets as well? If you can give us more details, that'd be great.
Speaker Change: So let me set the table and again, assume floor is you're referring to just the rent to sales ratio, tenant occupancy cost relative to
Speaker Change: So the very encouraging news.
Speaker Change: More or less across the board.
Speaker Change: is opposed to prior cycles to important areas of distinction.
Speaker Change: One is in fact
Speaker Change: The Top Line Sales Growth
Speaker Change: has improved over the last several years, AJ touched on it relative to 2019.
Speaker Change: and has improved well in excess of the rental growth so far. So that means that tenants have room to run, that means that rent to sales ratios are substantially healthier than certainly a prior peak. And...
Speaker Change: and that room to run gives us a fair amount of comfort as we think about.
Speaker Change: Going forward in that's...
Speaker Change: Conferend by our retailers who are saying they're very comfortable at rents where they are right now and they're ability to grow it. The other...
Speaker Change: Keith that I'd say is equally encouraging is we are now absolutely in an omnivisional environment. We're as tenants in the past, we're kind of guessing as to whether or not there would be a halo effect from online sales.
Speaker Change: Now they know for certainty that there is a benefit of having a great store.
Speaker Change: and he's driving on myself.
Speaker Change: They're also much better, much more sophisticated.
Speaker Change: in the use of technology, the use of AI in terms of sight selection that it less gets work.
Speaker Change: and more science and in an omnichannel world, OCR of an individual store is still critically important, but for the kind of locations we're talking about that, our mission critical.
Speaker Change: They can look beyond just simply the sales out of that store and look at the overall sales that are generated from when they open the store.
Speaker Change: [inaudible]
Speaker Change: that we're seeing in the Henderson's first as the so-hows in the Williamsburg. Yeah, look, I think generally speaking in the more established markets like the Gold Coast, like so-home, Madison Avenue, you're seeing mid-teens occupancy costs, which as Ken mentioned, gives you a good amount of room to run. You know, these tenants could push comfortably up towards 20% to low 20%.
Speaker Change: Markets like Bleecker and perhaps some of the younger markets, the markets that are in earlier innings, we're seeing occupancy costs that are closer to that 10% range, which just gives us confidence.
Speaker Change: Along with seeing market rent growth, right, deals getting signed at higher rents than what we're purchasing, room to run in terms of pushing those occupancy costs pretty considerably higher.
Speaker Change: here.
Speaker Change: So it really varies from market to market.
Speaker Change: And is that the same in Williamsburg, or how does Williamsburg compare to Bleeker versus Soho? Is it in between, or is it more like Soho in terms of the mid-teens occupancy costs?
Speaker Change: I'd say it's pretty comparable to SoHo.
Speaker Change: Okay and then Dallas is like, is Dallas even sub-10?
Speaker Change: Yeah there are a number of tenants in Dallas just because the vintage of those leases and the improvement that we've seen yes it's several of those tenants are sub 10%.
Speaker Change: Great. And thanks, AJ. My follow-up question, if I may,
Speaker Change: Obviously, you've got, you know, 270 million of acquisitions sort of earmarks. You've got, you know, 120 closed, 150 for the core, I think, in the final stages.
Speaker Change: How big of a pipeline do you have behind that? I mean, I guess, well, because part of this stems from the fact, well, you've done very little over the last
Speaker Change: Unknown Attendee
Speaker Change: How deep is the street retail market and how much capital can be put to work in this in this segment? And again, maybe if you can expand about upon the, you know, the total size of the market, how much.
Speaker Change: I understand it to be pretty big, but if you could maybe expand on that, Ken, and the potential here to, you know, I suspect, you know, several billion dollars can be invested comfortably, but I'd love to hear your thoughts on that.
Speaker Change: Yeah, so for a bunch of different reasons, we remain very bullish on what the pipeline could look like.
Ken Bernstein: And you're right, the way we think about it is both in terms of what is our internal capacity to digest in the normal course of business, and this half a billion dollars of acquisitions that John referred to, whether it's the investment management platform or core portfolio.
Ken Bernstein: The team needs to be able to digest a certain amount and I think we are proving that That is a rate we can live with so then the question is the opportunity set
Speaker Change: And you're spot on, cost of capital is one of the metrics because we do have to check those boxes. The stars have to align to the extent we have a competitive cost of capital.
Speaker Change: And to the extent that sellers are beginning to emerge, and they are only beginning just now, we think we can continue at this growth rate for several years, for as long as...
Speaker Change: The stars align. There are enough deals both in the markets that we are currently active in
Speaker Change: And I say most importantly in those markets, because I think that's where you will see the majority of our growth. But there are also additional markets, a handful of them, that either we've been active in the past,
Speaker Change: or our retailers are saying these are now established must-have markets that you can also see us get involved with.
Speaker Change: So, I don't doubt.
Speaker Change: that there are several billions of dollars of
Speaker Change: potential scalable assets for us? I don't doubt.
Speaker Change: You know, on one hand, it was quiet for a couple of years for all the obvious reasons.
Speaker Change: Our growth was pretty darn good. We had very strong internal growth for many years in front of us.
Speaker Change: So, if the deals are not accretive, if they're not additive, if they don't make sense...
Speaker Change: We will have really powerful top line and bottom line graphs just based on what we have right now.
Speaker Change: Thanks, Ken.
Speaker Change: Sure.
Ken Bernstein: Thank you.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Jeffrey Spector with Bank of America Securities. Your line is open.
Jeffrey Spector: Great, good morning and congratulations on the quarter. Maybe Ken, the first question I have, I don't know if it's for you or AJ, on the strength in leasing and demand for space.
Jeffrey Spector: Would you say it's, you know, the result of strong luxury fashion retail sales the last couple of years? Is it, you know, these retailers are continuing to move away from wholesale? Is it a combination? What are your thoughts?
Speaker Change: Unknown Attendee
Ken Bernstein: Yeah, it is a combination, and AJ, feel free to chime in as well. First of all, let's...
Ken Bernstein: Let's acknowledge the headwinds.
Ken Bernstein: that we experienced for several years. First was fears around, confusion around the so-called retail Armageddon.
Ken Bernstein: Then there was certainly COVID and lockdown and all of the issues around and concerns around where would people settle? Would they ever come back to places like SoHo? Now, going forward,
Ken Bernstein: Those headwinds are tailwinds. Tailwinds I mean as follows. One, asked and answered, retailers recognize the critical nature of the store.
Ken Bernstein: Second was the so-called concern about e-commerce has become a halo, and in fact where you can have stores that benefit from Omnichannel, it's a net benefit.
Speaker Change: And then, as you pointed out, there has been a notable shift into what we refer to as direct-to-consumer, DTC, a shift out of wholesale, and retailers saying they need to.
Speaker Change: connect directly with their customers and the store, especially these key stores, is critical to that. Then, notwithstanding a lot of noise around the economy,
Speaker Change: The fact that the job market is still pretty darn strong, the economy is still pretty strong, inflation, which as long as it's not out of control, continues to drive top line sales, all
Speaker Change: bode well for our portfolio and the ability to continue to drive rents. Ajay, I said a lot, but anything you want to add to that? Yeah, the only thing I would say is, again, don't discount the data, right? You kind of know exactly where their consumers want to be, and they want to be open air and... Unknown Speaker
Speaker Change: That's where they choose to plant their foot.
Jeffrey Spector: Thank you. And then my follow-up for John, and I'm sorry if I missed this, did you discuss the renewal rental spread from the quarter, you know, and was this skewed by one deal or or a combination? It was really a suburban quick service
Speaker Change: restaurant that small space that Our leasing team just renewed so really just down to a single single small space
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Seth Bergey with Citi. Your line is open.
Speaker Change: Hi, it's Craig Mellon here.
Craig Mellon: Just a question for you, Ken. It sounds like, you know, you think it's replicable to maybe do 300, maybe 400 million acquisitions.
Craig Mellon: a year in the near term, assuming stars align. You guys were able to kind of issue...
Craig Mellon: A lot of equity this quarter and the market seems to be giving you the green light. But as you move forward, if you want to continue to deploy this level of capital.
Speaker Change: annually maybe for the next year or two and keep leverage kind of in check. What should we think about the the right mix or how to think about kind of debt equity and maybe asset sales to fund the growth on you know the accretive earnings and NAV basis?
Speaker Change: John, you want to touch on that? Absolutely. So I think Craig is a
John Gottfried: Put in my put in our remarks that that our balance sheets right where we want it and we're going to keep it there Right, so I think let's just start at that
Speaker Change: Unknown Attendee
Speaker Change: NaviCreative, and that we do have the growth that we have as we have today. So I think those are the ways that we're going to approach it. Leverage neutral, and what we're buying is accretive to what we're already on.
Speaker Change: And then just to add to that, Craig, in terms of asset sales,
Speaker Change: do keep in mind, as we monetize assets in our investment management platform, we get a fair amount of capital coming back from that as well, whether that is redeployed into future investment management deals or otherwise, cash is relatively agnostic. So we do have
Speaker Change: Several hours in our quiver without having to lever up and that's what you should expect to see
Speaker Change: And then on Henderson, as you guys move forward, sounds like the yields there are pretty attractive, but from a risk mitigation standpoint,
Speaker Change: Is there a targeted level of free leasing or at least you know deals in
Speaker Change: maybe an LOI stage that aren't signed yet, but just to give you the confidence to go forward with with additional build out there to hit those returns without you know a higher level risk to the extent they're not pre-released.
Speaker Change: Yeah, and thankfully, and it just happens to be the situation there, we can proceed in phases. So we expect to have a pretty high level of leasing as we
Speaker Change: do each phase of this which will provide some level of mitigation but again thankfully the tenant demands feel strong so I'd have to see a major shift for us to lose the enthusiasm that we have right now.
Speaker Change: Okay, then maybe just one last one. It sounds like North Mich, Leeson's picking up a bit. Any update on potentially
Speaker Change: selling part of the building next to Waterside. I know you guys have talked about maybe monetizing a piece of that as an option to the developer next door, or is it getting to a point where you would think you can release to existing retail?
Speaker Change: So first of all, leasing demand is improving and that's
Speaker Change: Unknown Speaker Positive.
Speaker Change: We remain open-minded and have a variety of conversations around monetization opportunities there. I don't think anyone should expect any significant earnings dilution if we were to go that route. So we think what we have on North Mesh, thankfully, is rebounding and should be accretive. John, anything? No, I think that sums it up. Nothing to add there.
Greg: Thanks. Thanks, Greg.
Speaker Change: Thank you.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Todd Thomas with KeyBank Capital Markets. Your line is open.
Todd Thomas: Hi, thanks. Good morning. Ken, first, I wanted to go back to the investment management platform and while you're acquiring assets with
Speaker Change: Unknown Attendee
Speaker Change: Fund dispositions accelerate as off-balance sheet acquisition activity.
Speaker Change: picks up. Is it more of a capital recycling exercise within the investment management platform, or should we think about growth?
Speaker Change: in the size of that platform? And then what's the impact to the model that we should be thinking about from transaction activity, you know, in the investment management platform?
Speaker Change: So let me start, but John, I want you to chime in. What we think is prudent for now is to assume stability.
Speaker Change: Yes, it could ramp up in GrowTot, but we also...
Speaker Change: want to continue to monetize. As you pointed out, this last deal we sold in Fund 5 was north of a 2x equity multiple, north of a 20 IRR. If we can achieve those for Fund 5, there's a lot of economic benefit to our shareholders and to our investors, and that's what the Buy Fix Sell
Speaker Change: platform does. It could ramp up.
John Gottfried: But for now, for modeling purposes, assume stability, John. Yeah, that's what I was just going to, just to expand to that, Todd, is assume stability, and for now, a capital recycling. And what I would say that we really like about this model,
John Gottfried: is that we are putting deals in separate vehicles that do not have cross promotes, so I think this will enable us to get to that.
Speaker Change: Unknown Attendee
Speaker Change: Okay, and then.
Speaker Change: John, you know, just a question on the math around the 1% accretion on every $200 million of acquisitions. I think you've been discussing, you know, that level of accretion for for some time, but the company's cost of capital has improved.
Speaker Change: Meaningfully here over the last year, you know, I'm just curious about the, the, the way, you know, the formula there, why, why it has not improved relative to the spread that you're able to invest at, or are you just being conservative as you think about the accretion?
Speaker Change: from external growth with, you know, some of the other pieces.
Speaker Change: I'll let John think about that for a second, but yes, he's being conservative, but also, Todd, going in, accretion is just one of the box to check. The growth rate of what we teed up here is higher than perhaps we theoretically thought about.
Speaker Change: And we're allowed to beat our 1, you know, 1% every 200 million.
Speaker Change: So I think it's
Speaker Change: Unknown Speaker Acknowledge all your points, but yeah, we're glad to be the time.
Speaker Change: 7% growth COD feels pretty darn good.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Kai Ben Kim with Truist. The line is open.
Speaker Change: Unknown Attendee
Speaker Change: Thank you. Good morning.
Speaker Change: AJ, why don't you take that? Yeah, I'd say the last go-around occupancy costs were probably closer to that 20% range. You know, again, one of the quivers that we or one of the errors that we have is fair market value reset.
Speaker Change: Unknown Attendee
Speaker Change: and how prevalent are the fair market value recess and your street retail profile?
Speaker Change: more often than not.
AJ Levine: We have a fair market value reset. I can't think of a recent example of a deal we've done in our streets
AJ Levine: over the last however many years, several years that doesn't have some form of a reset.
Speaker Change: Okay, great. And in terms of watchlist, as we look forward,
Speaker Change: Any particular reason to think of it, you know, up or down from what we've seen in the past couple years?
Speaker Change: Anyone want to take that? Yeah. Yeah, so so Keem, I think we've been as an industry really fortunate in terms of watchlists and and and retailers, so I I would say that
Speaker Change: We're prepared that there will be retailers that will struggle. Fortunately, we have a lot of confidence where we're at as we sit today. So, long-winded way of saying, I think we are aware that there will be, and all the well-known names that are out there, that we're certainly watching. I think the difference...
Speaker Change: Quickly on on spaces having multiple tenants that are interested that there's just not supply of high-quality space so I think you know, we should be very aware and we are of Retailers and agent his team are proactively pulling that space back But if we and you know, we're very comfortable we get at least
Speaker Change: Okay, thank you.
Speaker Change: Thank you.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Paulina Rogers-Smith with Green Street. Your line is open.
Paulina Rogers-Smith: Good morning.
Speaker Change: and do you think it's fair to say that today going in yields for street retail are inside those you can find for grocery anchored neighborhood centers
Paulina Rogers-Smith: And then having IRRs in mind, can you comment on how you think market rent growth for these two subtypes looks like over the next five years?
Paulina Rogers-Smith: and what do you think are the drivers behind that growth differential from a fundamental perspective?
Speaker Change: Yeah, and obviously it is to some degree comparing apples and oranges in terms of going in cap rates, going in yield. But the best I can tell.
Speaker Change: Because supermarket Anchorage still is where most of the initial investment activity was, and thus is probably the most crowded of the areas in comparing
Speaker Change: going in yields for high-demand best-in-class supermarket anchored shopping centers versus high-demand best-in-class street retail I'd say the going in yields
Speaker Change: are pretty similar.
Speaker Change: Now, historically, street retail had lower going in yields because of the growth, but as it sets up today...
Speaker Change: It feels like going in yields are about the same and then the growth rate.
Speaker Change: is about twice for street retail.
Speaker Change: as it is for our supermarket anchor component of our portfolio. And we own both and we like both. Now, there is certainly the possibility that growth...
Speaker Change: for one area versus the other is higher or lower than I just said, but in general when I compare notes with my peers that's how it's stacking up. That growth on the street being higher is one because of stronger contractual growth
Speaker Change: to the fair market value resets that A.J. mentioned that we tend not to see in the supermarket side. So we think that...
Speaker Change: The
Speaker Change: Long-term growth, defined as the next five plus years.
Speaker Change: for the Street Portfolio, assuming those assumptions should be materially higher than what we get out of our supermarket-anchored assets. Some would argue, well, supermarkets are more defensive and therefore deserves, but if you
Speaker Change: Going in yields in the fives and sixes for either, and that's where it seems like they're settling. And growth rates of, call it, four to five percent, maybe higher for street retail.
Speaker Change: and 2-3% for supermarket anchored. Then you're getting to high single digit unlevered returns. That feels pretty good for retail overall.
Speaker Change: Okay and then regarding Henderson and I think you mentioned it but I didn't really understood the details. What's behind the wide range for the total development cost there?
Speaker Change: It seems wild to me.
Speaker Change #100: and then related to that, I think the original plan was to include some office space, if I remember well. Is that still the case or this is entirely a retail space?
Speaker Change #100: you were thinking about.
Speaker Change #101: Yeah, so the reason that there is a very wide range, and it is, is because we can do this in phases depending on demand. It will have a mixed-use component, but it pencils out just fine even if we were not to.
Speaker Change #101: Add, build, and lease the office piece of this, so we're feeling pretty good about it.
Speaker Change #101: But we recognize that new development has risks, and so we want to do this in phases. Final point to keep in mind, we own a lot of Henderson right now. We're in fact going to add a few more existing buildings to this.
Speaker Change #101: and this expansion, if it happens in full phase, and I'm pretty confident it will.
Speaker Change #101: is going to lift the whole Henderson Avenue.
Speaker Change #101: So then even separate of the unlevered 8% yield that I mentioned in the prepared remarks, there's the lift to the existing portfolio.
Speaker Change #101: where we've had really strong same store and market rent growth in the last few years that we've owned it and the overall street
Speaker Change #101: then DUS gets a lift as well. So give us some time to give you updates over the upcoming quarters but we think we can
Speaker Change #101: do this in reasonable phases, but my goal would be to be at the upper end of that and to have AJ have at least so that that accretion hits the bottom line sooner rather than later.
Speaker Change #102: Thank you very much.
Speaker Change #103: Thank you.
Speaker Change #103: Thank you.
Speaker Change #104: Our next question comes from the line of Michael Mueller with J.P. Morgan. Your line is open.
Michael Mueller: Yeah, hi. I guess first sticking with Henderson, where are the new locations going relative to the buildings you already own? Are they scattered throughout or is it an extension of what you have already?
Speaker Change #106: Yeah, I mean, it's it's relatively an extension. They're all clustered in the same area. There's 10 architecturally distinct buildings. It really is right across. It's right in the it's right in the mix.
Speaker Change #106: That's the 50-yard line of what we own.
Speaker Change #106: So I'm not sure if you've watched it, but we have the Sprouts Grocer on one end, and we have the Tacobas in Wharton Park.
Speaker Change #107: Robby Parker in the middle and what AJ is talking about is the middle is that vacant land parcel That's going to connect the entire street. So think of some of our other locations that we curate. That's exactly what this is It's bringing connecting all of those and pushing rents from there
Speaker Change #108: Got it. Okay, and then maybe I guess looking at the street portfolio for a second Occupancy dipped a little bit. I think it's around 84, 84.2 in the quarter Can you walk through where you see that settling say by year-end 24, year-end 25 as the NOI ramp that you talked about takes hold
Speaker Change #109: Yeah, so Mike, and just as a reminder for anyone new on the call, the percentage is somewhat, not somewhat, is very irrelevant to the actual space we're leaving, just given the variation of rents, whether it's first floor space, second floor space, etc. So dollars is probably the better way to look at it. But what I'll talk about is...
Speaker Change #109: One, I think in terms of occupancy,
Speaker Change #109: percentage where we think we land by I call it year-end.
Speaker Change #109: When we just look at what's in our sign not yet open, I think that gets us to, you can see with the lease rate of that, that should get us into around 90.
Speaker Change #109: And I think we'll, you know, we will get there, you know, throughout 2025 by the end of by the end of the year. And then I would say full occupancy both in terms of percentage and on economic occupancy.
Speaker Change #109: I would say by 26 is where we would get to full occupancy, which we'd assign as 94-95%, both economic and actual percentage.
Speaker Change #110: Got it. Okay. Thank you.
Speaker Change #110: Thank you.
Speaker Change #111: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Ken Bernstein for closing remarks.
Ken Bernstein: Thank you all for taking the time and we look forward to speaking with you again next quarter.
Speaker Change #112: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change #113: Unknown Attendee