Acadia Realty Trust - Q3 2024

Transcript

Operator (participant)

Hello, and welcome to Acadia Realty Trust third quarter twenty twenty-four earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to hand the conference over to Alec Aronson, Development Analyst. Sir, you may begin.

Alec Aronson (Development Analyst)

Good morning, and thank you for joining us for the third quarter twenty twenty-four Acadia Realty Trust earnings conference call. My name is Alec Aronson, and I'm an analyst in our development department. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of nineteen thirty-four, 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, October twenty-eight, twenty twenty-four, 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 Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your 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. 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 (President and CEO)

Thank you, Alec. Well done. Good morning, everyone. We had a very active and productive third quarter with a lot to discuss, so let's jump in. As we've discussed on prior calls, there are three critical drivers of our business. The first is delivering continued strong internal growth, most significantly coming from our street retail portfolio. A.J. Levine will provide more details on our continued success on this front, but as you can see from our earnings release, we had another strong quarter and have averaged over 6% same-store NOI growth for the past three years. Most importantly, we see this growth continuing. The second driver 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 to get our key metrics and our liquidity where we want them.

And then the third driver is to provide external growth through accretive acquisitions, both with respect to our on-balance sheet investments as well as through our investment management platform. This third driver is kicking into gear, so let me spend a few minutes discussing our progress on our external growth initiatives. First, with respect to our on-balance sheet activity for our core portfolio, our goal here is to add assets that are consistent with our highly differentiated portfolio, dominated by high-growth street retail properties in critical shopping corridors. As we've discussed, we are focused on acquisitions that are accretive to earnings, accretive to net asset value, and that enable us to continue to deliver peer-leading growth long after full stabilization of our existing portfolio.

After several years of the REIT industry in general, and Acadia specifically, facing a challenging capital market backdrop for on-balance sheet acquisitions, conditions have finally begun to shift. This has enabled us to move to offense and allowed us to amplify our focus on street retail properties in key, must-have high-growth markets. Starting last quarter and to date, we have closed or are under contract for a total of $270 million of acquisitions for our core portfolio. We have closed approximately $120 million of them, with the balance closing over the next couple of quarters. I'll let A.J. give more color on the leasing trends we're seeing in these corridors, but here's a quick overview of the transactions. As previously announced, we closed on a four-property retail portfolio along the Bleecker Street retail corridor in the West Village of Manhattan.

Over the last several years, Bleecker Street has begun to emerge as a coveted landing spot for many of our younger, advanced contemporary brands and reflects the same curation, same fundamentals that we've seen in our other high-growth streets. We have an attractive going-in yield and the ability to significantly grow rents over time. We have also expanded our Williamsburg assets by adding four buildings on North Sixth Street in Williamsburg, Brooklyn. What we have seen in Williamsburg over the last several years, since our Bedford Avenue acquisition, is tenant demand and tenant performance continues to grow. And with that growth, North Sixth Street has emerged as a must-have corridor for leading retailers in Williamsburg. Our investment there is a combination of lease-up and redevelopment opportunities, combined with below-market leases that provides us with long-term growth and attractive returns.

We have also acquired a three-tenant building that will further enhance our presence on Greene Street in Soho, with leases substantially below market in arguably the highest demand corridor in Soho. This building is adjacent to the building we own on the corner of Prince and Greene, currently occupied by Bang & Olufsen. This addition now gives us two contiguous clusters on Greene Street. Lastly, we have approximately $150 million in assets under contract, primarily in Georgetown, in D.C., and in Soho. We anticipate closing the balance of these transactions early next year, and we'll discuss them in more detail as we close.

In terms of pricing, while we're not going to discuss individual pricing of deals, these day one accretive acquisitions have an initial GAAP yield in the mid-sixes, with a cash yield in the mid-five, with compounded annual growth rates north of 7%, and growing to a cash yield also north of 7% in the next few years. In terms of earnings accretion, as we've said in the past, given our size, relatively small amounts of external growth can really move the needle, and that's certainly the case here. As we previously discussed, we have been targeting transactions that, on a leverage-neutral basis, provide approximately $0.01 of earnings growth for every $200 million of acquisitions, with further growth then upon stabilization.

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% upon stabilization in 2027 and 2028, then, along with these on-balance sheet acquisitions, we expect significant long-term growth through some of our recently announced expansion plans for our core portfolio assets on Henderson Avenue in Dallas. I'll let A.J. discuss this further in his comments, but we have patiently watched the demand for this corridor 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% yield on cost. 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 excess of 2% incremental long-term earnings upon stabilization. So this accretion, plus the estimated 3% accretion upon stabilization of the on-balance sheet investments I discussed, sets us up very nicely over the next few years. Then complementing these on-balance sheet investments, we're continuing to see opportunities in our investment management platform, where we can leverage our institutional capital relationships for a broader variety of investments. First, as we had previously announced in July, we completed a new acquisition in Tampa, Florida, of an open-air community center for approximately $31 million. Recently, we formed a partnership with Cohen & Steers, where we retained an interest in the investment, plus retained the management as well as upside potential.

Beyond this, we and a global alternative asset manager are very close to finalizing a potential investment for approximately $275 million. That would fall into the opportunistic business bucket, and we'll give more color on that as it progresses. As for the accretion of the investment management platform investments, the metrics remain about the same as our on-balance sheet investments, meaning we expect roughly $0.01 per $200 million of gross acquisition volume. But for now, we think it's probably more prudent to think about this buy, fix, sell platform as a capital recycling vehicle, where our current goal is to maintain approximately $2 billion in AUM and maintaining a stable and profitable revenue stream equal to what we have today. We may see opportunities to grow this platform, but for now, just pencil in stability.

So looking ahead, we remain very bullish on our ability to continue to add value by driving internal growth by maintaining a strong and flexible balance sheet, and by adding additional growth through strategic new investments. New investments, including on-balance sheet acquisitions that are consistent with our high-growth portfolio that we own today, accretion from redevelopment and expansions of existing assets, such as what we have begun on Henderson Avenue, and then also opportunistically adding assets to our investment management platforms. So before I turn the call over to A.J. for his remarks, I'd like to thank the Acadia team for their incredibly hard work, as we have been waiting, not so patiently, for the stars to align. And this quarter, they finally did. With strong internal growth and solid balance sheet metrics, and now impactful external growth, we are hitting on all cylinders.

With that, I'll turn the call over to A.J.

A.J. Levine (EVP)

Great. Thanks, Ken. Good morning, everyone. 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. So jumping right into leasing and 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. We've increased the SNO pipeline to $10 million, and with no signs of a slowdown, we have several more leases in advanced stages of negotiation. In terms of fundamentals, our tenant sales continue to grow and remain well above where they were in 2019.

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 choppiness, and they remain focused on long-term growth. A direct-to-consumer, or DTC, brick-and-mortar strategy is priority number one for our retailers. That includes categories that may have historically relied more on wholesale and department stores, like luxury, advanced contemporary, and aspirational. That sentiment is reflected clearly on our high-growth streets, including Soho, Williamsburg, M Street, and Georgetown, and at our newly acquired Bleecker Street portfolio. 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.

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. More than any time in the past, tenants know very clearly where their customers are and where they can operate a profitable store. A healthy tenant, 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, over time, increase rents. We've continued to watch this dynamic play out on streets like Armitage Avenue, where rents have increased 20% over the last year and 50% since 2019. In the third quarter on Armitage, we signed new leases with Levain Bakery and the contemporary fashion tenant, Rails, both at healthy double-digit spreads.

In terms of merchandising, Rails is just one of the many contemporary tenants that have shown up in our markets, like Soho and M Street, as they shift away from wholesale and towards a direct-to-consumer strategy, and Levain, who has been a long-term tenant of ours in Williamsburg and has a presence on a number of our streets, will add a new F&B component to Armitage and drive a new layer of traffic that will benefit the entire street. We've already seen it happen firsthand in Williamsburg, on M Street in Georgetown, on Newbury 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. On Michigan Avenue, we are increasingly encouraged by the interest and activity we're seeing on the street.

This past quarter, at 664 North Michigan Avenue, we successfully signed a lease with the fashion brand Mango for the entire building, which includes approximately 8,000 sq ft of ground floor space. Just a few blocks north on the Gold Coast, we completed a new lease, again, for the entire building, including approximately 4,500 sq ft at grade, with an exciting New York-based fashion and lifestyle brand. We are actively negotiating a lease with another leading fashion retailer for our final vacancy on Walton Street, which we expect to have signed in the coming days. Elsewhere in the portfolio, we're seeing continued growth in both sales and rents, and we are especially encouraged by the recent additions to our existing high-growth streets.

Doubling down in markets like Soho, Williamsburg, and M Street, and expanding into new markets like Bleecker Street, will continue to provide fuel for future internal growth. In Soho, for example, rents are up double digits year over year and 30%-40% since 2019. Over the last year, in our portfolio alone, we've added great luxury and advanced contemporary brands like Zimmermann, Staud, and Madewell. And the market continues to see a steady influx of today's most relevant brands, like Khaite, Valentino, Jacquemus, and Totême. Now, with the recent acquisition of 2 more storefronts on Greene Street between Prince and Spring, along with the Bang & Olufsen we already owned on the block, we can control a meaningful portion of the most coveted luxury block in Soho, with neighbors including Louis Vuitton, Dior, Stella McCartney, and Cartier.

This will give us seventeen storefronts in Soho, which is an essential market for our retailers, and the team is excited to get to work, prying loose those under-market leases, and taking advantage of the incredible growth we've seen over the last several years. Williamsburg is another market that has seen rents grow 40%-50% since two thousand and nineteen, and 10%-15% over the last year alone. Williamsburg has firmly established itself as a must-have location for brands like Lululemon, Alo Yoga, Sephora, On Running, Kith, and now Hermès. By purchasing older vintage leases with short-term expirations, we can get to work extracting that embedded rent growth. And again, because of our history in the market, we can see firsthand how demand continues to outpace supply and drive rents. Turning to Bleecker Street.

As Ken mentioned, over the last several years, Bleecker 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, Melrose Place, and the Gold Coast. And while we're entering Bleecker Street in the relatively early innings, it already shares many of the same attributes as our other high-growth markets: high demand and extremely tight supply, a noticeable improvement in sales performance resulting in healthy tenants, and has recently emerged as one of New York's premier shopping destinations. With where we see sales and rents today on Bleecker, it's clear that we're entering the market at the opportune time to capture significant rent growth moving forward. And to M Street, where in the third quarter, we successfully signed two new leases, including a new 5,000 sq ft Tesla flagship.

The story in Georgetown continues to be a pivot away from older mall, mall brands and towards more dynamic, higher volume retailers. We know from our portfolio that year-over-year sales growth is north of 10%, and several of our tenants have experienced over 40% sales growth since 2019. Demand on M Street has never been stronger, and with the addition of several great brands like Alo Yoga, Vuori, Skims, Sézane, Veronica Beard, we expect demand to only accelerate as we continue to curate the street. Last, but certainly not least, we are excited to announce that in partnership with Mark Masinter, Tristan Simon, and their team at Rebees, we have kicked off the next phase of our Henderson portfolio in Dallas.

We first entered Dallas in 2022 by purchasing 15 retail buildings on Henderson Avenue, with younger tenants in place like Tacolicious and Warby Parker, a Sprouts market, as well as a fully entitled land parcel. At the time, it was clear that the center of gravity in Dallas had, for years, been shifting towards the Knox-Henderson corridor. 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. Henderson Avenue was clearly a diamond in the rough. Since that time, we've seen firsthand rents grow between 40% and 50%. Sales today on Henderson are on par with markets like Armitage Avenue, but rents are half as high. Now, after years of patience and planning, we are adding the next phase of retail on Henderson.

The project will consist of ten architecturally distinct buildings and will be completed in several phases with an incremental project cost of approximately $100 million. This highly curated retail is designed to appeal to the same tenants you'll find on our other high-growth streets, like Soho, M Street, and Armitage. 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. 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. In the meantime, we will continue to keep you updated as we make progress towards stabilization. So all in all, another exciting, eventful quarter.

Now I will turn things over to John.

John Gottfried (CFO)

Thanks, A.J. Good morning. We have had another busy and productive quarter. And as Ken mentioned, three key things are becoming increasingly clear to us. First, our balance sheet is right where we want it. As the capital markets opened up, we moved quickly, securing over $1 billion of debt and equity capital. And not only did this allow us to achieve our targeted ratios and liquidity, we were able to do it on a non-dilutive basis. 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%.

Just to highlight, this 5+% growth is even before we layer in the accretive impact of the external growth that Ken just discussed. Finally, external growth. As Ken mentioned, as the bid-ask spread narrowed, our team moved quickly to lock up over $500 million of accretive investments that were in our pipeline. 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 balance sheet that has both the liquidity and flexibility to fund it. I'm now going to spend the next few minutes highlighting on some of these key highlights, starting with our balance sheet.

In a short period of time and on a non-diluted basis, we completed approximately $1.5 billion of debt and equity transactions, resulting in a reduction of our debt to GAV to about 30%, along with reducing our debt to EBITDA ratio in excess of a full turn to 5.6x, and to be clear, the 5.6x is our total debt to EBITDA ratio, inclusive of our share of debt from the investment management business, which means that on a standalone basis, our core debt to EBITDA is about a half a turn lower. 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.

And we have no meaningful core debt maturities until 2028, along with a fully hedged balance sheet for the next several years, which means that our internal growth of 5+ % will drop to our bottom line. And a final point on the balance sheet, we have secured the capital that we need to close our pipeline. Thus, our balance sheet has the flexibility and liquidity to continue to transact on the accretive external growth opportunities that we are seeing.

As evidenced 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 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 NAV accretion that we target on each transaction. Moving to our quarter results, along with an update on internal growth. Consistent with the quarterly run rate that we laid out a few calls ago, we reported FFO of $0.32 per share, which reflects sequential growth of $0.01, along with year-over-year earnings growth of $0.05 per share or 20% when excluding the realized gains on our Albertsons shares.

We have also successfully maintained our full-year guidance, and this is even after taking into account the $320 million of equity, representing over 10% of our market cap, that we issued over the past few months to pre-fund our acquisition pipeline. Thus, we continue to reaffirm our projected range of $0.32-$0.34 for the fourth quarter. Moving to same-store NOI. We reported core same-store NOI, same-store NOI growth of 5.9% for the quarter and 5.7% for the year, which has us trending towards the upper end of our 5%-6% annual same-store guidance. Additionally, during the quarter, our street portfolio outperformed our suburban assets by approximately 250 basis points. Moving on to leasing.

We increased our signed, not-yet-opened pipeline by over 20%, bringing it to approximately $10 million at September 30th. As a reminder, the $10 million is at our pro rata share 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. Additionally, the entire $10 million of signed not yet open pipeline represents incremental ABR, as it excludes any leases that we have not executed on space that is currently occupied. As A.J. discussed, and as outlined in our release, we had a strong leasing quarter, signing $7 million of new core leases, representing about 5% of our ABR. The $7 million is comprised of $3 million on vacant space and $4 million on space that is currently occupied.

In regards to the $4 million of occupied space, our team was able to successfully pry loose several below-market spaces across our portfolio, and we were able to recapture these spaces at a nominal cost of under $500,000. Further, as outlined in our release, the capture of these spaces will result in incremental ABR of $1.6 million upon commencement of the new leases. So when we combine the $10 million in our signed, not-yet-open pipeline with this $1.6 million, we have approximately $11.6 million of incremental core ABR, representing core growth of approximately 8%. For those modeling, given 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.

We anticipate approximately 25% of the ABR will commence in the fourth quarter of 2024, and will contribute an incremental $220,000-$400,000 during the quarter, with the remaining 70% expected to commence in 2025, contributing an incremental $3 million-$5 million throughout the year, skewed towards the second half. Now, keep in mind that this incremental amounts in 2024 and 2025 are net of the downtime associated with the profitable recapture of $2.4 million of occupied ABR that we highlighted in our release. Thus, the full impact of the incremental $11.6 million will show up in our 2026 results.

In summary, our core portfolio continues to exceed our expectations, and given our highly differentiated street retail portfolio, we continue to see this playing out over the next several years, driven by a powerful combination of 3% contractual growth, double-digit spreads on expiring leases and fair market value resets, and ongoing lease up. Ken has 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. With that, we will now open up the call for questions.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star one one on your telephone and then wait to hear your name to be announced. To withdraw your question, please press star one one again. We ask that you limit yourself to two questions and then feel free to requeue. Please stand by while we compile the Q&A roster. Our first question comes from the line of Linda Tsai with Jefferies. Your line is open.

Linda Tsai (SVP)

Hi, good morning. Exciting quarter. I know the acquisitions you've announced didn't happen overnight, but just given what you've accomplished here to date, is this indicative of the pace and level of opportunities you see going forward near term?

Ken Bernstein (President and CEO)

Short answer is yes. Obviously, the stars have to align. It has to check the boxes that I've outlined, frankly, over the last year, Linda, and you're 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 that are accretive to earnings, accretive to net asset value, and that extend the strong growth that has come primarily from internal growth for the last few years, as long as we can extend that, we feel pretty good that we're in a position to establish Acadia as the highly differentiated street retail owners in the public market. So, so that's the longer answer of, yes, we can do this.

Linda Tsai (SVP)

If street retail is back, how do you deal effectively with competition?

Ken Bernstein (President and CEO)

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. 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. So 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, 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.

Linda Tsai (SVP)

Thanks. And then a question for John. What percentage of NOIs, NYC 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 (CFO)

Yeah. So Linda, I think it's right now, not I think it is, about a third of our, a third of our NOI, core NOI, comes from New York, with a concentration in Soho and in Williamsburg. And then, you know, I'll let Ken expand on the, you know, where we see that growing. But I think what I would say is that to the extent it checks, that checks those boxes, the day one earnings accretion, the long-term growth and NAV accretion, we're seeing those trends across all of our key markets, whether it's in Georgetown, certainly in Dallas. You know, we're gonna continue to do that and diversify.

I think it's, you know, I'll turn it over to Ken, but I think there's not a set target that we have, but just where can we, knowing where our cost of capital is and 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 (President and CEO)

Yeah. So I totally agree with what John said, and diversification, I think, does benefit our shareholders. But I would say that as or more importantly, is from AJ and the leasing team's perspective, it also, by being geographically diverse, enables us to remain highly relevant for a broad group of our retailers throughout the United States. Because a lot of the decisions of where we're seeing outperformance comes from conversations with retailers of what's where are you doing best? Where do you want to be next? And by adding assets, as we've referenced in today's call, in Georgetown and DC, or our expansions in Henderson and Dallas, all of those bode well from a perspective of making sure that we're capturing the right growth amongst our retailers.

Linda Tsai (SVP)

Sorry, sneaking one last one in for A.J. Just when you look at the pipeline of deals being signed, is it more domestic brands or international?

A.J. Levine (EVP)

Yeah, it's a nice mix. You know, certainly a market like Soho has always been a preferred landing spot for international brands, right? Not just luxury, but even a lot of the younger brands. I think Zimmermann is a great example of that. You know, that's a brand that started in Australia and decided to go international, and their first landing spot was in Soho. You know, Linda, what's more encouraging to me is when you start to see these brands notice and show up in markets like M Street, right? You know, tenants like Sézane and Zadig & Voltaire, Lugano Diamonds, right? Those are traditionally Soho tenants that are starting to focus on you know next entry markets. So that's when you really know you're turning the corner.

Ken Bernstein (President and CEO)

Thanks, Linda.

Linda Tsai (SVP)

Thank you.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Floris van Dijkum with Compass Point. Your line is open.

Floris van Dijkum (Managing Director)

Hey, thanks, guys, for taking my question. Good, good set of results, encouraging. Question, I have is, I guess maybe for A.J., or, or Ken, you might have planned on this as well. But I'm curious as to, how you look at OCR, and how does OCR compare across the various markets, and in particular, Soho versus Bleecker versus Williamsburg, and maybe touch upon Chicago. And then, you know, 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 some more details, that'd be great.

Ken Bernstein (President and CEO)

So let me set the table, and I, again, assume, Floris, you're referring to just the rent-to-sales ratio, tenant occupancy cost relative to. So, the very encouraging news, more or less across the board, is as opposed to prior cycles, two important areas of distinction. One is, in fact, the top line sales growth has improved over the last several years. A.J. touched on it relative to two thousand and nineteen, 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 at prior peak.

That room to run gives us a fair amount of comfort as we think about going forward, and that's confirmed by our retailers, who are saying they're very comfortable at rents where they are right now and their ability to grow it. The other piece that I'd say is equally encouraging is we are now absolutely in an omni-channel environment, whereas tenants in the past were kind of guessing as to whether or not there would be a halo effect from online sales. Now they know for certainty that there is a benefit of having a great store and it driving online sales.

They are also much better, much more sophisticated in the use of technology, the use of AI, in terms of site selection, that it's less guesswork, more science, and in an omni-channel world, OCR of an individual store is still critically important. But for the kind of locations we're talking about that are mission critical, 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. A.J., why don't you touch on the different markets and the distinctions-

A.J. Levine (EVP)

Mm-hmm.

Ken Bernstein (President and CEO)

That we're seeing in the Henderson's versus the SoHo's and the Williamsburg?

A.J. Levine (EVP)

Yeah. Look, I think generally speaking, in the more established markets, like the Gold Coast, like Soho, Madison Avenue, you're seeing, you know, mid-teens occupancy costs, which is, as Ken mentioned, gives you a good amount of room to run. You know, these tenants could push comfortably up towards 20 and into the low 20%. You know, 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, 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, right? So it really varies from market to market.

Floris van Dijkum (Managing Director)

Is that the same in Williamsburg, or how does Williamsburg compare to Bleecker versus Soho? Is it in between, or is it more like Soho in terms of the mid-teens occupancy costs?

A.J. Levine (EVP)

I'd say it's pretty comparable to Soho.

Floris van Dijkum (Managing Director)

Okay and then Dallas is like. Is Dallas even sub-10?

A.J. Levine (EVP)

Yeah, there are a number of tenants in Dallas, just 'cause the vintage of those leases and the improvement that we've seen. Yes, several of those tenants are sub-10%.

Floris van Dijkum (Managing Director)

Great, and thank, thanks, A.J. My follow-up question, if I may, obviously, you've got, you know, $270 million of acquisition sort of earmarked. You've got, you know, $120 million closed, $150 million in the for the core, I think in the final stages. How big of a pipeline do you have behind that? I mean, I guess, well, 'cause part of this is stems from the fact, well, you've done very little over the last years, partly because the market wasn't giving you the cost of capital.

But, you know, some people have also questioned, well, geez, how, you know, how deep is the street retail market, and how much capital can be put to work in this segment? And again, maybe if you can expand upon the, you know, the total size of the market, how much it I understand it to be pretty big, but if you could maybe expand on that, Ken, and the potential here to, you know, as I suspect, you know, several billion dollars can be invested comfortably. But I'd love to hear your thoughts on that.

Ken Bernstein (President and CEO)

Yeah. So for a bunch of different reasons, we remain very bullish on what the pipeline could look like. 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 $500 million of acquisitions that John referred to, 'cause whether it's the investment management platform or core portfolio, 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. 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, 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 the stars align. There are enough deals, both in the markets that we are currently active in 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 or our retailers are saying these are now established, must-have markets, that you can also see us get involved with. So I don't doubt that there are several billions of dollars of potential scalable assets for us. I don't doubt the team's ability, proven now, to digest them.

And so then it's just a matter of the negotiations, the pricing. It has to be attractive, because here's the final good news, Floris. You know, on one hand, it was quiet for a couple of years for all the obvious reasons, but our growth was pretty darn good. We have very strong internal growth for many years in front of us. So if the deals are not accretive, if they're not additive, if they don't make sense, we will have really powerful top line and bottom line growth just based on what we have right now.

John Gottfried (CFO)

Thanks, Ken.

Ken Bernstein (President and CEO)

Sure.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Jeffrey Spector with Bank of America Securities. Your line is open.

Jeffrey Spector (Managing Director)

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 A.J., on the strength in leasing and demand for space, 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?

Ken Bernstein (President and CEO)

Yeah, it is a combination, and A.J., feel free to chime in as well. First of all, let's acknowledge the headwinds that we experienced for several years. First was fears around, confusion around the so-called retail Armageddon. 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, those headwinds are tailwinds. Tailwinds, I mean, as follows: One, asked and answered, retailers recognize the critical nature of the store. Second was the so-called concern about e-commerce has become a halo, and in fact, where you can have stores that benefit from omni-channel, it's a net benefit.

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 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, 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 bode well for our portfolio and the ability to continue to drive rents. A.J., I said a lot, but, anything you want to add to that?

A.J. Levine (EVP)

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 that's where they choose to plant their flag.

Ken Bernstein (President and CEO)

Good.

Jeffrey Spector (Managing Director)

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 a combination?

John Gottfried (CFO)

It's really a suburban quick service restaurant, that small space that our leasing team just renewed. So really just down to a single small space.

Jeffrey Spector (Managing Director)

Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Seth Berge. Seth Berge with Citi. Your line is open.

Craig Mailman (Director, Equity Research Analyst)

Hi, it's Craig Mailman here. Just a question for you, Ken. It sounds like, you know, you think it's replicable to maybe do $300 million-$400 million of acquisitions a year in the near term, assuming stars align. You guys were able to kind of issue 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 annually, maybe for the next year or two, and keep leverage kind of in check, what should we think about 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 on an EV basis?

Ken Bernstein (President and CEO)

John, you want to touch on that?

John Gottfried (CFO)

Absolutely. So I think, Craig, as I put in our remarks, that our balance sheet's right where we want it, and we're going to keep it there, right? So I think let's just start at that starting point. So anything we do is going to be leverage neutral, and whatever we do, we're going to be very well aware of our cost of capital is. We know what it needs to be FFO accretive day one, but I think more importantly, we know what the growth we have is. So I think where, you know, when we look at our acquisition meetings, that's why it's critical that we look at, and we check all those boxes. So day one, earnings growth, NAV accretive, and that we do have the growth that we have as we have today.

I think those are the ways that we're gonna approach it, leverage neutral, and what we're buying is accretive to what we're already on.

Ken Bernstein (President and CEO)

And then just to add to that, Craig, in terms of asset sales, 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, we do have several arrows in our quiver without having to lever up, and that's what you should expect to see.

Craig Mailman (Director, Equity Research Analyst)

Great. And then, on Henderson, as you guys move forward, sounds like the yields there are pretty attractive. But from a risk mitigation standpoint, is there a targeted level of pre-leasing or at least, you know, deals in maybe an LOI stage that aren't signed yet, but just to give you the confidence to go forward with additional build out there to hit those returns without, you know, a higher level of risk to the extent they're not pre-leased?

Ken Bernstein (President and CEO)

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 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.

Craig Mailman (Director, Equity Research Analyst)

Okay. Then maybe just one last one. It sounds like North Michigan leasing's picking up a bit. Any update on potentially selling part of the building next to Water Tower Place? 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 re-lease to existing retail?

Ken Bernstein (President and CEO)

First of all, leasing demand is improving, and that's positive. 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. We think what we have on North Michigan, thankfully, is rebounding and should be accretive. John, anything?

John Gottfried (CFO)

No, I think that sums it up. Nothing to add there.

Craig Mailman (Director, Equity Research Analyst)

Great. Thanks.

Ken Bernstein (President and CEO)

Thanks, Craig.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.

Todd Thomas (Managing Director, Equity Research Analyst)

Hi, thanks. Good morning. Ken, first, I wanted to go back to the investment management platform. And while you're acquiring assets with partners, you did sell a Fund V asset in the quarter, and you mentioned you have potential to raise capital there. You have over $100 million of annualized rent being generated in Fund V alone. Should we assume fund dispositions accelerate as off-balance sheet acquisition activity picks up? Is it more of a capital recycling exercise within the investment management platform, or should we think about growth 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?

Ken Bernstein (President and CEO)

So let me start, but John, I want you to chime in. What we think is prudent for now is to assume stability. Yes, it could ramp up and grow, Todd, but we also want to continue to monetize. As you pointed out, this last deal we sold in Fund V was north of a two X equity multiple, north of a twenty IRR. If we can achieve those for Fund V, there's a lot of economic benefit to our shareholders and to our investors, and that's what the buy-to-sell platform does. It could ramp up, but for now, for modeling purposes, assume stability. John?

John Gottfried (CFO)

Yeah, that's what I was just gonna add, 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 is that we are putting deals in separate separate vehicles that do not have cross promotes. So I think this will enable us to get to promotes earlier and more visibility into those. So I think that's where what we like about it is the stability and the ability to get to a promote in a faster pace. But I would say for our model, I would assume it remains stable.

Todd Thomas (Managing Director, Equity Research Analyst)

Okay. And then, 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 some time, but the company's cost of capital has improved meaningfully here over the last year. You know, I'm just curious about the way, you know, the formula there, why it has not improved relative to the spread that you're, you know, able to invest at? Or are you just being conservative as you, you know, think about the accretion from external growth with, you know, some of the other moving pieces?

Ken Bernstein (President and CEO)

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 boxes to check. The growth rate of what we achieve up here is higher than perhaps we theoretically thought about.

John Gottfried (CFO)

And we're allowed to beat our 1%, you know, every $200 million. So I think it's acknowledges all your points, but, yeah, we're allowed to beat it. Done.

Ken Bernstein (President and CEO)

7% growth, Todd, feels pretty darn good.

Todd Thomas (Managing Director, Equity Research Analyst)

Okay. Thank you.

Ken Bernstein (President and CEO)

Thanks.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Ki Bin Kim with Truist. Your line is open.

Ki Bin Kim (Director of Equity Research)

Thank you. Good morning. Just want to go back to the topic about occupancy costs in your more established markets being in the mid-teens and maybe can go to low to mid-twenties. Can you remind us where that was, the prior healthy peak for that occupancy cost ratio? And ultimately, do you think you can get there through renewals, or do you need a different slate of retailers to get to that higher occupancy cost ratio? Thank you.

Ken Bernstein (President and CEO)

A.J., why don't you take that?

A.J. Levine (EVP)

Yeah. I'd say the last go-round, occupancy costs were probably closer to that 20% range. You know, again, one of the quivers that we, or one of the arrows that we have is fair market value resets, right? So that's really how we're going to pry loose a lot of that value. So the tenants that can afford to stay at market will. Those that can't, we will pry that space loose and mark-to-market at a pretty positive spread.

Ki Bin Kim (Director of Equity Research)

How prevalent are the fair market value resets in your street retail portfolio?

A.J. Levine (EVP)

More often than not, we have a fair market value reset. I can't think of a recent example of a deal we've done in our streets over the last, however many years, several years, that doesn't have some form of a reset.

Ki Bin Kim (Director of Equity Research)

Okay, great, and in terms of watch list, as we look forward, any particular reason to think of it, you know, up or down from what we've seen from the past couple of years?

Ken Bernstein (President and CEO)

Anyone want to take that?

A.J. Levine (EVP)

Yeah.

John Gottfried (CFO)

Yeah. So, Ki, I think we've been, as an industry, really fortunate in terms of watch list and retailers. So I would say that, you know, we're prepared that, you know, there will be retailers that will struggle. Fortunately, we have a lot of confidence where we're at as we sit today. So, you know, long-winded way of saying, you know, I think we are aware that there will be and all the well-known names that are out there, that we are. We're certainly watching. I think the difference now is that the retail demand that's behind it, and our ability to quickly on spaces, having multiple tenants that are interested, that there's just no supply of high-quality space.

I think, you know, we should be very aware, and we are of retailers, and A.J. and his team are proactively pulling that space back, and, you know, we're very comfortable we get a lease.

Ki Bin Kim (Director of Equity Research)

Okay. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Paulina Rojas-Schmidt with Green Street. Your line is open.

Paulina Rojas Schmidt (Equity Research, Senior Analyst)

Good morning. 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? 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? And what do you think are the drivers behind that growth differential from a fundamental perspective?

Ken Bernstein (President and CEO)

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, because supermarket anchored still is where most of the initial investment activity was, and thus is probably the most crowded of the areas. In comparing, 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 are pretty similar. Now, historically, street retail had lower going-in yields because of the growth, but as it sets up today, feels like going-in yields are about the same, and then the growth rate is about twice for street retail 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 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. Two, the fair market value resets that A.J. mentioned, that we tend not to see in the supermarket side. So we think that the long-term growth, defined as the next five-plus years 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, supermarket's more defensive and therefore deserves.

But if you assume 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, 4%-5%, maybe higher for street retail, 2%-3% for supermarket anchored, then you're getting to high single-digit unlevered returns. That feels pretty good for retail overall.

Paulina Rojas Schmidt (Equity Research, Senior Analyst)

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? It seems wide to me. 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 retail space you were thinking about?

Ken Bernstein (President and CEO)

Yeah. So the reason that there is a very wide range, and it 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 add, build, and lease the office piece of this. So we're feeling pretty good about it, but we recognize that new development has risks, and so we wanna do this in phases. Final point to keep in mind, we own a lot of Henderson right now. We're in fact gonna add a few more existing buildings to this. And this expansion, if it happens in full phase, and I'm pretty confident it will, is going to lift the whole Henderson Avenue.

So then, even separate from the unlevered 8% yield that I mentioned in the prepared remarks, there's the lift to the existing portfolio, 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 then thus gets a lift as well. So, give us some time to give you updates over the upcoming quarters, but we think we can do this in reasonable phases, but my goal would be to be at the upper end of that and to have A.J. have at least so that that accretion hits the bottom line sooner rather than later.

Paulina Rojas Schmidt (Equity Research, Senior Analyst)

Thank you very much.

Ken Bernstein (President and CEO)

Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Mueller with JPMorgan. Your line is open.

Michael Mueller (Senior Equity Research Analyst)

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?

Ken Bernstein (President and CEO)

Yeah, I mean, it's relatively an extension. They're all clustered in the same area. There's 10 architecturally distinct buildings. It's right across.

Michael Mueller (Senior Equity Research Analyst)

Really.

Ken Bernstein (President and CEO)

It's right in the mix. That's the fifty-yard line of what we own.

Michael Mueller (Senior Equity Research Analyst)

Yeah.

Ken Bernstein (President and CEO)

I'm not sure if you've watched it, but we have the Sprouts grocer on one end, and we have the Taco Bell and Warby Parker in the middle. And what A.J. is talking about is the middle, is that vacant land parcel that's gonna connect the entire street. Think of some of our other locations that we curate. That's exactly what this is, is bringing, connecting all of those and pushing rents from there.

Michael Mueller (Senior Equity Research Analyst)

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 84.2% in the quarter. Can you walk through where you see that settling, say, by year-end 2024, year-end 2025, as the NOI ramp that you talked about takes hold?

Ken Bernstein (President and CEO)

Yeah. So Mike, and just as a reminder for anyone new in the call, the percentage is somewhat, not somewhat, is very irrelevant to the actual space we're leasing, just given the variation of rent, whether it's first floor space, second floor space, et cetera. So dollars is probably the better way to look at it. But what I'll talk about is two things. One, I think in terms of occupancy percentage, where we think we land by, call it year end 2025, when we just look at what's signed, not yet open, I think that gets us to, you know, you can see with the lease rate of that, that should get us into around 90%. And I think we'll, you know, we will get there, you know, throughout 2025, by the end of the year.

Then I would say full occupancy, both in terms of percentage and on economic occupancy. I would say by 2026 is where we would get to full occupancy, which we design as 94%-95%, both economic and actual percentage.

Michael Mueller (Senior Equity Research Analyst)

Got it. Okay, thank you.

Operator (participant)

Thank you. 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 (President and CEO)

Thank you all for taking the time, and we look forward to speaking with you again next quarter.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.