Acadia Realty Trust

Thank you for standing by, and welcome to the Q4 2020 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Alex Berger. Please go ahead.

Good afternoon, and thank you for joining us for the fourth quarter 2020 Acadia Realty Trust earnings conference call. My name is Alex Berger, and I'm an analyst in our acquisitions department and previously interned at Acadia in the summer of 2019. 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 risks and uncertainties, including those disclosed in the company's most recent Form 10-K and other periodic filings for the SEC, Forward-looking statements speak only as of the date of this call, February 11, 2021, and the company undertakes no duty to update them. During this call, management will 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.

Great. Thank you, Alex. Good job. Good afternoon, everybody. Before we delve into the details of the last quarter, I'd like to spend a few minutes on some of the trends we saw last year and what we're seeing looking into 2021 and 2022. While we're still working through an ongoing health crisis and ensuing economic headwinds, there is clearly light at the end of the tunnel. Looking at our collection rate in the fourth quarter, our leasing activity, our discussions with our retailers, it's comforting to see both stability with respect to current operations and then, more importantly, very encouraging green shoots in terms of new leasing activity. Terms of existing retailer performance and our collections, as John will discuss, collections throughout our portfolio have stabilized to above 90%. Initially, this was driven by the more essential and suburban components of our portfolio, but more recently, the street retail component has begun to restabilize as well. And while the range of potential outcomes remains very wide, And I suspect focus on monthly collections will continue for another few quarters. There are a few worthwhile trends that are beginning to emerge. One of the more notable trends we saw in the fourth quarter and accelerating to date is that tenants are looking past the pandemic and positioning themselves for the reopening of the economy in the second half of the year. Retailers are showing up. And most recently, not just in the suburban portion of our portfolio, but also in the street and urban components. And thankfully, we're seeing this in our current leasing activity. In terms of our current leasing pipeline, which we mentioned on the last call as being approximately $6 million, and now it has grown to over $8 million. And this number is relevant because this pipeline already represents a rebound of about half of the 10% short-term hit to our NOI that we estimated as a result of COVID. This pipeline has rebuilt faster than we had initially expected and has continued to improve over the past month. To date, we have executed $3 million of leases in this pipeline. We're at lease for another $3 million, and then the balance is at the letter of intent stage. Leasing activity in our pipeline is now weighted fairly proportionate to our portfolio weighting, meaning that while initially the activity was weighted to our suburban and necessity portion of our portfolio looking forward in our pipeline, our deal flow is now rebalancing and about 70% is in street and urban. Now given that the street portion of our portfolio represents about 40% of our core portfolio and is a key area of differentiation for us. I think it's worth spending a few minutes on the encouraging rebound we're seeing there. After a very scary and quiet couple of quarters, retailers are actively touring and going to lease in these markets. The early movers we saw for the street component They were in the half of our street portfolio located in the less dense markets that were generally quicker to reopen for business. For example, in Greenwich and Westport, Connecticut, in the last few weeks, we have finalized leases in both of those markets. Rents there are approaching pre-COVID levels. But even more encouraging in terms of street retail trends is the recent activity in the more dense gateway markets. We are finalizing several leases in Manhattan, including in Soho. Several leases in Chicago, including in the Gold Coast. And here we're seeing a variety of retailers stepping up in these markets, from luxury leaders to up-and-coming digitally native brands, all preparing for a post-COVID economy and using these stores to further differentiate themselves in an omnichannel world as these retailers focus on on the shifting channels of distribution. Our retailers are looking past the harsh short-term realities that we're facing this winter, as well as the oversimplified longer-term narrative around retail real estate. And based on the number of retailers touring and many of them signing leases, our retailers are making it clearer every day that the key markets in our portfolio will remain long-term must-have locations. Now, starting rents compared to pre-COVID rates are going to vary space by space and street by street, and they are certainly well off of their 2017 peaks. But we have built our portfolio to avoid some of these peaks and valleys. And these leases will be compelling, especially if the long-term term rents are consistent with our pre-COVID goals, and so far they are. And our retailers are telling us that the ratio of rents to their anticipated sales performance looks compelling from their perspective, which is also essential for this recovery. It's still early, but if these trends hold, The street portion of our portfolio will be a key driver of our longer-term growth metrics. We recognize that the significant portion of our portfolio, both urban and suburban, that is weighted with necessity and value-based tenants like Target and TJ Maxx, that that provided a very important ballast to weather a truly 100-year storm. But it is becoming clearer that the longer term growth will come from our mission critical locations for a few reasons. First of all, our releasing potential here is of uniquely high quality locations and we are working off of decades low occupancy level. Second, the contractual rental growth rate in our street portfolio is 100 to 200 basis points higher than in the other components of our portfolio. And finally, from an AFFO perspective, since the cost of retenanting in these higher rent markets is substantially less as a percentage of rent, the net effective rent growth will be stronger than in the lower rent portions of our portfolio. Now, this is not ignoring some of the longer-term trends that are playing out in our industry, the accelerated move to digital commerce, the reality that the U.S. is over-retailed in general, and that some formats are facing functional obsolescence. Nord is ignoring a workforce that's pondering where they might live, how they might work. These are real challenges, challenges that our industry is being forced to adapt to on an accelerated basis. But notwithstanding these challenges, we are seeing signs of recovery, and our portfolio is well positioned for this. And some of this rebound, in hindsight, will look obvious. For example, it's important to keep in mind that the consumer in general, and especially that segment of the consumer that is shopping at the stores in our portfolio, that consumer is climbing out of this recession in a much different spot than prior recessions. Now, for that significant portion of the population that could not shift to remote work, that is living paycheck to paycheck or worse, the impact of this crisis is heart-wrenching. But that portion of the economy that has been able to shift to remote work, that has seen their house values and their stock portfolios rise, For those consumers, their savings rate and disposable income is much stronger than when they were climbing out of the global financial crisis. But to date, spending by this segment has been down as the short-term trend has been on necessities, on essentials, on pajamas, almost irrespective of the financial condition of that specific consumer. Not because of fear, or belt tightening by the affluence as much as just the realities of the lockdown. And as we move past this lockdown, our retailers are expecting shifts in consumer spending as well. And our retailers are seeing not just short-term pent-up demand, but longer-term trends and are planning accordingly. From a capital markets perspective, both the debt markets And the equity markets are slowly beginning to rebuild, albeit selectively. The retail real estate industry is still working through the drama around the collection crisis of last spring. And while that is abating, the aftershocks are still with us. And many of the traditional and found metrics that our industry has historically used to evaluate location quality have paused. Last spring, for instance, property level collection rates trumped credit quality. And credit quality trumped location quality. Now, during the darkest days of the crisis, this might have made sense. But longer term, location quality tends to win out. And while this trend is beginning to resolve, it's gonna take time. Additionally, many institutional investors are overweight retail due to their mall holdings. And even investors who are not overweight retail are looking for clarity. Clarity as to what the cost to restabilize assets will be. Clarity as to when and what level will rents and tenant performance stabilize. And then finally, what will the longer-term growth rates look like? Now, I get that providing this clarity sounds like a tall order. It always does at this point in the cycle. And then the rebound happens, usually faster than most of us predict. In terms of our investment activity with our stock at a discount to NAV and our cost of capital being elevated, we don't anticipate acquisitions in our core in the short term. In fact, we'll be opportunistically monetizing assets as we recently did with a freestanding Home Depot in New Jersey where the net lease retail market is still robust and properties are trading at peak pricing. But we are hopeful that as significant buying opportunities arise, we'll be in a position to capitalize on them. Given that retail is in such disfavor and many folks who previously dabbled in it are gone, there will be less competition and our expertise will be in demand and it will be of value. And while we wait for the public markets to rebalance, fortunately, as Amy will discuss, we have our discretionary fund where we still have plenty of dry powder and deal flow is finally picking up after a quiet year. So to conclude, we are pleased to see tenants stepping up And while it's hard to predict when the capital markets will also respond in kind, when they do, a portfolio like ours dominated by unique must-have locations with stability and then strong prospects for growth will once again become compelling. And management teams like ours with access to multiple types of capital and a proven track record of deploying it will be well positioned to execute on the opportunities in front of us. So with that, I'd like to thank our team for their hard work and their focus over the past year. I know that it felt like at times that the earth stopped spinning around its axis. I assure you it didn't. And your efforts and your commitment not only helped us get through this treacherous period and survive, but helped us plant the seeds going forward for our ability to thrive as well. And with that, I'll turn the call over to John.

Thanks, Ken, and good afternoon, everyone. I will start off by providing an update on our cash collections, along with our fourth quarter results, followed by a discussion of our 2021 guidance, and then closing with our balance sheet. Now, starting with collections. In hindsight, the initial and immediate impact of the pandemic was staggering. with our April 2020 results barely achieving a 50% collection rate. But over the course of the year, we quickly saw improvement, not only with the collections of current rent, but also in past due amounts. In fact, as we look back over the course of the pandemic, we actually ended up collecting over 86% of our billings during the three quarters in 2020, and over 90% when we look at the third and fourth quarter alone. And as we outlined in our release, we are now consistently collecting in excess of 90% of our rents. And as we experienced throughout the pandemic, our collection percentages remain consistent throughout our street, urban, and suburban locations, given the relatively comparable credit that exists across our portfolio. As I discussed last quarter, our balance sheet continues to reflect our collection efforts. Not only do we see our net tenant receivables decline from the prior quarter, in fact, they're actually even lower than they were as compared to the fourth quarter of 2019. In terms of tenant deferral agreements, we have approximately $3 million on our books at December 31st. And as our approach was to largely focus our deferral efforts on credit tenants, we remain on track for full repayment in 2021. Moving on to quarterly earnings. Our FFO as adjusted for special items was 24 cents a share for the fourth quarter. We anticipate that our quarterly FFO prior to any transactional items should remain around the current level for the next few quarters, give or take a few pennies in either direction as we navigate through the pandemic. As we highlighted in our release, we have provided our 2021 guidance with a range of 98 cents to $1.14 of FFO before special items. Now we continue to expect ongoing variability in our results for at least the first half of 2021. We've not attempted to predict the impact of this within our guidance, But as we've done throughout the pandemic, we will continue to point out any significant items in our quarterly results and we'll update our expectations accordingly. Additionally, although we didn't include any specific NOI assumptions, I wanted to provide a bit more color as to how we're thinking about it. Consistent with what we experienced the past couple of quarters, we expect that our quarterly pro rata core and fund NOI should trend in the low to mid $30 million range for at least the first half of 2021. And this is based on our assumption of maintaining a 90% collection rate, along with no meaningful tenant expirations or no leases coming online. In terms of overall occupancy, as we've said in the past, given the wide range of rents that exist within our portfolio, the percentage change in and of itself is generally not particularly well correlated to the NOI impact. Our expectation is that our physical occupancy percentage drops a bit further in Q1 and Q2, primarily to natural lease expirations within our suburban portfolio, before it begins climbing in the second half of the year. It's worth highlighting that our current spread between physical and leased occupancy is in excess of 1%, and given the velocity as to which our leasing team is building the pipeline and executing leases, we anticipate this spread, particularly in our street and urban locations, to continue to expand throughout the year. Now, as we move into the latter half of 2021, we anticipate that our quarterly NOI run rate will increase by approximately $1 to $3 million. And this is coming from a combination of reduced credit losses, along with the additional NOI from the leasing efforts beginning to come online. Now, in terms of rent commencement on those new leases, of the $8 million pipeline that Ken mentioned, approximately 40% of this involves, or $3 million involves executed leases. And we expect about $800,000 of that will show up in the second half of 2021 and the remaining portion coming online at various points throughout 2022. And as I will touch on shortly, we are becoming cautiously optimistic that this will be the start of what we believe is a meaningful multi-year NOI growth trajectory. In terms of other assumptions within our fund and transactional side of our business, I wanted to point out a few things. Consistent with our past practice, we will continue to exclude any changes in value from our unsold Albertson shares. Rather, we will only include the realized gains as the shares are sold. And as I mentioned on prior calls, we expect that the remaining Albertson shares should be sold over the course of the next 18 to 24 months. As a reminder, we own, on a pro rata basis, approximately 1 million shares, which are subject to certain lockup arrangements. And based upon the current share price, This equates to approximately $16 million of gains as the shares are sold. Additionally, we have guided towards $2 to $5 million of a temporary reduction in fund fees. This is primarily a result of the pandemic-driven timing delays in our acquisition and leasing activities. And we anticipate these fees should revert back to more normalized levels in 2022. I also wanted to point out, and Amy will discuss further, we have approximately 40% remaining in Fund 5 to deploy. And if we invest that consistent with the Fund 5 returns to date, this provides us with an additional five to six cents of incremental FFO on an annual basis. Now, in terms of the multi-year core NOI growth trajectory, not only does our base case model have us returning to pre-COVID levels by late 2022, early 2023, we are also starting to see the building blocks forming to grow above and beyond that. We are becoming increasingly optimistic that this shows up within the next few years. The key drivers of that return to pre-COVID core NOI and the ongoing growth beyond that are expected to come from two primary sources. First, a reduction in credit losses. And we estimate that should result in roughly $7 million of annual NOI. We continue to estimate that about half of our non-paying tenants get to the other side of the pandemic and revert back to contractual rents. In terms of timing, As I mentioned in my guidance, we expect to see some improvement beginning the second half of 2021 with stabilization at some point in 2022. Secondly, lease up, and more specifically, lease up in our street and urban portfolio. Our overall core occupancy is at a decade-low occupancy of 90%, with the street and urban portion at 87% and some of our best locations available. In terms of timing a lease up, as Ken mentioned, our team has made strong progress in the past several months, with building out an $8 million pipeline, the majority of which is coming from street and urban locations. And for those spaces that have not yet made it into our pipeline, while it's premature to pencil in precise rent commencement dates, we are optimistic that a good chunk of the space is leased over the next 12 to 18 months, based upon the leasing discussions we're having and the increased momentum that we see building in the marketplace. So we certainly have a lot of hard work in front of us, We are encouraged at the leasing activity we have seen and continue to see and the opportunities it presents for meaningful and profitable multi-year NOI growth. Now moving on to the balance sheet. I want to highlight just a few items along with an update on our dividend. We continue to maintain ample liquidity between our cash on hand and available liquidity under our various facilities with no material near-term core capital needs. And at a 90 percent cash collection rate, coupled with a break-even below 50 percent, we are continuing to retain cash flow. In terms of the dividend, as we highlighted in our release, we expect to initially reinstate our dividend at 15 cents a share. Our initial payout was conservatively determined based upon what we currently expect will be the minimum payout required to maintain REIT compliance. And at this level, we should be able to generate meaningful amounts of liquidity and to set ourselves up for strong dividend growth over the next several years as we execute on the lease-up opportunities within our portfolio. In summary, while we are still in the midst of the pandemic, we are starting to see the green shoots. And while our earnings will continue to feel the impacts of the pandemic for the next couple of quarters, we are starting 2021 with increased optimism and a positive outlook as we look forward. I will now turn the call over to Amy to discuss our fund business.

Thanks, John. While I usually discuss all our funds on these calls, today I will focus my remarks primarily on Fund 5, which is our current fund vehicle for new investments. When we launched this fund in 2016, we were already facing disruption in the retailing industry and knew we were late cycle. In response, we chose to focus this fund on selectively acquiring out-of-fever suburban shopping centers where most of our return comes from existing cash flow. Our thesis was buy at an 8% cap rate, leverage at two-thirds, in our case at a sub-4% interest rate, and then clip a mid-teens coupon. We did not anticipate any material growth in NOI, nor was it required to make an attractive return at an 8% going in yield. This thesis proved to be prudent. While the events of the past year were certainly unexpected, Consistent with our original expectations for our Fund 5 portfolio, the properties have largely been performing consistent with plan. For example, last year at the property level, we achieved roughly a 14% leveraged yield on invested equity, including deferred rents. Looking ahead, we expect 2021 and 2022 to achieve similar mid-teens returns, reflecting continued growth in NOI, but also continued investment of equity as we complete various leasing activities. Second, collections have rebounded since April and May and are now roughly at or above the 90% level. Third, our team has built a strong leasing pipeline, which has enabled us to maintain our NOI. Post-COVID outbreak, our Fund 5 leasing pipeline has 32 leases, aggregating annual base rent or ABR of $5.1 million, of which 20 leases and approximately 2.6 million of ABR have already been executed. These metrics provide further evidence of our acquisition selectivity and our overall careful approach to capital allocation. I'd also like to share a couple of examples at the property level. First, since recapturing a 95,000 square foot Kmart at Frederick County Square in Maryland last February, we have successfully pre-leased 83% of that box to Lidl, Ollie's Bargain Outlet, and Harbor Freight Tools, together with our partners at DLC Management. We are also negotiating a lease for the remaining 17,000 square feet. The blended rent for the four new leases is more than five times Kmart's rent. Next, consistent with our core portfolio, we monetized two parcels at Family Center at Riverdale in Utah. The parcels, located at the back of the shopping center, generated $10 million of gross sale proceeds. Given the strength of the net lease market, we were able to achieve roughly a 200 basis point spread between the allocated cap rate in our underwriting and our actual exit cap rates. This translates into about $2.5 to $3 million of profit on these two sales alone. Looking ahead to new transactional activity, we have approximately $200 million of discretionary equity available to invest, which gives us approximately $600 million of buying power on a leveraged basis. We are still seeing opportunities consistent with Fund 5's existing high-yield strategy and hope to close several more of these types of deals this year. The good news is we're seeing an increasing appetite among our vendors to finance these types of properties. On the other end of the risk spectrum, we are also focused on the acquisition of more deep distress and opportunistic investments, ranging from buying distressed debt to restructuring to heavier lifting value-add projects, all areas where we have successfully invested in the past. These opportunities have been, for a variety of reasons, slower to emerge, but they are clearly coming. Most importantly, we'll make sure that we are being rewarded appropriately for the risks we're taking. Given the success of Fund 5 and the longstanding support of our investors, we remain confident that we'll have the time we need to put the balance of the fund to work. At the same time, we continue to proactively mine our existing fund portfolio for disposition opportunities, be they smaller transactions less reliant on debt or large levels of debt, or traditional shopping centers with a larger share of essential retailers. Finally, on the debt front, during and subsequent to quarter end, we successfully extended approximately $150 million of loans across our fund platform at a weighted average duration of 17 months. In conclusion, our fund platform remains well positioned with a successful capital allocation strategy and ample dry powder to continue to execute on it. Now we will open the call to your questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Todd Thomas with KeyBank Capital Markets. You may proceed with your question.

Hi. Thanks. Good afternoon. First, just a couple of questions on guidance. John, the 24 cents in the quarter or 96 cents annualized, that's a clean number without Albertsons. It sounds like that's the right level to think about for the next few quarters, which is above the low end of the comparable 21 range after stripping out what's embedded in the guidance for Albertsons. What's assumed in the guidance range that would get you down to sort of the low end of the range?

Yeah, Todd, you know what I would say is that, and if you, within the press release, you know, we had an observation there on the credit losses. So I would really say when we look at our quarterly run rate, look at the third and fourth quarter combined, right, to come up with, you know, between where I think we're at 20 cents, which was too low in Q3 and 24 this period. So I think that's probably just, I would look at that second half as really be indicative of what, you know, the first half of next year should be. So like I said, remarks, give or take a few pennies is is really what we're talking about, particularly with the cash basis of accounting creates noise simply based upon when that portion of our tenants pay us.

Okay. And then you talked last quarter about getting back to sort of a recurring AFFO level of a dollar per share in the near term. Can you just help reconcile the 21 FFO guidance, which on a recurring basis, again, after stripping out Albertsons is is in the sort of 93 to a dollar one range, you know, with that recurring AFFO target. And what's the timeline in your view to get back to a dollar per share of recurring AFFO on a quarterly run rate?

Yeah, so what I would say is that I think we're there in the fourth quarter, and this is just a seasonal piece of our business, that our fourth quarter tends to trend higher on a cap expense. Where I look out over the course of next year, I still think we're in that, you know, an average 25 cents, a range, particularly with the growth we have in the back end. So, you know, I don't think we're far off of that, and I would not use the CapEx spend, which is really the driver of where we're a few cents short in FFO this quarter as being a run rate.

Okay. And then just last question for Amy or maybe Ken. You know, in terms of Fund 5, you know, you talked about, you know, some of the activity that's picking up. It sounds like there's a broad sort of set of opportunities across the capital stack and across the board that you're seeing. Can you sort of characterize the opportunity that you're seeing for Fund 5 in terms of the timeline and what you think you might end up sort of maybe you could kind of bookend the value of investments that you're targeting here over the next couple of quarters in 21? And how much risk or heavy lifting are you willing to undertake just given you know, what seems like, you know, a lot of opportunities that are starting to surface.

So, and Amy, I'll take a first stab at it if anything you want to add by all means. We have deals under letter of intent that look, feel, and cash flow very similar to our previous Fund 5 deals. And I think given the uncertainties in the marketplace, there's just nothing wrong with with continuing to add assets where we get the majority of our return out of current cash flow. There's enough uncertainty in the world that you should expect, if I were to guess, and this is just a guess, that probably half of the remaining fund five looks a lot like the prior. Then for the other half of that, Todd, We're willing to, and you've seen us in the past, undertake very heavy lifting opportunities. We just have to make sure that our stakeholders are rewarded for the risks we're taking. And that requires two things. One, we need to see improvements in tenant demand, and we're beginning to see that. So that's encouraging. And then we need sellers to be realistic about the time, cost, effort, and what returns we deserve. And that's taken a little longer because I have a feeling on the heavy lifting pieces, much of this deal flow is going to come not from the junior equity, but from the lenders or mezzanine holders who are going to ultimately control that capital stack. And because I think for good reasons, the Fed has urged banks to be very accommodative. because things froze for a while, that's been taking a bit longer. But we are now starting to see things become actionable. We're seeing the selling stakeholders be rational about what their expectations are. And so if we can get better rewarded for buying vacancy, doing heavy lift, then existing cash flow will do that. And if we can't, we'll just continue to do those type of fund five deals And the market's going to be there for those as well because there's enough institutions, primarily private, who are in need of liquidity, either reducing their holdings in retail or for otherwise, and we're in the perfect spot to, I think, take advantage of this.

Okay. All right. Thank you. Sure.

Thank you. Our next question goes from Linda Tsai with Jefferies. You may proceed with your question.

Hi. Can you talk about some of the tenants signing leases in your street retail portfolio? You know, anything interesting to highlight here? You know, are the tenants new to your portfolio or existing?

It's a combination. But, Linda, I think the – first of all, the important thing is they're showing up. And there was moments in the summer where we were like, wow, My tenants go away forever, and the answer is clearly they're not. At the luxury level, there are a host of encouraging signs that the luxury segment is not going to wait for international tourism to come back in order for them to open stores where they can differentiate themselves from their peers, where they can control their format, and where they can get in front of both a domestic customer and otherwise. So the luxury piece is encouraging, and you're seeing signs of it in Soho, you're seeing signs of it elsewhere in the country, and we expect to get our fair share of that. Then the digitally native, who again, over the summer we were wondering who's gonna make it through or not. Those retailers who started off with strong online presence, they used that presence during the lockdown to get them through this, but what they're seeing is that the stores are still a critical way for them to drive both top line, but especially bottom line. If you think about our assets on Armitage Avenue with tenants ranging from Allbirds to Warby Parker, we're continuing to work with a variety of those type of tenants throughout our portfolio, and I'd expect to see them continue. And then in between are just the Brands that have weathered this storm have rethought how they are going to connect with their customer. They're recognizing that the days of pushing a whole bunch of product through department stores, that those days are changing, that the days of being able to just sell the same stuff in the same way, that those are ending. And so they want to use these unique stores as a way to connect with their customer as well. So all of that is adding up to tenants showing up, looking to be around, cluster with each other in specific select areas. So let me be clear, I don't think this means that the retailer demand, the amount of square footage is going to expand over the next several years. I don't. The United States is over-retailed. But in these select corridors, retailers are seeing that they can show up that way, and you should expect to see that. Then on top of that, do expect to see service retailers show up after a period of nothing but essentials and other uses that are complementary to everything that we think about when we look forward to getting back out there.

Thanks for that. And then understanding that sales are still recovering for a number of nonessential retailers, you know, looking out a year from now, do you think occupancy cost ratios change meaningfully from pre-COVID?

Yeah. And this will be critical, and this is something that I think we all are going to have to keep our eyes on, because simply listening to retailers saying that they can afford to open that space can lead to some errors. So we saw rents, for instance, on certain streets increase 10%, 20%, plus percent a year for several years, and we really need to monitor where rent to sales are. So based on the rents that we see tenants executing, based on the sales history pre-COVID, as well as what we might anticipate as things open up, the rent to sales ratios look very healthy. Retailers are acknowledging it. They also are acknowledging that there is, for many of them, a so-called halo effect where they're not just going to have strong sales on a four wall basis, but the benefits to their online initiatives as well. So I think to be crystal clear, it is going to be a retailer's market for a period of time. And with that rent to sales ratios that are going to be lower, meaning rather than paying 15%, 17%, 20%, they're going to be at the lower end of that. And everything we see about how our portfolio stacks up, we can afford to do those deals. We're going to. And I think there will be some really good growth on the other side of that.

Thanks a lot.

Sure. Thank you. Our next question comes from Katie McConnell with Citi. You may proceed with your question.

Okay, great. Thanks. So 4Q occupancy fallout was a little bit lighter than we had expected, so I'm curious to hear your thoughts around the magnitude of potential fallout in 1Q, and whether you view that as more delayed after the holidays, or does it just feel lighter overall now that more leases have been renegotiated?

Okay, let me just start with sort of the numbers, and then you can maybe backfill into some of the other pieces. Katie, what I would say is that in terms of what I mentioned on my call is that we have a handful of suburban natural expirations coming up in the first quarter and in the second quarter, so I think just the expectation is on a percentage basis it'll drop, but you need to keep in mind, as you know, that we have very different rents, so the percentage itself is somewhat, you need to look at that in context. But in terms of Actual physical declines, you know, what I'll go back to is, you know, of the 10% that are not paying us, I think half of those ultimately go away. So whether that goes away first quarter, second quarter, 2022, you know, we'll see where that shakes out. So I don't really have a view other than that, other than from an NOI perspective, it's not showing up because we're reserving it. So that's really the unknown, you know, Katie, when that goes through. But I think of what I know and what I expect is, like I said, a handful of suburban movements.

Okay. And then within the $8 million leasing pipeline, understanding that all deals are going to be a little bit different, but can you provide a wide range or, you know, some context around what you're expecting for leasing spreads on the deals that you have already executed?

John, why don't you take that?

Yeah. So, you know, I think it's going to vary. And Katie, what I will tell you is that on our street, a lot of times these don't show up. in the spreads for a host of reasons, whether we cut up the space or otherwise. So what I will do is we actually, as we get these executed, we will provide color as to what the profitability was before and afterwards, as well as the cost to get us there, to the extent they are not showing up in spreads. But I would say that they're pretty consistent with what we've seen in the past. There's not any They're pretty solid, but I'll provide color on them as they show up in our results.

Okay, that'd be great. Thanks.

Thank you. Our next question comes from Craig Schmidt with Bank of America. You may proceed with your question.

Great. Thank you. Good afternoon. I was just wondering, in terms of the street and urban retailers that are now starting to investigate, Did you see a noticeable change once the vaccines were announced, or has it been more recently? And the ones that are now looking around, when might those new leases hit your P&L?

So, and Craig, I think it was a combination of events, and certainly the encouraging news around the vaccines were a first step in getting retailers to say, okay, we can now start thinking about 2021 and 2022 and what the world might look like. But I would tell you that also we saw a change in tenor with the retailers in terms of how they're thinking about executing through their various different channels and much more of a focus on getting back to offense, themes that have been around for a while but that are clearly resonating, doing more with less, picking their stores carefully, and then thinking about, based on who those retailers are, where they want to be. So it really, while October, November felt good, I'd say December, January felt significantly better in terms of just retailers recognizing that they're gonna get through this, they're going to get to the other side, the opportunities in terms of spaces available are, in the cities, unprecedented. So if they wait much longer, they're gonna at least miss out on some of those opportunities, but by moving now, there are a variety of choices and you're starting to see, and you read about it in the papers as well, but you're starting to see them show up.

And how long would it, I mean, the people who are just looking now, when would you think you might add those rents at the P&L?

John, you gave some guidance as to what hits this year versus next in terms of the second half.

Yeah, no, Craig. So I think particularly the pipeline of the 3 million that are executed, a relatively small portion shows up this year and call that, I think what I said in my script was about 800,000 and that's going to be in the balance of that's going to start showing up in you know 2022 um and i think the good thing with the street and we've said this before is that there's not a lot that goes into these spaces so the time from execution to opening is much different than a suburban property that could take you know 18 months to build out and split etc so it could it could happen quickly um and you know we're starting to see increased conversation so i think on the street that could ramp up very very quickly but you know this this year i'm i'm guiding about $800,000 of that $3 million we've signed shows up.

Great. And just real quick for Amy, I believe Fund 5 has until August 2021 to be invested. Given the more robust pipeline, do you think you can accomplish that, or might that date get extended?

You know, Craig, that's where I said in my remarks earlier that, These are long-standing relationships we've had with our limited partners in the fund. So, whether it's done over the next several months or if there's, you know, if there's time beyond that, we just, we're confident that we'll have the time we need to make sure that we put the balance to work.

Great. Thank you.

Thank you. Our next question comes from Michael with KPMG. You may proceed with your question.

Yeah. Hi. This is Hong Ong for Mike. It looks like you put a few other tenants on a cash basis this quarter. How should we think about that? Is that kind of just a year-end cleanup? All the non-paying tenants are on a cash basis now, or can we expect more in the coming quarters?

Hi, Hong. I assume you're referring to just from this straight line, where we did the straight line write-off, the incremental. Is that where the question's coming from? Yeah, so I think it's the, just as you suspected, it's just incremental cleanup at this point.

Got it. And would you know what cash collections were for your tenants on a cash basis in both the fourth quarter and in January?

Off the top of my head, I would not. I mean, I think it's one where I think if I look at the, you know, I keep going back to the 10% that aren't paying us, so certainly it's that bucket that if those are on a cash basis. And I would estimate we're probably another 5% to 10% above that that are paying us. And I don't really have the percentage handy as to what percentage of those are actually paying us.

Yeah, no worries. Thank you.

Thank you. Our next question comes from Paulino Rojas-Smith with Green Street. You may proceed with your question.

You might be on mute.

Can you hear me?

Yeah.

Okay, sorry for that. So my question is about tenant reopening. About 10% of the tenants in your portfolio haven't reopened yet. While it appears this number is much lower, closer to 3% for other strip center peers. Can you help me understand the reason behind this gap? Is it that you have a lower exposure to essential tenants? Is it more the geographic distribution of your assets? Any color would be appreciated.

John, you want to? Well, you know what? It is first and foremost geographic. And so because our properties are dominated in the major urban markets and they experience a more significant shutdown, more of those tenants were slower to reopen. In New York City, restaurants, for instance, not a significant portion of what we own, but many of them were forced to shut down or remote only. So the glass half empty side of this is, yeah, more of our stores are currently closed than in some other parts of the country. The glass half full side is they are getting ready to reopen. Those that can't make it to the other side, as John mentioned, we're fully reserved for, and I think that's to be expected. But those that have yet to reopen and do intend to get to the other side, I think that that will be a quick bounce back for us. John, I don't know if there's any additional color you want to add.

Yeah, I think that's right. I think it's really just the geography and getting to the point where there's enough density in those areas to make it profitable for the store to open. So no, I think that's done how much I can.

And then the second question, do you have any sense of how much market rents in New York, let's say Soho, changed in 2020 for your type of street retail assets?

Too hard to tell, but here's part of the problem. When people held their asking rents at prior peaks, and keep in mind, rents peaked in 2016, 2017, and we were very cautious about that when rents were climbing to those levels. But if a landlord is quoting off of those rents, the lease that they would execute in 2020 would be substantially lower because rents had already fallen. Whereas realistic landlords who had been transacting throughout the period 2019, 2020, pre-COVID, et cetera, there I don't think there will be as big a distinction. but it's so hard to gauge and each store is different, et cetera. What I will tell you is that 2020 rents are going to continue to be transitional to the extent that the tenants get open. 2021, same thing. But as we think about 2022, 2023, our retailers are showing a fairly bullish attitude and are willing to see pretty significant rental growth, whether it be contractual or fair market value reset. So short term, I think you should expect a lot of turbulence. You should expect a bunch of headlines across the board. But longer term, I think you're going to see some very nice momentum.

Thank you.

Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from Kevin Kim with Truist. He may proceed with your question.

Thanks, John. Good afternoon, everyone. So it was good to hear you guys talking about the green shoots and street and urban retail leasing. But I'm curious, you know, what are the retailers looking for to turn that kind of positive attitude that you talked about to much more of signing for it to be more sustainable? on solid footing.

Yeah, and let's be clear, this winter is going to stink because of everything that we read about in the headlines, plus cold weather, etc. So some of this is going to be simply the seasons changing. And with that, Retailers are starting to, as I said, look forward because it takes a month, if not longer, to gear up for a strong reopening. Watch luxury, and I think what you'll see pretty consistently is the luxury retailers are picking their spots, and one of the spots happens to be Soho. And watch who's stepping up there and where they're going. And I think that, again, will bode well for our portfolio and for SOHO in specific. And it's not just SOHO, the same thing in other parts of the country, elsewhere in our portfolio. Then watch where the up and coming retailers are clustering as well. And what I think you will start seeing over the next few quarters is a rational migration to a few key areas where they can do strong top line growth and strong bottom line. where they can present their brand in a differentiated way. Because remember, the channels are shifting. And some brands may say, you know what, I can do all of my sales online and achieve all of my needs. And for those, select few, great. But that's going to be the exception to the rule. Most recognize the stores are critical. And then it's a matter of where. So I think it will be clearer which markets win, which markets lose. Much of this will take into account a whole bunch of the trends we're talking about. But our focus in our portfolio is to make sure that we have those kind of must-have locations.

Okay, and the deals that you've talked about that are in the pipeline, is the nature of the leases different than what we're used to? So things like some optionality or duration, things like that?

So here's been the evolution, and it's been different than climbing out of other recessions. Out of the GFC, retailers were cutting tough deals and very long-dated deals. And so when you were signing that lease, you were committed to a bearish outlook for a long period of time. or certainly over the first half of this year-long crisis, retailers that were stepping up were stepping up generally with shorter-term leases. And they said, you know, we'll figure out 2023 or 2024 when we get there. And so it worked for the landlord and the tenant on that side. And I still say that's more the theme we're seeing than very long-dated leases. But now we are seeing, especially recently, some luxury retailers saying, no, we know we want to be here for a long period of time. You've even seen on Madison Avenue in the last few months two different retailers announcing that they're buying their locations. So talk about long-term commitments. As retailers are starting to make longer-term commitments, then there is a give and take of what rental growth would look like. And I am very encouraged by retailers' willingness to see their rents grow back to certainly pre-COVID and other levels as they are interested in reaching out longer term. So, again, short term, mainly retailers are saying, how do I get open? How do we figure out the next couple of years? And then we'll have some form of reset. But you'll start seeing longer-dated leases, and we are starting to sign some of them as well. Thanks for that, Jim.

Thank you, and I'm not showing any further questions at this time. I would now like to turn the call back over to Ken Bernstein for any further remarks.

Thanks, everybody. Probably a few more months before we get to get together in person, but I cannot wait to see you all in person. Until then, stay safe, and we'll talk soon.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating.