Acadia Realty Trust - Q4 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to Acadia Realty Trust Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, it will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. I would now like to hand the call over to Jeff Winston. Please go ahead.

Jeff Winston (Senior Associate for Asset Management & Development)

Good morning, and thank you for joining us for the Fourth Quarter 2023 Acadia Realty Trust Earnings Conference Call. My name is Jeff Winston, and I am a Senior Associate in our Asset Management 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 1934, and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risk and uncertainty, 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, February 14th, 2024, 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 CEO, who will begin today's management remarks.

Ken Bernstein (President and CEO)

Great job, Jeff. Thank you. Welcome, everyone. Happy Valentine's Day. I'm here with John Gottfried, Stuart Seeley, and A.J. Levine. I'll give a few comments, then hand the call over to A.J., then John will discuss our earnings, our balance sheet metrics, and our guidance. After that, we're here to take questions. As you can see in our earnings release, our 2023 performance was very strong. Same-store NOI growth was nearly 6%, and new lease spreads were over 40%. This same-store NOI growth is comping off prior year's growth of over 6% as well. Fourth quarter results also showed continued strength, driven by the street retail portion of our portfolio delivering 10% same-store NOI growth, and strong leasing spreads.

I'll let John discuss the moving pieces of our earnings in detail, but in short: our goal of creating superior top-line growth at the property level, and having that growth translate into bottom-line earnings growth, remains on track. As we look to 2024 and beyond, the leasing momentum we saw last year is continuing. This is evidenced by both our significant Signed Not Open activity and the leasing pipeline behind it. And while in some respects last quarter might be viewed as just another solid quarter from an internal growth perspective, I think there is a more meaningful shift going on. We are now past retail simply experiencing a COVID lift or a COVID recovery. The shift in retailer sentiment and retailer activity feels more secular than cyclical, and thus more long-lasting than just a rebound.

While we first saw this as a lift in the suburban and necessity portions of our portfolio, and we're still seeing strong, solid performance there, the longer-term growth is now having its most material impact within the street retail component of our portfolio. It is looking more likely that that growth rate in street retail has real staying power. A.J. Levine will discuss the drivers of this trend in further detail, but as it relates to internal growth, these secular tailwinds should add further support to the multi-year growth goals that we have been discussing and delivering on for the last couple of years. Along with continued momentum on internal growth after several relatively quiet years, actionable external growth opportunities are starting to emerge. We are seeing a narrowing of the bid-ask spread, an increased likelihood that accretive growth will start to pencil out.

Since retail has not been an area of focus by institutional investors over the last several years, there are just fewer well-positioned, capable buyers. Now, granted, the inverted yield curve and elevated interest rates are still a headwind for improving deal flow, but this is beginning to shift. Increased optimism about improving borrower cost, coupled with resilient tenant demand, is helping underwriting. And more significantly, whether due to more realistic appraised values or other factors, sellers seem to be more realistic and more willing to transact. A couple of quarters ago, I thought the majority of our activity would be distress-focused, either discounted debt or forced sales, and it's still likely that there will be a fair amount of what we refer to as special situations, certainly for office, but other products like retail as well.

Given the non-performing nature of much of this type of investing, we'll likely participate in distressed special situations in conjunction with one of our strategic capital relationships. But more importantly, we are now seeing sellers begin to emerge that are not highly distressed, just motivated. They may have some staying power, but not unlimited patience. This shift means our pipeline for a broader variety of opportunities is coming together nicely. You will hopefully see this reflected later this year and for years to come. Here's how we're thinking about external growth. In terms of product types within open air, we consider ourselves to be highly confident in all areas of open retail and try to position ourselves to be open-minded as to which growth opportunities, which capital structure, which risk-adjusted returns are most compelling at any given time. Here's how that landscape looks today.

In terms of power or junior anchor-dominated regional centers, these will have the highest going-in yields. But in order to have net effective growth, special attention will have to be paid to tenant turnover and the cost of re-tenanting, which heavily impacts net effective growth. We still think this area can provide attractive risk-adjusted returns, but as was the case with our Fund V investing, we'll continue to focus on this investing in the fund or strategic venture format. Then in terms of supermarket or neighborhood-anchored centers, investor demand remains strong because of their resilience during COVID, the defensive profile, the ease of underwriting, and this segment is probably the most covered or most crowded in terms of competition for bidding. So unless there's a value-add component, it will be hard for us to be constructive.

We could add the right supermarket-anchored assets, both on balance sheet or in a joint venture structure, but in either case, growth opportunities will have to be compelling. In terms of street retail, after several bumpy years, we believe this segment will have the highest long-term net effective growth. For a variety of reasons, notwithstanding the ongoing rebound in fundamentals, street retail seems to be trading at an elevated floor on cap rates, with going-in yields that don't appear to take into account the growth potential. And this is creating an opportunity for asymmetrical upside. Now, granted, street retail requires the highest level of expertise to underwrite as it lacks some of the uniformity of other open-air assets.

And while not all streets, not all markets are recovering equally, the initial fear that street retail was too idiosyncratic or a zero-sum game, with the Sunbelt winning and other key markets losing, is turning out not to be the case. For most retailers, there is more synergy than cannibalization, meaning retailers can thrive in SoHo and in Nashville. And since there are more markets that are thriving from a scale and opportunity set perspective, we think there should be plenty of deals of size out there. We think we are entering a period where our shareholders will benefit from the expansion of our highly differentiated street retail portfolio in our core portfolio, provided we can do it on a leverage-neutral, earnings, and NAV-accretive basis.

Given our expertise and our extensive experience in this space, Acadia is well-positioned to be a consolidator in street retail assets in this phase of the cycle. While a key focus will be, to the extent practical, to grow the street retail component on balance sheet, adding to the 70% of our current portfolio, that is street or urban, we suspect that there could also be several larger opportunities that will also include the leveraging of our strategic capital relationships. We are in a period where having access to multiple sources of equity and debt should inure to our shareholders' benefit. Finally, from a capital allocation and deployment perspective, a few thoughts. Capital recycling will be part of our growth strategy. It can come from multiple areas. First, from portions of our core portfolio that might not be as high growth or not consistent with our long-term growth strategy.

And then second, from portions of our over $2 billion of assets currently in our fund or investment management platform. Investor interest is growing, and we should be able to capitalize on this increased interest. This means we should be able to bring in new capital on a non-dilutive basis and then redeploy it accretively. Given our recent equity issuance, our balance sheet metrics are getting to where we want them so we can also afford to be strategic with our capital recycling initiatives. Finally, since it doesn't take much volume to move the needle for us, even a few acquisitions can add meaningfully to our external growth. So to conclude, the stars are beginning to align. This year, we will be keenly focused on the three key drivers of our growth. First, driving solid internal growth. Second, maintaining a solid and flexible balance sheet.

And third, executing on our accretive external growth strategy. The combination of improving fundamentals, improving debt markets, improving bid-ask spreads, and investors inching their way back to retail are all positive trends. And we're in a great position, having access to both public and private capital, to use our platform to execute a highly accretive growth strategy. And with that, I'd like to thank the team for their hard work last year, and I will turn the call over to A.J. Levine.

A.J. Levine (SVP of Leasing and Development)

Great. Thanks, Ken. Good morning, everyone. So every week, I get asked the same two questions. First, is there any sign of a slowdown? And for the last 2+ years, my answer has consistently been a resounding no. Despite some of the choppiness in retailer sales that we saw in 2023, fundamentals remain strong, and it's feeling as if that trend will continue well into 2024 and beyond. Now, that doesn't mean that we're naive to the impacts of inflation or the normalization in sales growth that we saw in 2023, of course coming off of a record year of sales growth in 2022. But it does mean that when I speak with our tenants, they are yet to signal any anticipated slowdown in new store growth. There are always exceptions, but for the vast majority of our tenants, they continue to see a remarkably strong consumer.

They are still comping significantly positive against 2019 sales, and they are still operating under the reality that the physical store is the greatest driver of profitability for their businesses. When one of our luxury tenants on the Gold Coast tells me that despite a relative slowdown in 2023, they are still comping up 50% against 2019, it no longer surprises me. And that general message holds true across the board. So that leads me to the second question. Do you have any space for me? This is true for both the suburbs and the streets, but particularly on our high-growth streets, the demand for new stores well exceeds the supply of desirable space. The biggest challenge facing my retailer counterparts today is the lack of well-located, high-quality space.

And as Ken mentioned, this is the result of the trends that we started seeing in late 2020, early 2021, that have persisted and appear to be more secular in nature. Robust yet thoughtful and disciplined retail expansion into both new and existing markets - that's certainly true for our luxury markets like SoHo and the Gold Coast - but also applies to markets like M Street where luxury hasn't yet shown up, but that hasn't deterred dynamic brands like Alo Yoga, Skims, and Glossier from planting their flags on the street. The pivot away from department stores and toward freestanding, open-air storefronts on our streets and the inevitable clustering of other like-minded brands within these markets. In cities like New York, Los Angeles, Chicago, increased customer demand and a diverse demographic profile has prompted many of these retailers, including luxury, to have multiple locations within the greater market.

They can capture the tourist in one neighborhood and the local shopper in another. They can do Madison and 5th Avenue and SoHo, and in the case of Hermès, they can even add Williamsburg. They can do Melrose and Rodeo. In terms of rents, the sharper decline in rents that we saw on our streets coming into the pandemic and the remarkable recovery we've seen over the last few years will continue to provide stronger net effective rent growth relative to our suburbs. In our existing high-growth markets like SoHo, Melrose, the Gold Coast, M Street, the double-digit rent growth we've seen over the last few years should continue. Stronger sales are fueling higher demand, now layer in low supply and natural barriers to entry, and that is a recipe for sustained growth.

To be clear, even with a moderation in rent growth moving forward, many of our markets can still experience low double-digit growth. With the healthy occupancy costs that we've been seeing, these markets will remain affordable for our tenants. On a related note, just like in past quarters, we continue to proactively pry space loose on our streets and accelerate a positive mark-to-market. In the third quarter, in SoHo, we accelerated a 45% mark-to-market spread, and in the fourth quarter we did the same, this time with a 25% spread over a one-year period, and this was done at zero out-of-pocket cost to Acadia. Now, that's very hard work, but the team has shown themselves to be more than capable of identifying these opportunities and then getting to work on unlocking that value.

For those spaces that we can't recapture early, the street-centric nature of our portfolio will allow us to capture that growth through FMV resets. Of course, this is not unique to our portfolio. Space in SoHo that was being offered at $3.5 million in ABR just one year ago recently leased at $4.5 million. That's 30% growth in one year. That only happens in markets with a combination of low supply, high foot traffic, and the right brands, including luxury, that will cluster and create the right ecosystem to attract those shoppers. Additionally, that scarcity of space should also continue to accelerate the rebound of traditionally high-growth markets that have been slower to recover, like Madison Avenue in the '70s, North Michigan Avenue, and eventually San Francisco, as well as newer markets like Nashville and Tampa. As Ken mentioned, this is not a zero-sum game.

Retail expansion and rent growth has and will continue to occur in both established and newer growth markets. Overall, the net result of all this was another exceptional year of both street and suburban leasing. In 2023, we signed approximately $11 million of new core leases, representing 8% of in-place ABR. That eclipsed the $9 million in new leases we signed in 2022. We added a number of key retailers to our core portfolio, including Zimmermann, Madewell, Club Monaco, Alo Yoga, SKIMS, and the ANINE BING, and the pipeline remains strong. Already this year, we have an excess of $4 million in new core leases in advanced stages of negotiation. Shifting for a minute to City Point. The park is complete. Our neighbor, which is the tallest residential tower in New York outside of Manhattan, is open, and residents are starting to move in.

The scaffolding is coming down, and we are no longer leasing into a construction zone. In more recent news, Live Nation will be opening a 2,000-seat theater directly across from City Point. In terms of occupancy, the retail on our upper floors and concourse level are spoken for, with best-in-class anchors including Target, Primark, Alamo Drafthouse, and Trader Joe's. This past year, we successfully anchored both ends of Prince Street with Fogo de Chão on the north and Sephora to the south. But despite this momentum, in many respects, the leasing story at City Point is just beginning. Much of our most valuable street-level space is yet to lease, and with positive mark-to-market opportunities, there remains substantial embedded value at City Point still ahead of us.

So wrapping it all up, an exceptional year for fundamentals and an exceptional year for leasing volume in both our high-growth streets and our suburbs, and no sign of a slowdown on the horizon. So with that, I will pass things off to John.

John Gottfried (EVP and CFO)

Thanks, A.J., and good morning. As outlined in our release, we had a strong finish to the year, with our same-store NOI and earnings coming in above our initial expectations. As a recovery within our street retail portfolio not only continued, but as we had been anticipating, accelerated throughout the year, with growth of 10% during the fourth quarter. We kick off the new year, that momentum is continuing. Our multi-year core internal growth of 5%-10% remains intact, along with a balance sheet that is now in a position to capitalize on an expanding pipeline of accretive opportunities, which sets us up for above-trend same-store NOI and FFO growth over the next several years. Now I'll provide some more color on the quarter, along with an update on our multi-year outlook, starting with our fourth quarter results.

In line with our expectations, we reported FFO of $0.28 per share for the quarter. In terms of same-store in Hawaii, we came in at the upper end of our guidance range, with growth of 5.8% for the year. Additionally, as I highlighted in our release, we reported same-store growth of 4.2% for the fourth quarter. We wanted to point out a couple of things related to the quarter. First, the fourth quarter results were comping off our 2022 quarter, which had included approximately $400,000 of prior-period cash recoveries, which, if excluded, would have increased the 4.2% we reported to 5.7%. Secondly, and as outlined in our release, our street portfolio grew in excess of 10% on a same-store basis.

Not only have we been anticipating this acceleration, but we are feeling increasingly confident that this double-digit growth will continue, with our model projecting about 10% annual growth from our street portfolio over the next several years. And with roughly 45% of our pro-rata NOI coming from the streets, this 10% annual growth is expected to generate incremental NOI of approximately $18-$20 million on our share. And we are already well on our way of capturing this, with more than half of the $18 million-$20 million already accounted for. Approximately $6 million will come from the 3% escalations that are built into our street leases, along with another $6 million from executed street leases that have not yet commenced and are included in the $7 million of signed but not yet open pipeline that we reported at December 31st.

Which leaves us with another $6 million-$8 million of street retail growth coming from two additional sources. First, about half, or $3 million-$4 million, is anticipated to come from projected cash rent spreads on expiring leases over the next few years, with the balance coming from lease-up of our current inventory of available space. And to be clear, this is just the growth coming from our same-store portfolio, meaning the $18 million-$20 million of NOI, or 10% annual growth, is before any potential upsides from our redevelopments on North Michigan Avenue. So while we are starting to see some encouraging activity on North Michigan, neither our 2024 guidance nor our base-case multi-year projection assumes a recovery. It's also worth pointing out that in addition to the extraordinary growth we are projecting from the street, we are also seeing solid trends across our core and fund platform.

In fact, as we look into 2024, in addition to the 5%-6% of projected 2024 same-store NOI growth, we are projecting 6.5% of total NOI growth from our core and fund businesses, inclusive of redevelopments. The good news is that our leasing team has already signed the vast majority of leases necessary to achieve our 2024 goals, with $13 million of executed leases representing 7.5% of in-place ABR on our share and the signed but not yet open pipeline at December 31st. This $13 million of signed but not yet open pipeline is comprised of $7 million from our core operating portfolio that we highlighted in our release, which represents the assets in our same-store pool, with another $4 million of signed leases from assets in our core redevelopment and $2 million from our fund business, with all of these amounts being on our share.

Let's now transition from how this NOI growth impacts our 2024 outlook. Consistent with what I introduced on our last call, we are projecting $1.28 of FFO at the midpoint. This equates to earnings growth of about 5% over 2023, before the $0.08 for the non-cash gain on the Bed Bath & Beyond lease, and over 7.5% when adjusting our FFO for the promotes earned from our fund business. As you may recall from our last quarter's call, our 2024 earnings growth is being driven by the underlying strength of our core business, with $3 million of ABR that commenced fairly late in the fourth quarter that we highlighted in our release, along with another $7 million that is included in our signed but not yet open pipeline, of which approximately 85% of those represent street leases and will commence throughout 2024.

Last point on earnings, with strong year-over-year earnings growth of about 5% or over 7.5% before promotes, we see the potential for upside on our numbers from a few areas. First, we are now past the painful and long-discussed rollover on North Michigan Avenue and the bankruptcy of Bed Bath & Beyond. In fact, as we look forward, these historical headwinds are now a source of upside, as neither our 2024 guidance nor our base-case multi-year projections have assumed a near-term recovery. Secondly, we have made significant leasing progress, with $13 million of executed leases in our signed but not open pipeline, representing 7.5% of our core and fund NOI, coupled with a long and growing list of LOIs out for available space.

We are in great shape to not only hit our 2024 leasing goals, but with a lot of calendar left in the year, a very realistic opportunity to beat them. Not to mention that the rental rates our team is achieving on new leases is routinely beating the rents we had assumed in our model. Finally, we have not factored in any earnings accretion from external growth, but as Ken discussed, we are starting to see some exciting and accretive opportunities. As I will discuss now, our balance sheet is now at a point where we can and will aggressively pursue these. As it relates to the balance sheet, let me first start off with talking about how we thought about the equity raise that we completed in early January.

As you would expect, we thought long and hard about the decision to issue our equity below NAV. But in this unique instance of being able to raise a moderate amount of equity on a non-dilutive basis, it enabled us to accelerate our balance sheet goals by at least a year, if not more, and put our balance sheet in a much better position to go on offense. And to be clear, our goal is and will be to get our core debt to EBITDA back into the 5%s. We are now in the low 6%s post-equity raise and projected to be in the high 5%s on a non-earnings-dilutive basis by year-end, if not sooner. Thus, our acquisitions team now has both the balance sheet and liquidity it needs to aggressively pursue the external opportunities that we are seeing.

We will fund this accretive external growth on a leverage-neutral basis, using all of the diverse and efficient sources of capital that are available to us, whether it's recycled capital from non-dilutive dispositions, repayments from our loan book, retained earnings from our business, or the issuance of common equity or private capital. Lastly, on the balance sheet, I wanted to highlight our exposure and potentially the opportunity related to interest rates. With a core balance sheet that is fully hedged and no meaningful maturities over the next few years, we are well-positioned to have overall stability in our earnings related to interest cost. With the vast majority of our floating-rate exposure in the funds already being to mark-to-market in terms of both spread and base rates, we have some upside in our earnings if and when the interest rates begin the downward trend that the market is predicting.

In summary, we are starting the year with a strong balance sheet along with a near-term and non-dilutive path to get it back to best-in-class. We are excited about the internal growth that we are poised to generate in 2024 and for the next several years, along with the potential to beat our expectations, whether it's the continued acceleration in our street portfolio and/or the accretion from external growth. With that, we will now open up the call for questions.

Operator (participant)

As a reminder to ask a question, you will need to press star one one on your telephone if you've not already. To remove yourself from the queue, you may press star one one again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Linda Tsai of Jefferies. Your question, please, Linda.

Linda Tsai (SVP and Senior Analyst for US REIT Team)

Thank you. Good morning. In terms of the outside 10% same-store growth in the street portfolio this quarter, how sustainable is this run rate and why?

Ken Bernstein (President and CEO)

John, why don't I let you talk about the specific numbers as to our portfolio, and then maybe I'll touch on these tailwinds from a more macro perspective.

John Gottfried (EVP and CFO)

Absolutely. And Linda, before we just back to what I spoke about in my prepared remarks, it's a little under half of our portfolio. And when we look at our model, you factor in the 3% contractual escalations that we're getting. We have a good chunk of great space that A.J. and his team are actively leasing up, and then the mark-to-markets. So I think you look at that. That's, as I outlined, $18 million-$20 million that we think we capture over the next two and a half, three years. And when we model that out, that portion of our business, just a little under half, is projected to grow annually 10%.

Ken Bernstein (President and CEO)

So then let me transition from that to why we see what I referred to in our prepared remarks as a secular shift. And while I neither expect nor hope that market rents continue to grow at the 10%-20%, and A.J. even mentioned 30% in one of our markets, year-over-year, I do think that street retail is poised for high single-digit market rent growth and thus our ability to capture it and others' ability to capture it in street retail as follows. As John touched on, 3% contractual growth is industry standard. Fair market value resets also fairly common. But what you need is really three different components as I think about it. One, you need supply and demand, and A.J. talked about now having more tenants than space. And that's a good tailwind to have right now after several tough years.

Second, you need to have strong tenant sales. Tenants can only continue to pay more rent if their sales are there, and A.J. mentioned that as well. And then finally, you have to have the right deal structures. You have to have the ability to capture that rent growth. In a strong supply-demand, strong rent-to-sale, you need to have the right contracts, and we do. Final point is why now? Well, if you think about the last 10 years, almost 10 years ago, we entered into what was an oversimplified so-called retail Armageddon. And that was the notion that retailers were going to be able to migrate their sales profitably online. The migration online occurred, but the profitability didn't.

By around 2019, it was becoming clear to a variety of our retailers that the ability to use online sales as the main driver of profit was going to be too elusive. But COVID hit, and thank goodness for online sales because it kept a variety of retailers alive. What retailers saw in 2019, they are now executing on today, and that means they're recognizing the importance of the store. Whether it's discount department stores, off-price, certainly luxury and aspirational and everyone in between, that tailwind is what's driving then this long-term growth.

Linda Tsai (SVP and Senior Analyst for US REIT Team)

Thanks for that, color. And then you sort of referred to this earlier, but what types of opportunities are most compelling for you as it relates to external growth?

Ken Bernstein (President and CEO)

So partially because there's less competition, partially because or significantly because we see outsized growth, we are probably most excited about street retail. That's not to diminish the other areas that also I see tailwinds for in terms of open-air retail, but we think that there is an opportunity now to capitalize on that. We're seeing increased seller interest and willingness. We see what I referred to as an artificial floor on cap rates, and I can get into that later, but we see what I think will be a good entry point at some point in 2024. And so we're looking forward to that really nice combination of strong internal growth and now the ability to add a penny here, a penny there, which on a company of our size really adds up.

Linda Tsai (SVP and Senior Analyst for US REIT Team)

Just one last one. What kind of assumptions are baked into the high and low end of same-store growth for your whole portfolio, and what are the assumptions for bad debt at the high and low end?

John Gottfried (EVP and CFO)

Right. Linda, I think first just on the rent side, so I think as I alluded to in my remarks, where we have a chance to hit the upper end is if leasing team hits some of they're able to pull forward some of our expectations of when we get space assigned. So I think that's the key, is that do we beat our base-case expectations on not only getting the leases signed but open? So I think we have a very deep team of professionals that try to accelerate that commencement, so between leasing getting a lease signed and our property management team that is making incredible strides on accelerating the time from signing to execution. I'm sorry, to commencement. Those are the two areas where we beat it.

Then on credit, we have, again, and what I would say is each month wake up thinking we're going to have some sort of deterioration in credit. We're just not seeing it in the terms of collections, disputes. We're not seeing any downward trends. But within our guidance, I've put in a conservative, particularly over where we saw last year, expectation of 1.5%, so 150 basis points of rents of credit reserve that I built in, which is more than we needed last year.

Linda Tsai (SVP and Senior Analyst for US REIT Team)

Thank you.

Operator (participant)

Thank you. Stand by for our next question. Our next question comes from the line of Craig Mailman of Citi. Please go ahead, Craig.

Craig Mailman (Director and Equity Research Analyst of Real Estate and Lodging Team)

Hey. Good morning, guys. Just followed back on the acquisition theme here, Ken. Can you just go through where you would see Acadia kind of put out its own capital fully on balance sheet versus bring in potential partners and maybe what those partnerships could look like relative to maybe the historical use of funds?

Ken Bernstein (President and CEO)

Yeah. So obviously, it will be very dependent on what our on-balance sheet cost of capital, both debt and equity, versus utilizing outside sources. And while every deal could look different in our investment management platform, our historic economics are probably a good starting point. So the issue will be where and when will the right pricing show up? Here's what excites me in terms of on-balance sheet. And to be clear, Craig, I think our shareholders will benefit from earnings-accretive acquisitions on balance sheet of assets that are consistent with the 50% of our portfolio that is street retail. I think that there is less competition in terms of buyers.

There are sellers now who, after a couple of years of not being able to transact, are recognizing either that time's up or, as often as not, it probably is as good a time as it might be for them to exit these kind of assets. The going-in yields have an artificial floor on them. And let me explain what I mean by that. For retail in general, there is a hesitancy by institutional investors and then other similar investors. There is a hesitancy for retail in general to enter in at yields lower than borrowing costs. And I'm talking about private market borrowing costs. Now, that is true for supermarket anchors, and that's probably the most crowded of the trades. And so it's true for a variety of other components as well.

What that means for street retail, which should have about twice the growth rate as what we're seeing in our supermarket portfolio, that creates an interesting opportunity. The stars have to align. They're not there yet, but it's feeling real close for on-balance sheet acquisitions that pencil out. In terms of utilizing other funds, if we were talking a year ago, I would tell you that institutions were at best what I referred to as retail curious. They were thrilled to take meetings and hearing about retail after not having invested in it in many years. What we've seen in the last three, six months is a shift, a recognition that they want best-in-class partners, and we're now in a position to partner with a variety of different institutions.

So if we are unable to acquire accretively on balance sheet for street retail, we absolutely will utilize some of those relationships. Then irrespective of whether or not we grow street retail on balance sheet, if you look what we did with our Fund V power center acquisitions, been highly successful, I have every reason to expect us to continue to do that. Then to the extent that special situations, distressed debt, other kind of workouts and restructurings become viable, we are being asked by a variety of capital sources to partner with them to be their retail solution in what might be pools of debt or complicated transactions.

So you put it all together, and I'm not going to predict which hits because it's so dependent on a bunch of moving pieces, but I am willing to tell you that whereas in 2023, I was cautious about even thinking about external growth, now I am much more excited based on what we see in our pipeline, the deal activity, and the outreach from both investors and sellers.

Craig Mailman (Director and Equity Research Analyst of Real Estate and Lodging Team)

That's helpful. I don't want you to get too over your skis in terms of guiding on potential acquisitions, but from what you're seeing in the pipeline, kind of what would be a base level that you'd be disappointed maybe if you don't get to over the next 12, 18 months given what's in the pipeline? Are there any new markets, especially on street, that you guys are closer to today than you were previously?

Ken Bernstein (President and CEO)

Yeah. So I want to be very, very respectful of your request for us not to get too far over our skis. So John, I think, said there is zero in our earnings growth associated with that, and I would be very disappointed if that is the case. But don't forget what A.J. Levine was just talking about. We have really good internal growth. So I don't feel a need to do something prematurely just to do it. We will remain opportunistic but disciplined. And keep in mind every $100 million-$200 million of acquisitions, whether done on balance sheet or through our investment management platform, can add $0.005-$0.01 per $100 million historically, and I think that could be the case going forward. So it could really move the needle if the deals make sense.

In terms of new markets, here's what we saw kind of heading into COVID and now out. There was what I referred to fear of a zero-sum game, that SoHo loses and let's say Nashville wins. Turns out not to be the case. Turns out our retailers, for a variety of reasons, are recognizing there are just more key markets that they need to control their own store and format in. You're seeing this for a variety of reasons and in a variety of geographies. One of the reasons is wholesale is generally shrinking. A lot of retailers, whether they're luxury or otherwise, are recognizing while the department store can still be an important component and an important channel for them, there are just fewer doors, and there is more desire to have their own location.

So with that added distinction, plus some of the migration we've seen over the last few years, markets that were experimental just a few years ago, like Nashville, like Tampa—I could go on with a variety of them. I picked those two because A.J. mentioned them. These are now locations that our retailers are saying, "If you build it, we will come. We need a location there. We want to be around our other retailers for a variety of reasons. There's strong demographic demand." So you add those at the same time. I'm more than happy to double down in Williamsburg, Brooklyn because the tenant sales and the demand there is strong, as is SoHo and, A.J. mentioned, Madison Avenue coming back. So make new friends but keep the old ones. Seems to be a logical way for us to continue to expand street retail.

Craig Mailman (Director and Equity Research Analyst of Real Estate and Lodging Team)

Great. Thanks for the color.

Ken Bernstein (President and CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of Todd Thomas of KeyBanc Capital Markets. Your question, please, Todd.

Todd Thomas (Managing Director and Equity Research Analyst)

Hi. Thanks. Good morning. First question, I just wanted to go back to the comments around capital recycling. I think you commented that some of that activity might be from both the core and from the funds. You haven't really sold much in the core over time, and I'm just curious how you think about the core portfolio and how much property you consider to be non-core and also whether you're marketing assets for sale or is the thought process that investments and capital needs will drive the decision to sell over time?

John Gottfried (EVP and CFO)

Yeah. So multiple components to that. Let's stick with the core portfolio first, Todd. The 50% that is street, the 20% that we call urban, the vast majority of those are core markets. And there are one or two that we have mentioned over time that were probably overweighted and would look to trim some. But in general, we see those as growth markets and are less likely to recycle there other than due to overexposure. Then for the 30% of our core portfolio, that is traditional, solid, suburban, what we have found is there have been inbound inquiries or we've reached out in general to investors who want to participate in those kind of assets and want a operating partner. And that would be best execution for us because, as I've said, we think we are best when we are agnostic as to the different components within open-air retail.

And so bringing in capital on that side may be more advantageous both economically but also just in terms of making sure our team can stay on top of the game. So could be recap of some assets, but could be sale as well. If they are lower growth and less consistent with our long-term growth strategy, there's no reason not to sell at the right time. So you pointed out we haven't shed it in the last few years. I would say it's been a tough time to be a seller of assets. Thus, you saw the lack of volume. If a friend called and said, "Hey, I want to sell an asset in 2023," I'd say, "Brace yourself." Now, 2024, increased investor interest. It is starting to feel like the bid-ask spread declines, and maybe we can have transactions there.

More importantly, though, the couple billion of assets that we have in our fund platform, there is increased investor interest, and that might also translate it. It might translate through to the old way we have and the traditional way of buy, fix, and sell. Nothing wrong with that. It would be great to see some more promote income come in. But there are also investors saying, "How about we just recapitalize some portion of Fund V, some portion of Fund IV?" And so we're certainly having those conversations in terms of potential transactions there. That's a fair amount of information, Todd, for what may or may not be a key driver of our capital. We're not looking to necessarily shrink the company. We don't have to. We are just saying, "Here are different ways we can create shareholder value.

To the extent that those numbers make sense, we will do it.

Todd Thomas (Managing Director and Equity Research Analyst)

Okay. Understood. And then, John, you mentioned that you're past the painful vacates and, I think, expirations on North Michigan Ave and that there's no recovery there really assumed in guidance. But can you provide an update on the status of H&M and some other movement at those assets that was anticipated, whether there's any NOI in the 4Q run rate and if there's any vacate activity that, I guess, could impact results in the near term just as we think about the quarterly cadence of earnings throughout the year?

John Gottfried (EVP and CFO)

Yeah. Absolutely. So why don't I, I'll walk through the numbers, and then I'll have A.J. talk about what early I mentioned some early signs of exciting things on the street. I'll turn it over to him. So I think within our 2024 guidance, highlighted that the pain is behind us. So an H&M is on a very short-term lease. So they found a new space. They will be moving later this year, but they're effectively on a month-to-month lease, Todd. That's baked into our numbers. Verizon is out very early this year. So I think they have a little bit left in the quarter, and then they'll be fully out. But that's baked into our numbers.

A.J. Levine (SVP of Leasing and Development)

Yeah. Yeah. I mean, what I would add to that is North Michigan Avenue still has a little ways to go. We are very encouraged by what we're seeing happening on the street.

Alo Yoga opening up, Aritzia not far behind opening up in 50,000 ft. The number of tours that we've had at our assets, the LOIs that we are aware of on the street has increased significantly over the last 3 months-6 months. And then, of course, there's the success that we saw on the Gold Coast, which is just a block over, the high level of demand, the incredibly low level of supply, and the inevitable spillover back onto the avenue that's going to occur as a result of that. And then, of course, Chicago. I'm yet to meet a retailer that in some form or fashion doesn't view Chicago as a market that they need to be in. So not at a SoHo level of recovery quite yet, but we're certainly on our way, and we're very encouraged by what we're seeing.

John Gottfried (EVP and CFO)

Todd, just to reclarify what I said in my remarks, all of that optimism, while I'm rooting for A.J., is not in our multi-year model. So whenever we talk about North Michigan from this point on, it's going to be upside.

Todd Thomas (Managing Director and Equity Research Analyst)

Okay. Yeah. Understood. But John, is there any way to just quantify, I guess, how much ABR or really NOI is still being that those assets are still generating and how much might come offline during the course of the year?

John Gottfried (EVP and CFO)

Yeah. Off the top of my head, I don't have the exact number, but it's de minimis. And I'll tell you, H&M's not covering their taxes, right? So this is one that's an insignificant amount of revenue throughout the year. It's literally keep the light.

Todd Thomas (Managing Director and Equity Research Analyst)

Okay. Okay. It's already a drag on earnings that's in the run rate today.

John Gottfried (EVP and CFO)

That's right.

Todd Thomas (Managing Director and Equity Research Analyst)

Got it. All right. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Floris van Dijkum of Compass Point, LLC. Your question, please, Floris.

Floris van Dijkum (Managing Director)

Great. Hey, thanks, guys. Thanks for the color on everything. Can you remind us? I think your street portfolio currently is only, I think, 91.5% leased or 91.4% leased. What is the actual percentage of paying or physical occupancy? And can you also remind us where peak occupancy was, obviously, in a different time? And give us an indication of what kind of upside potential we could look at.

Ken Bernstein (President and CEO)

So let me start while John looks at those numbers of when we say peak occupancy at a different time. We're getting pretty close to that different time, Floris. There is more demand for quality space than there is space. And A.J., I won't criticize you on a live earnings call, but why aren't we 100%? Obviously, it takes time to get the spaces open. But right now, for quality space, Floris, I think we can, in the key markets, get to full. That probably translates through into the mid-90s because there's always different spaces. But John, now why don't you give the numbers?

John Gottfried (EVP and CFO)

Yeah. So Floris, right now, we're about 89% physically occupied, and we're historically spot on. We were in the mid-90s up to 96.4% from what I recall. So we have a ways to go.

In my prepared remarks, that $18 million-$20 million does not. There's still room to run after that. So those are pretty well base case assumptions.

Floris van Dijkum (Managing Director)

Yeah. I mean, if you do the math, I mean, your average street and urban rent is $71 and depends a little bit on where that vacancy is located. I mean, there's some significant upside, it appears. Maybe two things I was curious on as well. You mentioned something about M Street, Ken, I mean, and maybe A.J. did as well in his remarks about there's no luxury there yet, but you expect that that could potentially happen. What do you see in terms of the signs for that, and what kind of impact, in your view, would that have on your holdings in that particular quarter?

Ken Bernstein (President and CEO)

So there is no confusion. We are not currently predicting luxury shows up on M Street. I think A.J.'s point was simply, even without luxury, you can have thriving corridors. Think of Armitage Avenue in Chicago. Think of M Street. Certainly, though, if and when luxury shows up, as it did on Melrose Place, there is that additional lift. But our point would be, let's not limit our thoughts to just where luxury is. There is a broader universe than just pure luxury. And then if luxury shows up, as we are now seeing, let's say, in Williamsburg, great. But if it didn't, Williamsburg would still be great.

Floris van Dijkum (Managing Director)

Great. And then my last question was, so where do you think SoHo market rents are today? Obviously, we've seen some massive growth, and I think in prior peaks, it was close to 700 or even actually above $700 sq ft. Clearly, rents bottomed, I think, somewhere around $300 sq ft off the top of my head. Could you tell us a little bit or maybe A.J., could you give a little more color where what levels per sq ft rents are being signed at in that particular market?

Ken Bernstein (President and CEO)

Yeah. So I'll let A.J. answer it other than to really emphasize it's space by space. Some spaces are 700. Some are 200. It has to do with frontage. That's why it can be idiosyncratic. But the movement, in general, is a trend that is happening more or less across the board, A.J.. So answer Floris's question on those caveats.

A.J. Levine (SVP of Leasing and Development)

Yeah. Yeah. We'll do the best we can. I mean, it's a very nuanced market as a lot of these street markets are. So to pinpoint a number, whether it's 700 or 1,000 or 300, is a little bit of a loaded question. There are certainly corridors that are quickly approaching the prior peak. There are certainly corridors, perhaps further south or further west, that still have a significant amount of room to run.

So hard to pinpoint an answer there, but the growth has been tremendous, and we think that there's enough growth ahead of us there where there's still a lot of value to capture.

Ken Bernstein (President and CEO)

And let me take one more stab at it, Floris. So again, not all spaces are equal, but if a space at prior peak was 700 and dropped to 300 during the dark days of COVID, it is certainly more than halfway back with room to run, and we're starting to see some leases getting done at prior peaks. So it has been a significant acceleration. But if you want to write that we're halfway there, fine. If you're saying we're less than halfway there, I would disagree. And if you say we are back to prior peaks across the board, I would disagree as well.

Floris van Dijkum (Managing Director)

So just to summarize, Ken, just to make sure that I understand that correctly, I think your average rent in place in SoHo is around $370/sq ft. So if you're back halfway to prior peak, would it be fair to assume that market rents are somewhere in that $500/sq ft range now?

Ken Bernstein (President and CEO)

With all the caveats I already said, if you look at some of the recent spreads that A.J. and his team have executed on, that would be consistent with your thinking.

Floris van Dijkum (Managing Director)

Great. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Ki Bin Kim of Truist. Your question, please, Ki.

Ki Bin Kim (Managing Director for US REIT Equity Research)

First question, just on the G&A guidance, it's a little bit lower than I thought. Any kind of commentary you can provide?

Ken Bernstein (President and CEO)

Sorry, Ki. Again, you say the G&A guidance?

Todd Thomas (Managing Director and Equity Research Analyst)

Yeah. Basically, you're not projecting it to grow, which is typically unusual. So just curious if you can provide any commentary around that.

Ken Bernstein (President and CEO)

Yeah. No, we're basically give it $0.01-$0.02 flat down to last year. So nothing dramatic, but constantly looking at ways to operate more efficiently.

Ki Bin Kim (Managing Director for US REIT Equity Research)

Okay. On the institutional capital front, your five fund are currently not in the promote period. So a couple of questions. Are we getting any closer to realizing promotes? And secondly, when you're talking about new possible joint venture partners or funds, are you thinking about restructuring somehow you actually earn and promote, maybe tie it to individual properties versus that fund format, which might have some pitfalls?

John Gottfried (EVP and CFO)

Yes and yes. Now to add a little more color to that, we are both for Fund III, where we are in the process of liquidating assets, getting very close to that promote as those assets ripen for disposition. We would be in the money there. Fund V very likely could be the next one because of the significant cash flow. Remember, we've been clipping mid-teens cash flow returns, and so a sale or recap of that could also provide accretion. And then to structuring going forward, very, very likely that going forward, we would come up with structures that would enable more consistent promotes than the multi-year lumpiness in our traditional funds. So you're spot on on both.

Ki Bin Kim (Managing Director for US REIT Equity Research)

Okay. Great. And if I could squeeze a third one here, to get that in your guidance of 150 basis points, how much of that accounts for known move-outs versus kind of an unknown general reserve?

John Gottfried (EVP and CFO)

I would say the vast, vast, vast majority is unknown general.

Ki Bin Kim (Managing Director for US REIT Equity Research)

Okay. Thank you, guys.

Operator (participant)

Thank you. Our next question comes from the line of Paulina Rojas of Green Street. Your question, please, Paulina.

Paulina Rojas (Senior Analyst and Head of Strip Center Research)

Good morning. You have talked about attractive Going-In Yields for street retail, given the growth you expect on those assets. Can you help us providing some numbers around this comment? Where do you see the Going-In Yields for street retail assets without material below or above market rents?

Ken Bernstein (President and CEO)

Yeah. And this goes back to the whole issue that investors, in general, seem hesitant to enter in below private marketplace borrowing costs. Well, what does that mean? That probably means if you're really good at executing on your mortgage debt, you're at about 6%. And so that's kind of the going-in yield. What's crazy about that is historically, again, different interest rate environment, but historically, cap rates tended to align with growth rates. But when you add that artificial floor, and if everything starts at a 6%, and I'm grossly oversimplifying, but if everything does, and that's kind of what we're seeing, it grows from there. And so a highly motivated seller may be selling at a 7%. A more patient seller may be closer to 6%. There will be examples where people break through and are in the 5%s.

But that floor is real, and we think that that's going to create asymmetrical upside for buyers like us who can avail themselves of both the public market and the private market.

Paulina Rojas (Senior Analyst and Head of Strip Center Research)

You have mentioned that you see more rent growth in street retail than in other open-air formats. First, I wanted to make sure that with this comment, you're referring truly to market rents, and you're not really capturing the different lease structures of the two segments. If you were really referring to market rents, aside from the fact that in street retail, you have more upside to historical values, can you elaborate on why you think there would be more rent growth in this asset class?

Ken Bernstein (President and CEO)

Yeah. So let's separate because it is a combination of both market rent growth and the contractual nature. So part of our bullishness is that we get 3% contractual growth and fair market value resets in our street retail, whereas in our suburban, the contractual growth rate is less, and there are no fair market value resets. So some of this is structural. But what we experienced over the last decade is it doesn't really matter how good your structure is if the supply and demand and rent to sales are not there. And so certainly, during COVID, it didn't matter that you had that structure. You had to deal with the realities of a very difficult time period. Going forward now, what our retailers are saying is, for a variety of reasons that A.J. touched on and otherwise, supply-demand for these markets, they want to be there.

Secondly, they can afford to be there because of their sales. Now, some of the sales lift was good old-fashioned inflation, which we've got to get past our inflationary period, but it sure as heck is better than deflation for rent to sales. And then the second is the migration towards these types of stores. So what our retailers are saying is they always would like to pay less rent, but they're more than happy to open profitably in these locations. And that combination, strong rent to sales, strong supply-demand, and strong contractual growth means we think we will be able to, over the next one, three, five, 10 years, recognize more growth in that component of our portfolio than in the other open-air that we mentioned.

Paulina Rojas (Senior Analyst and Head of Strip Center Research)

Can you put the comment around rent to sales into a historical context, where it is or how it has changed?

John Gottfried (EVP and CFO)

Yeah. So with the beginning of the retail Armageddon, so much attention went to driving sales online. In fact, retailers who were in the omnichannel business would often shift their sales to online because they were getting a higher multiple on that. I think we're all getting more and more comfortable that that era has passed. What retailers are recognizing right now is that they can open these stores, that they can quickly get to a sales level and a rent-to-sales level. Again, here's where it'll differ, and A.J. helped me. Some retailers need to be at 10%, restaurants probably lower than that of rent to sales. Then luxury and aspirational can be well into the high teens and otherwise ones. What we're seeing is they're achieving it, and they're achieving it off of comping to 2019.

So even when we see sales growth moderate over the last year, our retailers are showing up. The best evidence of retailers putting their money where their mouth is is the recent acquisition by retailers of some of these locations. So if you want to know what an infinite-life lease looks like when a retailer buys that location, that's as close as you get.

Paulina Rojas (Senior Analyst and Head of Strip Center Research)

Thank you.

Ken Bernstein (President and CEO)

Sure.

Operator (participant)

Thank you. Please stand by for our next question. Our next question. All right. Our next question comes from the line of Michael Mueller of JPMorgan. Your question, please, Michael.

Michael Mueller (Analyst)

Yeah. Hi. I think you've talked about different parts of the street portfolio, but the overall street portfolio is about 85% occupied. I know rent spreads can be erratic. Can you talk a little bit about new lease signing levels that you've signed so far and how to think about rents beyond that for additional lease-up?

Ken Bernstein (President and CEO)

So A.J., why not talk about the level of tenant interest for the spaces that we're leasing up as well as even prying loose?

A.J. Levine (SVP of Leasing and Development)

Yeah. Like I said, the demand definitely outpaces the supply. I definitely have more tenants interested in space than I have space to lease. So from that perspective, we shouldn't really expect to see a significant slowdown in leasing volume moving forward. Demand remains high on our streets. There's still a lot of great product out there. Yep.

Ken Bernstein (President and CEO)

Yeah. And Mike, where I tried to lay out in our remarks where over the next because we have leases that are well below market that we just can't get to in the next couple of years. So I think those we could guess on them, but it doesn't really help us if we can't get to them.

So I think what I tried to do is lay out on a lease-by-lease basis. A.J. and I walked through and said, "Here's where we think we can capture rents." And we put a dollar amount on that. So that's the $3 million-$4 million incremental dollars that we think over the next two years, as we get expiring leases back, we're able to mark-to-market. And the percentage could change quarter to quarter, period to period, but we're seeing strong rents.

Michael Mueller (Analyst)

So that $3 million-4 million, that'll take your occupancy from 85% up to what?

Ken Bernstein (President and CEO)

Call it so to get to the probably be in the 93%-95% range.

Michael Mueller (Analyst)

93-95. Okay. And that's about what time period to go from 85% to 93% to 95%?

Ken Bernstein (President and CEO)

Yeah. Call it.

Michael Mueller (Analyst)

Two years. Got it. Okay. Appreciate it. Thank you.

Ken Bernstein (President and CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of Jeffrey Spector of Bank of America Securities. Please go ahead, Jeffrey.

Speaker 12

Hi. It's Lizzie on for Jeff. I just wanted to confirm if we have more clarity on what to expect on the cadence of FFO throughout the year, or is the $0.30-$0.34 range in each quarter all that you're kind of willing to put out for now?

John Gottfried (EVP and CFO)

Yeah. Thanks, Lizzie. So what I would say, and it's going to be the cadence of rental start because, as I mentioned in my remarks, it's our core and the core portfolio as those rents kick in that's going to drive it. So I would say how we get to the midpoint of the $1.28, I would suggest we'll be in the lower 30s first half of the year and then upper 30s back half, if that makes sense. So again, not giving quarterly guidance, but just a cadence of when we get the full benefit of the rents coming online. It's going to be a little bit back-end loaded, but we're talking a penny or two.

Speaker 12

Okay. Great. Thank you. Just going back to A.J.'s comments at the beginning on City Point, it doesn't sound like there's too much new to gather, but just checking if maybe the discussions or the activity you're seeing today for leasing the remaining space changes any expectations around timing of when that gets into the same-store pool or maybe the potential accretion that you've consistently talked about.

A.J. Levine (SVP of Leasing and Development)

Yeah. I'll take that. I mean, we're always trying to strike a balance between signing leases quickly, maximizing long-term value. And Ken and I talk about this all the time. Of course, it's critical that we remain focused on that long-term value creation. And that's why we've strategically held back a lot of that space. But all the things that I mentioned, the park coming online, the scaffolding coming down, Live Nation, residential occupancy gains. So in a lot of respects, we're finally able to accelerate some of those signings like we did with Sephora, right, like we did with Fogo de Chão, and again, with all of these recent developments like we'll do with a lot of that space around the perimeter of the project. So definitely good days ahead of us at City Point. Good.

Ken Bernstein (President and CEO)

Then in terms of whether it comes into the pool, right now, we do not have it slated to come in this year. Even if and when it comes in, because the growth will be extraordinary and would skew the same-store numbers, we would make sure to break it out so that you get a better sense of our same-store without City Point, even if and when it comes online, unless it comes online with a 5%-10% growth, which is what we're seeing in our other street assets.

Speaker 12

Okay. Thanks for the color.

Operator (participant)

Thank you. I would now like to turn the conference back to Ken Bernstein for closing remarks. Sir?

Ken Bernstein (President and CEO)

I'll close with how I started. Happy Valentine's, everybody, and we look forward to speaking with you again soon.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.