Acadia Realty Trust

Good afternoon. My name is Dai Hanna and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2020 Acadia Realty Trust earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, Simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. At this time, I would like to turn the conference over to Ms. Amy Reconello. You may begin.

Good afternoon, and thank you for joining us for the first quarter 2020 Acadia Realty Trust Earnings Conference Call. Before we begin, please be aware that statements made during the call that are not historical are 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 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, May 6, 2020, 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.

Thanks, Amy. Good afternoon, everyone. As we get started today, I think it's important that we first and foremost remind ourselves that this is a health crisis. So I hope everyone on this call, all your loved ones, your friends, your colleagues are safe and healthy. Thankfully, from a health crisis perspective, our team is safe and working remotely. The transition was not easy. It certainly wasn't fun, but I've been incredibly impressed. with how smoothly, how professionally our team has made that transition. So today, we're going to try to update everyone as to what we're seeing in the retail real estate market, as well as with respect to our portfolio. And let me first give an overview of how we're thinking about the current situation. Then John Gottfried will discuss our quarterly results, our portfolio breakout, our balance sheet, and our liquidity. And then finally, Amy will discuss and update you as to our fund platform. As we think about Acadia and our portfolio, we feel we remain well-positioned to navigate through an incredibly challenging time. First of all, we have a portfolio that's diverse both in tenant base and geographies. Secondly, we have a strong balance sheet with adequate liquidity. We have limited exposure to new development and thus any need for significant development capital. And then finally, we have access to our discretionary institutional capital through our funds. Now that being said, retail is clearly at the epicenter of this crisis and no retail will be immune. We're all to some degree immune. still fighting through the fog of the current health crisis, and then simultaneously trying to gauge the short-term, the medium-term, and then the long-term impacts to our economy, to our industry, as well as to our portfolios. Now, in the short term, understandably, all eyes are focused on collections and which stores are open and operating. But then in the longer term, the real value of our businesses is is the quality of our real estate, and we're not going to lose sight of that. So as we think about our portfolio from a cash flow and collection basis, we break it into three general buckets. First, over a third of our portfolio, based on revenue, is essential, necessity-based, with tenants ranging from Target to Trader Joe's to all supermarkets. These tenants are open, and they're paying rent. And while longer term, necessity-based retailers are gonna continue to need to adapt to a changing landscape, in the short run, they've been able to stay open and busy during this crisis. The next largest group for us is just over an additional 40% of our rental base. And this group consists of non-essential but high-quality tenants with generally strong credit in high quality locations. And these tenants range from TJX to Ulta, from Chipotle to Starbucks, from Lululemon to Nordstrom Rack. Our April collections in this group have been less consistent, but even here we're seeing progress on that front. Now, assuming an economic recovery consistent with the current sober forecasts, this group should have the liquidity issues, the liquidity, and we expect them to honor their obligations. For the majority of these retailers, it's not a matter of if, but when. Thus, as we think about our portfolio from a collection perspective, over 75% are retailers that are either essential and open or national tenants with a high likelihood of making it through this crisis. Then the final 25%, are roughly in three sub-components. First are local tenants that were deemed non-essential and thus closed. Second are younger national brands. And then third are those tenants that entered into the crisis on weak footing. Now, in terms of the local component, this group represents about 10% of our rental base. Our collections rate on this component was low in April, but this is frankly secondary to our ability to get those tenants with previously strong businesses reopened, re-stabilized, and then succeeding in whatever the new normal is. And while this 10% component may be a relatively small portion of our portfolio, local small businesses are critical to our communities and getting them reopened is critical to our economy. The next segment is young brands or digitally native brands or those newer retailers growing their direct-to-consumer channel. This approximates about 5% of our rental base. Here, the range of outcomes will vary based on the strength of the retailer. For those startups without differentiated product and in need of several years of investor funding to get to break even, this new environment is going to be tough. But for young but exciting brands, whether they be Warby Parker or Allbirds, great locations like we have in our portfolio will likely be of increased importance. It has become even clearer that physical real estate is the pathway to profitability for these brands, especially as the department store and wholesale channel has become even more challenged. For instance, Even during the COVID crisis, we executed two leases with Veronica Beard, an exciting up-and-coming brand. These leases for Rush & Walton in Chicago as well as Greenwich Avenue in Connecticut had been in the works prior to the shutdown, but we got them over the finish line recently and we're very pleased to have them as a tenant. Then the final component are those tenants on our watch list, which represent somewhere between 5% and 10% of our portfolio. While everyone's watch list is is likely growing. Heading into the crisis, we had very strong interest for many of these locations, given the high quality of these locations. And based on very recent conversations, we expect most of that interest to continue. Importantly, in many of those instances, there's embedded upside, such as Kmart in Westchester, New York, where the tenant is clearly struggling. but their rent is significantly below market even in today's new world, and when we're finally successful in recapturing the space, it'll be a net benefit. We also think of our portfolio in terms of geography and product type. Our street and urban portfolio represents about 60% of our NOI. Somewhat surprisingly, given the shutdown of our gateway cities, our April collections for street and urban, we're fairly similar to what we're seeing in our suburban portfolio. Now, much of this is driven by the essential component in our urban centers. While the non-essential component of our street and urban retail was shut down in many of our markets, once these stores are reopened, our retailers are telling us that these stores will likely be an increasingly important part of their recovery. Additionally, keep in mind, street retail does not have the headwinds of being exposed to department store closures or co-tenancy headwinds that our traditional shopping centers might face. That being said, for as long as shutdowns or severe social distancing is a reality, we're going to need to be patient on this piece. Our collection rate for street and urban also varies based on tenant makeup. For instance, our street collection rate in Chicago was 45% due to a large percentage of essential and open tenants. Whereas in Manhattan, which represents approximately 10% of our NOI, our collection rate was lower. In the short and maybe even the medium term, concerns around dense major cities are legitimate. And in the medium term, it's very possible we're gonna see a relative lift to the lower density components of our street retail portfolio, whether it be Armitage Avenue in Chicago, Greenwich Avenue in Connecticut, or Melrose Place in Los Angeles. So if your view is that more people return to living in the suburbs of our major cities, well, we're well positioned from that perspective because, frankly, our retailers don't really care where you sleep. But if this health crisis causes you to conclude that everyone's going to move to Vermont, while we're less well positioned, as we only have one center in Burlington, Vermont. So to be clear, just because collections are front and center, and the essential and necessity component of our business is providing us very important stability, in the long term we still believe that mission critical gateway locations are gonna rebound nicely. And as we think about our core portfolio, while we're very sober about the realities of this crisis, We think we are well positioned as we climb out of the shutdown. This crisis has been a massive accelerator of prior trends impacting retailers. It further accelerates the separation of the haves and have-nots for both retailers and retail real estate. Retailers are telling us that it is very likely that they will do even more with even less. In many respects, location will be of increased importance to their brand. Yeah, rent will always be an issue. But what retailers are continually telling us is that quality of location, being close, being convenient to their customer, reducing customer acquisition costs, increasing customer loyalty are also critical, maybe even more so. And as we think about the future, it is likely to be the retailers who were leading the charge prior to this crisis that continue to gain steam. whether through strong omnichannel or simply best-in-class execution, it will likely include our key tenants like Target, like TJX, Trader Joe's, for their convenience and their value, but also Lululemon and Allbirds for their energy and their excitement. Then as it relates to our fund platform, as Amy will discuss, we have plenty of dry powder. For the last several years, we've been buying out-of-favor assets with high yields, attractive cash flow, and most of that cash flow looks stable. While the fourth quarter of last year and first quarter of this year have been quiet from a new acquisition perspective, we think our patients will be well rewarded. We commented on prior calls that we felt we were late cycle, and thus in both our core and fund over the last few years, we have not added new developments and thus have limited new development exposure. And with 40% of fund five, available for future acquisitions, we can go on offense as soon as the opportunity arises. So as we think about our positioning in an incredibly challenging period, we believe that the diversity of our tenant base and the quality of our locations, that the strength of our balance sheet with limited exposure to development, that our fund platform with plenty of dry powder All puts us in a solid position. And then as important as anything, as we work our way through this crisis, we have to remind ourselves we have been through cycles before. Cadia got its start in the real estate crash of the early 1990s. We navigated through the collapse of the REIT market in the late 90s. Then there were the horrors of 9-11 and the recession from the bursting of the dot-com bubble. That was followed by the global financial crisis, and over the past several years more recently, absorbing the headwinds of the retail Armageddon. Bottom line is we know how to deal with recessions. We know how to deal with headwinds. They're never fun, and each time is different, but many of the steps we need to take are the same. And often, out of these cycles comes unique opportunities as well. So with that, I'd like to thank the team for their hard work and bringing their A game during an incredibly unsettling time. We're going to get through this, and we're going to get through this together. And with that, I'll turn the call over to John.

Thank you, Ken, and good afternoon. I hope everyone is safe and healthy, and I look forward to seeing each of you in person sometime soon. I'm going to start off with a discussion of our first quarter results, along with additional commentary on our April collection. and then moving into a discussion of our balance sheet and liquidity. Before getting into the details of the quarter, I'd like to start off with a few observations as to what we are seeing in our business prior to the onset of COVID. Our business was performing in line, if not actually exceeding our expectations, with FFO and same store NOI trending towards the upper end of our expectations. We were seeing strength in our leasing discussions throughout our portfolio, which was further driving an increased level of optimism. But without a doubt, COVID abruptly shut that down, resulting in our cautious decision to increase our tenant credit reserves, which as I'll get into in a moment, it resulted in a $0.04 decline in FFO and a 300 basis point impact on our same store NOI during the first quarter. Now, in terms of relative performance, notwithstanding the 1.4% overall decline in our same store NOI, we continued to see differentiation within our product mix. with our street and urban portfolio outperforming suburban by approximately 200 basis points. So while it's too early to predict the length and severity as to what comes next, we entered this unprecedented era in a position of strength. And while it remains challenging at the moment, we remain cautiously optimistic that this benefits us when the new normal emerges. Now moving into the details. In terms of same-store NOI, our 1.4 percent decline in the quarter was driven by two primary items, neither of which were contemplated in our initial guidance. First, we did not place any new properties into redevelopment this past quarter. As a reminder, we had a single Forever 21 and four Pier 1 locations, along with 12,000 square feet of street retail, all of which, and as we discussed on a prior call, we got back in late 2019 and early 2020. Given the current environment, notwithstanding our belief that some of these locations may ultimately be redeveloped, these vacancies are currently reflected in our first quarter same-store poll. More specifically, this includes 11 East Walton in Chicago. As Ken mentioned, we successfully signed a lease with Veronica Beard. They took a significant portion of the space that was previously occupied by Marc Jacobs. We had contemplated a variety of formats for 11 East Walton, some of which would have required redevelopment. And notwithstanding the current COVID shutdown, Veronica Beard is moving forward with permits and is still geared up towards the late 2020 opening. Secondly, as I previously mentioned, as a direct result of COVID, we cautiously reserved approximately 300 basis points of core credit loss in build, rents, and recoveries, which equates to roughly $900,000. In terms of our first quarter FFO results of 30 cents a share, We recognize COVID-related credit reserves totaling approximately $4 million, or 4 cents a share. This reserve is comprised of two parts. First, the previously discussed $900,000, or 300 basis points that we took on build rents. And secondly, a $3 million reserve against our straight-line rent receivable balance. I'd like to provide a little more color on the straight-line rent reserve. For those non-accountants on the call, I thought it may be helpful just to point out that the $3 million that we took this past quarter is in and of itself somewhat meaningless. It represents the cumulative difference between the cash and gap rents that have built up on our balance sheet over several years. However, it is indicative as to how we are assessing credit risk within our portfolio. And it reflects our current thoughts on the 5% to 10% of our tenant base that we believe are at a heightened risk of recovery post-pandemic, which I will discuss shortly. Now moving on to tenant profile and cash collections. As Ken discussed, a third of our portfolio is open, operating, and deemed essential, and we have collected rent on virtually all of this space. In the aggregate, we have collected approximately 50% of our April rents and recoveries, and it's worth highlighting that at a 50% collection rate, given our prudent capital structure, we break even, meaning we meet all of our operating expenses and service our core debt obligations. And this is before we factor in any cash flows from our profitable fund business. Obviously, breaking even is not something we aspire to, but rather it reflects our ability to withstand the pressures we are currently facing should this continue for an extended period. As it relates to the 50 percent of our tenants that have not paid their April rents, one of the benefits of a relatively small portfolio is that we can and actually do a tenant by tenant, store by store analysis. to form a reasoned opinion on the financial strength of each of our tenants and the underlying value of their locations. So to break down the 50% of April rents that we have yet to collect, we put these into two distinct buckets. First, as Ken mentioned, 5% to 10% of our tenants either entered this crisis in an already weakened position or we believe they will become so as a direct result of COVID. This bucket is a manageable challenge, and we believe the credit reserves that we have taken this past quarter appropriately reflect that risk. Second, as it relates to the remaining pool of unpaid April rents, our tenant-by-tenant, store-by-store analysis tells us that the vast majority of these have the financial wherewithal to pay us, whether that's backed by an actual investment grade rating or through our knowledge of their business and profitability as a brand, as well as the importance of our location to their business. Now, keep in mind, this isn't to suggest that we won't negotiate payments or other deferral plans to bring their accounts current, but based upon our discussions to date, we anticipate that we get made whole on the vast majority of these outstanding receivables. I also want to give some color on our April collection experience for the top 20 tenants that we have listed within our supplemental. Our top tenants represent approximately 35% of our core revenues. with these revenues being split fairly evenly amongst our street, urban, and suburban locations, and Target being one of the largest tenants within each of these. In the aggregate, we have collected over 67% of April rents from our top 20 tenants, with a 75 collection rate in urban, 66% on the street, and followed by 63% from suburban. Now, moving beyond our top 20 tenants, I also wanted to highlight our April collection trends for all of our tenants across the different segments of our portfolio. As a reminder, our street and urban portfolio represents approximately 60% of our revenues, with 40% coming from our suburban book. We collected nearly 65% of urban rents, 55% on suburban, and 40% on the street. I wanted to spend a moment to drill a bit deeper into our urban portfolio. Notwithstanding the lockdown in our major cities, our urban assets have proven to be the most resilient during the pandemic. I want to highlight the impact that our city center redevelopment project in San Francisco will have on some of our go-forward urban metrics. As a reminder, city center is anchored by an open and thriving target, along with the expected addition of Whole Foods. And we've already funded the vast majority of redevelopment costs. Upon the expected stabilization of city center in the next year or so, our percentage of both urban NOI, along with the portion deemed to represent essential tenants, will increase by nearly 5%. I want to highlight a few items on our balance sheet. As we had highlighted in an earlier release, we have no material core maturities for the next several years, nor do we have any material non-discretionary capital commitments for development or construction. Based upon my earlier comments regarding our ability to break even the current collection levels, we are comfortable that we have ample liquidity to not only the weather the storm we are facing, but the sufficient ability to deploy discretionary capital towards any required leasing efforts or for acquisition opportunities within our fund should we decide to do so. At the end of the quarter, we had an excess of $100 million of liquidity comprised of pro-rata cash on hand, along with remaining capacity on our core and fund facilities. Keep in mind that given our size and relatively low leverage, our monthly core interest cost is less than $3 million a month. Further adding to our flexibility and opportunity for further liquidity it's worth pointing out that we have roughly 90 core properties that are currently unencumbered. This unencumbered pool generated nearly $25 million of NOI this past quarter, representing in excess of 70 percent of our total core NOI, which, when compared to our current unsecured obligations, generates a very healthy interest coverage in excess of five times. So, while we are truly facing unprecedented times and difficult decisions, we believe that our balance sheet is built to weather the storm we are facing. Now moving on to our dividend. As highlighted within our release, we have temporarily paused our quarterly dividend. While our balance sheet remains solid, in light of the unprecedented lack of short-term visibility in cash flows, this pause enables us to preserve capital and thus enhances our near-term liquidity. While we and our Board will continuously review our dividend policy, it's worth highlighting that given our 2020 tax position, we expect to have the flexibility to pay out our taxable minimum while at the same time enhancing our liquidity. In summary, it's been a challenging few months with a lot of hard work still in front of us. We are up to the challenge, and our team is looking forward to getting our portfolio back up and running safely and fully cash flowing as soon as possible. I will now turn the call over to Amy to discuss our fund business.

Thanks, John. Today I'll provide an update on our fund platform. First, with respect to the balance sheet, Overall, each of our funds are in balance from a leverage perspective. We have no material secured or unsecured debt maturities in 2020 in our fund portfolio, inclusive of extension options, which are subject to customary conditions. This includes our $200 million financing at CityPoint, which has an extension option through at least May 2022. You may also note in our supplemental posted on our website, that our $150 million Fund 5 subscription line had less than $5 million drawn on it as of first quarter 2020, so we have a lot of dry powder. Next, as previously disclosed, there is no ground-up construction currently underway in our fund portfolio. In general, for the foreseeable future, we expect that the only material capital expenditures in the funds will be tenant improvements and or leasing costs associated with the installation of new tenants with executed leases. This also includes CityPoint. With respect to our capital allocation strategy, our funds are a mix of street, urban, and suburban retail. Several years ago, we pivoted away from taking on new, somewhat riskier development projects in favor of acquiring more stable but out-of-favor shopping centers. Instead of simply targeting our nation's top 20 markets, we focused on two key types of properties. First is the only game in town, that is a shopping center with virtually no competitive properties. Here, tenants have few relocation options. And remember, in less dense markets, home delivery is even more expensive. Thus, assuming a store is profitable with an appropriate rent-to-sales ratio, among other things, that store becomes a critical part of a retailer's distribution channel. The other type of property is the best game in town, that is the top property among a handful of competitive properties. Here, there are perhaps more headwinds to growth, but our thesis never relied on rental growth. Most importantly, we have been picking needles from a haystack. Cash flow stability is key to this strategy, so it's important that we select properties with a strong tenant lineup and adequate backfill candidates in the event we recapture any tenant spaces. For example, at Fund 5 Frederick County Square in Frederick, Maryland, we recaptured a 95,000-square-foot Kmart and have two executed leases for a total of two-thirds of the space. Both leases were signed in 2020 with one executed post-pandemic in mid-April. Over the past few years, we've successfully aggregated an approximately $650 million portfolio of 14 open-air suburban shopping centers on behalf of Fund 5. Tenants include the TJX Companies, Ross Dress for Less, Best Buy, Walmart, and Target. The portfolio has strong geographic diversity. We acquired these properties at an unleveraged yield of approximately 8% and at a substantial discount to replacement cost. This means that our Fund 5 portfolio has approximately $50 million of NOI when everyone is paying rent. As previously discussed, we've used approximately two-thirds leverage at a blended interest rate of 3.7%, so this results in approximately $16 million of debt service. To date, we've collected 55% of April rents and billed recoveries in this fund. From a downside perspective, if this collection rate were to continue, at $27.5 million of NOI, we can still cover our $16 million of debt service. When you add in open balances from credit tenants, the minimum projected collection rate increases to approximately two-thirds. On the acquisitions front, we expect the transaction markets to remain quiet in the near term. We have approximately $200 million of dry powder. or approximately $600 million on a leveraged basis, and we have more than a year to invest it. Given increased headwinds in the near term due to COVID-19, we will remain appropriately disciplined. On the dispositions front, in mid-April, Fund 4 completed the sale of Colony Plaza, one of originally eight properties in our Northeast Grocery portfolio investment. This transaction was teed up at the beginning of the year, As a result of COVID-19, we granted the buyer an approximate 5% credit at closing. Credit aside, we believe it was prudent to proceed with this still profitable $15 million sale and take some chips off the table for this 2012 vintage fund. In the first quarter, we also thought it was prudent to record an impairment charge related to certain fund properties impacted by COVID-19. Remember, unlike properties in infinite life vehicles where impairments are less common, these properties are in finite life vehicles with anticipated sales over the next few years once the capital markets restabilize. I touched on CityPoint earlier in the call, but I'd like to add that the property has remained committed to serving the needs of the downtown Brooklyn community during this time with Target and Trader Joe's open and operating. Just prior to the pandemic, we were experiencing strong leasing momentum with the opening of McNally Jackson Books and execution of a lease with Lululemon in mid-February. We look forward to building upon this momentum once Brooklyn begins to reopen. In conclusion, our fund platform remains well-positioned to successfully weather the storm with a strong balance sheet, minimal construction, and ample dry powder to continue to execute our thoughtful, investment strategy. Every night at 7 p.m., my family and I head to our windows and cheer for New York City's essential workers. A big thank you to all who are keeping our city up and running during this challenging time, and to the Acadia team for remaining incredibly productive, communicative, and upbeat. Now we will open the call to your questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press star 1 on your telephone keypad. Once again, that's star followed by the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christy McElroy of Citi.

Hey, good afternoon, guys. Thanks. John, I just wanted to follow up. You talked about the accounting adjustments that you made in the first quarter and just given your conservatism on that front early in the process. When you're considering the 50% collection rate for April, how do you expect to approach Q2 from a collectability perspective in this environment as you assess you know, what reserves might be appropriate and whether to move leases to a cash basis sort of in this new environment of uncertainty.

Yeah. Hi, Christy. So I think it's a bit early into May where receipts are. So I think we're, you know, we'll have a lot more detail as to where we are and how tenants open up. But to answer your question, which is actually a technical accounting question for the non-accountants on the call and what Christy is referring to is when we move to a cash basis. versus an accrual basis. And, you know, I will explain what we do is that from a tenant perspective, we look at each and every single one of our tenants. We know their profitability at the store. We know their financial backing. We know their ability to continue or have a good view on it. And we're going to assess that as we move through this. And I think as I laid it out in my prepared remarks, we think 5% to 10% either started with a with something they need to work through or as a result of COVID became so. So that's the bucket as of right now we're going to continue to focus on, and those would be the ones that are at the heightened risk of moving to a cash flow is that 5% to 10% that we have currently identified as being most stressed.

And, Ken, you talked about, you know, the digitally native retailers as a group, these sort of young brands. It's been a big part of your leasing efforts on the street retail side. Sorry if I missed this. Can you say what the collection rate was for April for that group? What are they communicating to you in this environment? And we have seen some press on the hesitancy of some of these retailers to take government stimulus funds. So just wondering, you know, what you're hearing from that side.

Sure. So first of all, Keep in mind, as I said, it represents 5% of our overall NOI. It's exciting because I would argue if you walk on Armitage Avenue pre-COVID, some of these young brands are acting like the larger inducement tenants of the last century. And so that's why we're excited about it, not because of their credit quality or because we ever thought they would be a significant part of our NOI. The collection rate, Christy, I don't have it broken out, but you should expect it was low. That being said, a bunch of them have reached out and said the following. Because they started online and omnichannel, they had, especially for some of the more mature young brands, they had and continue to have through this solid online sales. Now, to the extent that half of their revenues were coming prior to COVID from the stores, that obviously got hit. To the extent that they were not yet profitable or were in need of additional capital just to stay alive, those are going to be more fragile. But when I think about and when we talk to the retailers about what the future would be, having strong omnichannel capabilities, having the ability to use real estate space more thoughtfully. So Allbirds doesn't care whether you buy their shoes online or in their stores, but they recognize that those are more profitable. So the retailers have been coming back to us already over the last several weeks to talk about how they get reopened and how they get current on rent, and I find that encouraging.

Thanks for the call, Eric.

Your next question comes from the line of Craig Schmidt of Bank of America.

Thank you. I wanted to know the difference for reopening a high street location from, let's say, your suburban shopping centers. What is required from Acadia to get these tenants open?

So there's a few things. Obviously, the governmental requirements will change jurisdiction to jurisdictions. I assume what you're saying is once a given city or county has said it is okay to reopen, what does it take? In the case of street and urban assets, since really all we're able to be in charge of is the sidewalks, we'll make sure the sidewalks are fine. We'll work with the retailers in any way we can to make sure that they're set up safely, but most of that is incumbent on the retailer. When TJ Maxx decides they want to reopen, we have a great relationship with them. Our team will be in conversation with them, but TJ will figure out how TJ opens. Now, in terms of suburbia, when we're working with local retailers, mom and pops who are need to figure out so much so fast. They're our team. We'll bring whatever resources we have to help them get safely reopened. They may need PPP. They may need various different types of pickup abilities, and our team is working to make sure that our parking lots are set up so that if someone is ordering and picking up, that they're able to do that. But it's in the very, and it's going to be shopping center by shopping center and case by case.

Great. And then you had mentioned, obviously, the $600 million dry powder in your fund. What do you think the transaction markets will be like, and what is your strategy going into it? Is it opportunistic or – Or just what do you expect to do with the $600 million dry powder?

Sure. Well, I think cost of capital has gone up for everything other than the Treasury market. And it would be imprudent. I'm very happy with the investments our team has made in Fund 5 to date. It would be imprudent to spend that 40% remaining in ways that we didn't think would rewarded our investors and us for having that kind of available discretionary capital. Here is on my checklist, Craig, things I think about. We're still early into both the health crisis and then the reopening of the economy into a severe recession. The amount of unemployment, the impact to a variety of shoppers is something that we're going to have to take very seriously as we think about Where will rents resettle on a given asset? And then similarly, we have to watch the debt markets. Thankfully, as opposed to the GFC, our lenders all seem to be in substantially good health. They are cooperative, very cooperative, with respect to existing loans. But the new debt market for new acquisitions is somewhat limited. We have a line of credit that Amy pointed out is virtually fully available. I think we have $3 million drawn on it. So we can certainly bridge acquisitions if they make sense. But I would also want to make sure that there is a healthy, reasonable debt market so that when we acquire assets, we can take into account what the cost of new debt might be, and that we make sure that we get rewarded on the equity side. So a bit early. We need to have somewhat better understanding what this recovery will look like and where the distress and opportunities will be. And to answer your question about how opportunistic, I would assume we're going to be very opportunistic with the remaining capital.

Thank you.

Sure.

Your next question comes from the line of Kibben Kim of Centrust.

Thanks. Hello out there. Ken, can you talk about when you look at your portfolio, what percent you think is luxury or aspirational type of tenancy? And I realize these might not be the 5% or 10% of tenants that were kind of getting into trouble or in heightened risk, but you could also make the argument that if there is an economic slowdown and it lasts a little bit longer, can you keep rent integrity in those segments?

Sure. So let me talk about it in terms of luxury, big picture, and then, John, maybe chime in as the percentage. I don't think luxury as a percentage of our overall portfolio is necessarily large, but it's important. But even if it is or is not relative to our portfolio, I think it's important that we correctly think about each of these segments and how they are – poised in a recovery. So, interestingly, after the global financial crisis, luxury froze for about 12 months, and then in terms of retail real estate, what we found was it was one of the quickest to rebound and grow. Now, we're in a different economic cycle, different time period, but do keep in mind what we saw over the last several years for luxury, at least in Our portfolio was one that even though international tourism held up until recently, international tourists were not shopping in the U.S. as aggressively as they used to, partially because of the strong dollar. Now fast forward to today, a few different things as we think about luxury rebounding. One is we don't expect any significant immediate international tourist shopping, but we also don't expect U.S. shoppers to go abroad as quickly to take advantage of their strong dollar and shop abroad. So when I talk to our retailers, they're balancing the pros and cons on that side. The other thing to keep in mind is this trend. economic recession will impact different segments of our society and economy differently. And I'm not suggesting that the luxury shopper is not going to become the Ross Dress for Less shopper for a while. But let's be careful and not assume that it's going to treat everyone equally. The last thing is one of the headwinds for luxury prior to COVID was the concept that the consumer was interested in spending money more on experiences, on luxury travel, on a whole host of other things, that's also going to be tempered. And so I can't predict exactly how this plays out, but I would be very cautious in assuming that the luxury segment is going to be impacted necessarily the same way that our restaurants, especially our local restaurants, are going to really feel this, or other segments that may be more exposed to the deep recession. John, how much is luxury as a percentage of our NOI?

Yeah, so luxury of our overall portfolio is about 7%, just under 7% of our total portfolio.

Okay, and just a second question here. When you look at you guys broke out your industry exposures and the supplemental, but when you break that out further, like what percent of your restaurants are actually do you think are pretty resilient? And even the parallel section, which is a fairly decent-sized bucket, I'm sure it's all different. What is the percent you think is more resilient versus at risk?

So, Ken, want me to take the restaurant one first? So keeping on the restaurant side, so I think as we laid out our supplemental, it's about 8% of our revenues come from restaurant. And I would say of that 8%, 75% of that is what we think about in terms of quick service. So that's the Starbucks, Tripoli's, Burger King's, et cetera.

So in terms of apparel, and, John, if I get any of this wrong – chime in, but we touched on the young brands, the 5% of our tenants on Armitage Avenue, Greenwich Avenue in Connecticut, some of the other areas. And I think it's going to be really dependent on those brands that have a highly differentiated product and ability to execute. And I think the exposure there will be partially about the economy, but also just of their overall capitalization. And you'll be able, in the next several months, I think we'll all have a better sense of who's going to make it and who's not. And then there's the 7% luxury. I've already touched on that. The most significant component is our off price. TJX, Ross Dress for Less, Nordstrom Rack. And what I would tell you is, at least for the next season or two, the amount of product that will be available to push through the system, because it will not go full price, is likely to be a significant tailwind for those type of retailers. And so I would expect them to, once they can get reopened in a safe and productive way, I would expect there to be a fair amount of resilience on that side.

Okay, thank you. Sure.

Your next question comes from the line of Todd Thomas, KeyBank Capital Mart.

Hi, thanks. Good afternoon. Ken, I just wanted to follow up on some comments you made in your opening remarks about the balance sheet. You mentioned the company has adequate liquidity, and I'm just curious, with $250 million of total capacity on the revolver, the company's liquidity appears to be a little tighter relative to peers, despite having a strong balance sheet and leverage profile. Is the size of the company's line appropriate? Is there room to increase capacity there in order to take advantage of both an increase of potential need for increased liquidity, but also to take advantage of dislocations that might arise for the core or for your equity contributions for the funds?

Sure. So two ways we think about it, Todd, and I think you phrased it correctly. In terms of is that adequate liquidity for where we stand now and where we're likely to stand for the next several months, not in terms of being opportunistic, but simply in terms of treading water, jogging places. John pointed out, at 50% collections, Todd, we cover all our debt service, our expenses, et cetera. So we can tread water for an indefinite period at a horrifically low collection rate, but we're not particularly well built for just sitting around treading water, said differently, I'd say treading water is like my least favorite swim stroke. So in terms of going back on offense, we are talking to our lenders, and thankfully they've been very supportive, and it is very possible that we will increase that capacity. But to be clear, right now all we would do is draw down on the line and put cash in deposit earnings zero, It may be a smart thing to do, and we may do some of that, but it's going to sit there earning zero until we're ready to go back on offense. Keep in mind, when we go on offense, our fund business tends to more or less be able to self-fund. In other words, we have fees coming in, we have capital coming in, and then there's our pro rata share going out. But the most likely possible place for us to go back on offense is the utilization of the funds and that discretionary capital sitting there. We would not need to expand our lines to go ahead and execute on our strategy on fund five unless extraordinary circumstances arose. So I think we're in fine shape. Maybe we increase the line, whether it's just so that everyone sleeps better at night or but it is not essential for us to either tread water or to go back on offensive front five.

Okay. And then, you know, Ken, maybe Amy can chime in here, but, you know, normally I think you'd be maybe drawing up documents or, you know, getting – you know materials together for for fun six at this point with with two hundred million of equity capital left in in fun five uh... you know perhaps you'd be fundraising a little bit here do you do anticipate uh... moving forward with fun six at this point is that is that possible can you just share uh... some insight maybe uh... you know how your lps are are thinking today about the the fund business and and uh... you know what they're thinking about in terms of uh... allocating capital sure uh...

I'll go first, Amy, but add any additional color. As you know, we have until I think it's a year from August to spend Fund 5's capital. LP's views right now are we would prefer you to spend the money we've already allocated to you before you come back. Management's view is it's hard enough to raise money on the road, but trying to do it on Zoom would strike me as even more difficult. So first and foremost, we'll be spending Fund 5 and our LPs, and we're in constant contact with them appropriately. So remain very supportive. Fund 5, up until COVID, was yielding mid-teens returns. As Amy walked through, we're still covering very nicely. And while those distributions will slow down for a while, we feel pretty to very good about the overall success of that. And so I think that will bode well for a Fund 6. That being said, my guess is until we get further into the deployment of the 40% left in Fund 5, and until, frankly, we're on airplanes, it's a little harder. So for the next six months, between now and year end, we'll be focusing on everything else we've been talking about on this call. plus deploying Fund 5, and I bet that Fund 6, those conversations start at some point in 21.

Okay. Thank you. Sure.

Your next question comes from the line of Hong Zhang of J.P. Morgan.

Yeah, hi. There's two questions for me. Number one, of the 5% to 10% of tenants that you identified as at-risk Does that skew one way or another towards your suburban or your suburban portfolio? And my second question would just be, I guess you talked about how you expect to recoup the majority of the non-rental payments. Have you entered into defense agreements one way or another with your tenants when you'll be paid back?

John, why don't you take the first, and then we can toss a coin for the second. Okay.

Yeah, good. Hey, Hung, how are you? So I think in terms of the 5% to 10%, I think it's split fairly evenly throughout our portfolio. You know, what I would say is when we look at the replacement rents that we need to get on them, we're very comfortable that once the world gets back up and running again that we replace those, but spread fairly evenly.

As it relates to ongoing negotiations with retailers, notwithstanding early reports, that were legitimate, of some very aggressive positions, we have found most retailers coming back to a reasonable position. There's always going to be outliers. And so I've been impressed with the job the team has been doing. If there are rent deferral agreements that impact the collections in one given month, so be it. But to the extent that it adds the clarity to as to what the next year or five or ten years look like, we welcome that. And so those conversations, negotiations are ongoing. We're finding most retailers to be realistic and reasonable, respectful of the fact that we are not a lender of first resort or a business interruption insurer, but that we are in this to see that everyone gets to the other side successfully, and that's our expectation.

Got it. Thank you.

Our next question comes from the line of Linda Sy of Jefferies. Linda Sy, your line is open. Hello?

Linda? Why don't we come back to Linda, operator?

Your next question comes from the line of Vince Timoni of Green Street Advisor. Vince, your line is open. Your next question comes from the line of Floris Van The Thumb of Compass Point.

Great. Can you guys hear me?

Yes, we can. We were beginning to feel lonely. Yeah, sorry.

I'm not sure. This remote thing could be a little more difficult. The question, the write-down that you took on your fund assets, was that related to – increasing the cap rates on those assets, or was it in relation to reduced NOI, or maybe it's a combination? Which one had the greater impact?

John, you want to cover that?

Sure. Yeah. Hi, Flora. So keep in mind, just on, and Amy highlighted this in her remarks, that it's a different model between what we hold in the core versus the fund. So without going into a ton of details, it's fairly difficult to get to on a long-term hold within the core an impairment charge, whereas on the fund, it's much closer to a mark-to-market. So to directly answer your question, the assets that we took impairments on were a combination of really where we thought we could sell these assets at and from a holding period, so both primarily around the NOI, I think, is what the key driver was.

And, Florence, just keep in mind, if we plan on selling something two years from now and we believe this crisis results in a one-year delay in getting to that stabilized ramp, that in and of itself has a material impact, and we have to account for that.

Got it. Another question, and, Ken, maybe this is more – for you. In terms of where you see the opportunities going forward, and as you rightly point out, you've always tended to, in the past, take advantage of dislocation to create value and to increase the company or grow the company going forward. Are you more excited right now with what you see on the streets, a retail portion of your portfolio or what you're seeing in the suburban market, given that a lot of people are saying, well, gosh, look at that higher rent collection and the higher percentage of essential tenants. Where do you see more upside going forward for yourself in terms of potential opportunities to grow?

And the first answer I think everyone needs to understand And the short answer is it's still a little bit early. And assuming we are going to be opportunistic in where there's dislocations, here's the issue with New York City. I'm actually bullish. As I pointed out, of course, we only have 10% of our NOIs in Manhattan. So it's not that I'm pounding the table on our book. But you've even seen now recent transactions, a couple of them involving public companies being sellers. The worldwide – demand for the key gateway cities may not result in the level of distress that we're all going to be looking for. And so we just have to be cognizant of, notwithstanding how horrific the screens look, when you see families step in and buy New York City, you just saw a recent announced transaction for retail on Fifth Avenue, but it's going to be true for many of the cities. While I salivate at the thought of us being able to find real dislocation there, it just may not happen. Now that's okay because we have a broad skill set and if the private markets backstop the key gateway markets, all the better for anything. The second piece of this is my guess is there's going to be a fair amount of debt restructuring. We've done plenty of those over the past decades. existing lenders finding themselves in a position where they need rescue capital, existing borrowers maybe are either fatigued or interested in a HOPE certificate or just in need of the capital to re-stabilize. It wouldn't surprise me that a lot of our transactions will be in that category. Again, whether it's suburban or urban, We can do both. We'll see where the opportunities are. And the final thing is I love the fact that Target is open and paying us rent, but I'd be surprised that I'd have a lot of opportunities to buy existing essential Target or supermarket at prices that justify the kind of returns we want. So we'll be prepared to have to roll up our sleeves and do more heavy lifting than just hiding behind essentials.

Great. Thanks, Ken.

Sure. Thank you. At this time, I would like to turn the conference back over to Mr. Ken Bernstein for closing remarks.

Great. Well, as I started the conversation, I hope everyone is safe and healthy. I can't wait to see everybody in person, and until then, we'll keep working, and hopefully everybody stays safe and sound. Thank you.

Thank you for participating in today's conference. This concludes today's call. You may disconnect at this time.