Acadia Realty Trust

Good day and thank you for standing by. Welcome to the Acadia Realty Trust first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Nathan Niemiec, please go ahead.

Good morning and thank you for joining us today for the first quarter 2021 Acadia Realty Trust earnings conference call. My name is Nathaniel Niemiec and I've been an intern in our development department since the summer of 2020 and will be transitioning to full-time this spring. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meanings 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, April 29, 2021, 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.

Thank you, Nathan. Great job and welcome to the team. Good morning, everybody. I'm going to first discuss some of the trends that we're seeing and how they impact our business, and then we will delve into the details. First of all, the improving retailer demand, which we began to see in the fourth quarter of last year, has continued to accelerate. Leasing tours and negotiations, which began in the fall, are continuing at an increased pace. and are now converting into signed leases. We're at a point where our leasing team is seeing more activity now than prior to the pandemic. And while initially the leasing activity was weighted to our suburban and more necessity portion of our portfolio, looking forward in our pipeline, we are seeing strong and encouraging emphasis on street retail, and the more discretionary components of our portfolio. We're seeing this reflected in a variety of our improving metrics. Most significantly, though, looking beyond the quarterly results, this improvement is beginning to feel more long-lasting in duration as opposed to just a simple snapback. Now, to be clear, our country is still working through the pains of the COVID crisis And several of our gateway cities are still far from restabilized. Additionally, retail real estate had already faced several years of headwinds and disruptions before the pandemic. Nevertheless, it's becoming clearer every day that our tenants are positioning themselves for the reopening of the economy. And more recently, retailers are beginning to recognize that as a result of this multi-year disruption, if they can correctly position themselves going forward, and because of the painful shakeout that has occurred as opposed to despite it, the next several years could see spending levels and profit margins well in excess of pre-pandemic levels. Now, that doesn't mean simply the reopening of past businesses, nor does it ignore the crisis of ubiquity that we saw in the overbuilt and over-retailed landscape that existed pre-COVID. If the COVID crisis has been a great accelerant, what that has meant for physical retail real estate is not its demise, but rather an acceleration of change and an acceleration of the separation of the haves and have-nots, both for retailers and retail real estate. It means that valuable locations, once we get through this crisis, have the potential to be even more powerful and more valuable to our retailers than before the crisis. And our portfolio is well positioned for this. Whether it is digitally native retailers like The RealReal, coming to our Greenwich Avenue property last quarter, or luxury retailers like Watches of Switzerland, opening an additional store next month in Soho at our Spring Street location. Retailers are clearly focusing on more effectively connecting directly with customers, whether digitally or through their own stores, or ideally both, and thus using these stores in more powerful ways, whether as showroom or pickup or return, but then more importantly, to create an experience and reinforce their brand. Now, looking back over the COVID crisis and as we think about the different components of our portfolio, the approximately half of our portfolio that is focused on necessities, essentials, stay-at-home needs, that portion proved critical during the lockdown. With Target as our largest tenant and other tenants ranging from traditional supermarkets to TJX's home goods, this component continues to show stability. But now as we move past the lockdown, we are seeing a significant improvement in tenant interest for the discretionary side of our business, especially from those retailers whose customers are climbing out of this crisis with pent-up demand, with increased savings, and in some cases significant, perhaps unanticipated wealth from the appreciation of their homes and their stock portfolios. And this rebound is starting to show up in our numbers. You may recall a couple of quarters ago, we discussed that as we were assessing the impact of COVID on our portfolio, we anticipated a hit to our net operating income of about 10% or roughly $15 million. And we saw that drop rebuilding over the next few years, driven most significantly through our leasing pipeline. As you may recall, our pipeline started at around $6 million. Then as of the fourth quarter, it had grown to $8 million, and it is now currently well in excess of $10 million. And importantly, already over $5 million of this pipeline, or in other words, substantially all of the $6 million of initial pipeline has already been converted to sign leases. This pipeline has rebuilt faster than we had initially expected and has continued to improve both in terms of number of tenants engaging with us, and the overall rent profile. It also appears the trajectory of growth should continue beyond the simple recapture of lost NOI and continue for several years due to the growth and the rebound potential in the street component of our portfolio. And while early movers in our leasing pipeline were concentrated in the less dense markets that were generally quicker to reopen, such as Greenwich or Westport, Connecticut. More recently, we're seeing a rebalancing. With our recent activity now being in the more dense gateway markets, along with watches of Switzerland and Soho, for instance, we executed a lease for a new Mark 4G-owned restaurant in Tribeca and are finalizing a lease with a luxury tenant in Chicago's Gulf Coast. and it's not just in our portfolio. Neighboring properties are beginning to attract exciting complementary tenants as well, such as Cartier, Bottega Veneta, Valentino, and Soho. Similarly, in the Gold Coast of Chicago, neighboring retailers include luxury brands Christian Dior and Brunello Cucinelli, both who are expanding their stores on Rush and Walton. We're the first to acknowledge that this type of retailer demand will not backfill all of the space in the United States. Retailers are going to be selective and they're going to be disciplined. But for properties in our portfolio with our demographics and our density and our barriers to entry, we see far stronger recovery than we could have anticipated just a few quarters ago. To be clear, the current vacancy rates on some of these key streets that we do business in are a bit daunting. And don't expect that to change overnight. But this vacancy is also offering key corridors and opportunity for a significant refresh of concept. And while zero vacancy may sound comforting, if it translates through into stale retailers and a dull shopping experience, that's often even a worse long-term outcome. We are much more encouraged by corridors where new and exciting retailers are planting their flags than by just okay folks hanging around. And thankfully, our locations throughout the country are where the new exciting concepts are showing up. Whether Melrose Place in L.A. or M Street in Georgetown, we are seeing the right retailers once again planting their flags there. And while it may take a few years for these markets to fully regain and then exceed the pre-COVID rent levels, which, by the way, has almost always been the case during prior cycles, even during this transition period, we should still have plenty of embedded growth in our portfolio, and John will discuss the key drivers of that shortly. Then from a capital markets and investment perspective, both the debt markets and the equity markets are continuing to rebuild albeit selectively. The retail real estate sector is still a less favored asset class in the private markets. But this will likely play out to our advantage as there are likely to remain fewer well-capitalized teams with proven investment expertise and many groups that previously were active in this space have lost the muscle memory to navigate the new normal for retail. Then notwithstanding the huge short-term impact from the COVID crisis on collections and the stock volatility that many of us faced, today there has been much less actionable distress than we might have thought in the early days And there's a variety of reasons for this. But it currently appears that there will be likely fewer opportunistic buying opportunities in the more favored or less unfavored components of retail, such as supermarket anchored, shopping centers, or net leased assets. But we very likely could see increased opportunities in the other less crowded components, including certain properties and gateway markets. So what does that mean for our investment activity? Well, in terms of our core portfolio, while our stock price is not yet at a point where we have a cost of capital advantage in the private markets, given our retained earnings, given our healthy balance sheet, we are starting to dip our toes in and certainly gearing up for what we expect could be a very interesting investment period. And we're confident that as buying opportunities arise, we're going to be in a position to capitalize on them. Keep in mind, a relatively small size means that even modest amounts of external growth can really move the needle. And while we may have to wait a bit for the public markets to rebalance, fortunately, as Amy will discuss, we have our discretionary funds 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 retailers continuing to step up and get ready to capture the pent-up demand and then longer-term growth potential that we see in front of us. And it is becoming clearer every day that a portfolio like ours, dominated by unique must-have locations, with both stability and then strong prospects for growth, will once again be compelling. And then more importantly, management teams like ours, with access to multiple types of capital and a proven track record of deploying it, we'll be well positioned to execute on the opportunities in front of us. I'd like to thank the team for their hard work and their success last quarter, and now I will turn the call over to John.

Thanks, Ken, and good morning, everyone. I'll start off with our first quarter results and key metrics. then providing an update on our core NOI growth expectations, and then closing with our balance sheet. Starting with core cash collections, we continue to edge up with collection rates of 92% during the first quarter, along with continued consistency between our suburban and street and urban portfolios. And while we are still in the midst of collecting and processing April rents, we continue to see stability within our collections, and we have already collected over 90% of this month's rent. And for those 8% of our tenants that aren't currently paying us, Consistent with our past practices, we are fully reserved against these unpaid rents, with it largely coming from the small percentage of our portfolio that continues to experience the lingering impacts from the pandemic, namely our gyms, theaters, and full-service restaurants, which, as a reminder, represent about 5% of our portfolio. As we move further into the year, we anticipate these businesses will continue to stabilize as operating restrictions are eased, with nearly all of our large format and studio gyms which represent about 3% of our ABR now open and operating, subject to capacity limits, and our sole theater tenant, our core, successfully reopened on April 16th. So not only do we think this provides us with an opportunity for near-term improvement in NOI, equally important, we are encouraged by the continued consumer appetite for these venues. And absent any setbacks in our pandemic progress, hopefully we are nearing the final stages of the cash collection focus. With collection rates now hovering much closer to pre-pandemic levels, And in fact, notwithstanding the really scary moment in time, last April when we barely collected 50% of our rents, in hindsight, as the year moved on, we ended up collecting about 90% of our billed rents during the pandemic. And that percentage, meaning 2020 rent collections, will continue to rise as our tenants continue to honor the repayment obligations on the short-term deferral arrangements that we had provided them. Now moving on to our quarterly earnings. And let's hope I get past it this time. I think this is where I keep getting cut off. So Our quarterly results of 25 cents a share were in excess of our expectation, driven by both our leasing efforts along with continued improvement in our credit reserves. With our quarterly credit loss declining by roughly 40% as compared to the prior quarter, after adjusting for the $2 million benefit that we recognized in our fourth quarter reserve last year, relating to credit reserve reversals on cash basis tenants. Our first quarter results were also very clean. meaning it did not include any pandemic-related noise or other one-time items, as we did not have any meaningful write-ups of straight-line rent or other non-recurring adjustments from the cash basis of accounting, nor did we recognize any material one-time transactional items during the quarter. And as we look into the second quarter, we anticipate that our core and fund NOIs should remain relatively in line with the first quarter. And consistent with the assumptions that we had outlined in our guidance, we are anticipating a slight decline in the run rate of our fund fees, given that we earned a few large leasing commissions this past quarter. In terms of the second half of the year, we are increasingly optimistic about the incremental one to three cents of FFO per quarter that we had guided towards on our prior call. And in fact, as evidenced by our raising guidance, it's starting to feel like the rebound that we had anticipated starting in the second half of the year has already begun. And as we had outlined, we raised our guidance to $1 to $1.14. And while admittingly we're a bit hesitant to adjust our guidance so early in the year, The strength and successful execution of our lease pipeline, along with the improvements we are seeing our credit analysis, increased the confidence as we look forward into the balance of the year, and quite frankly, alleviated some of the concerns that we had built into our initial assumptions involving both the timing and velocity of the rebound. Additionally, we did not recognize any realized gains this quarter from the sale of Albertsons. And as a reminder, based upon today's share price and the remaining shares we own, we have approximately $20 million of embedded gains representing over 20 cents of FFO. Given the nature of our investment, we can't predict the specific timing as to when or how many shares are sold in any given quarter. And if I had to guess, I would target it towards the later half of the year, but that is truly just a guess. And keep in mind, this is all about when, meaning what specific quarter that we recognize and monetize these gains, not an if. So not only are we becoming increasingly confident on our 2021 core NOI expectations, we are gaining additional conviction on our growth trajectory as we look beyond 2021. As we discussed on our last call, we had highlighted two key milestones on our path forward. First, as Ken had mentioned, we had anticipated that we would get back to our pre-COVID NOI by late 2022, early 2023, and we remain on track, if not ahead of that expectations. And this would set us up for mid to high single-digit core NOI growth in both 2022 and 2023, which is being driven by the $10 million of new leasing activity that I'll touch on in a moment, along with an expectation of reduced credit charges. And the second milestone is the continued growth above and beyond simply getting back to where we started, with our model showing solid core NOI growth as we look beyond 2023. And the key drivers of this internal growth is both the lease up coupled with the contractual growth of about 2% that's embedded in our portfolio. And to put this growth in context, we estimate that in the near term, defined as within the next three to four years, we expect to generate over $25 million of incremental core NOI, which translates to an increase of 20%. And that's even before we layer in the profitable redevelopment and expansion opportunities that exist across our portfolio. Our leasing team has made meaningful progress on the lease up portion, with the $10 million core leasing pipeline that Ken discussed. And to put what we are seeing on the leasing front in context, our current activity is about 50% higher than what we have seen historically, so it's clearly a data point reflecting the strength we are seeing across our portfolio, and particularly within our street and urban markets. Now, a bit more color on the pipeline. The $10 million is comprised of roughly 250,000 pro-rata square feet, or roughly 400 basis points of occupancy, And it represents our pro-rata share of ABR, excluding recoveries. And over 80% of the 10 million is incremental, meaning it is not replacing an existing in-place tenant, nor did we recognize rent on these spaces at any point in 2020. Additionally, and as highlighted in our quarterly results, we are continuing to see these signed leases reflected in our physical versus leased occupancy spread, which grew to 150 basis points at March 31st. And in line with Ken's remarks of the strength we're seeing in our street leasing, Our New York Metro portfolio is leading the way with a spread of nearly 600 basis points at March 31st, and the vast majority of that arose this past quarter. And as we continue to convert our pipeline into signed leases, we anticipate this spread will continue to positively widen throughout the year. Now to provide an update on the timing. As Ken mentioned, we have now executed leases on over $5 million of the $10 million dollars. And we expect that approximately $1.5 million of this will show up in the second half of 2021, with the balance of it coming online at various points throughout 2022. The 2021 NOI expectation of $1.5 million compares to the $800,000 that we had guided towards on the last call, and that's being driven by a combination of the new leases that were signed this quarter, along with a number of tenants that have accelerated their opening dates, primarily on some of our street locations. Now, in terms of tenant expirations, in any given year, we typically average roughly 10% to 15% tenant rollover. And 2021 and 22 is a fairly typical, if not a bit lighter than usual year, with less than 15% of our ABR scheduled to expire by December 31, 2022. And this 15% translates to about $18 million. And it's split relatively in line with our portfolio mix, with about 65% expiring on street and urban assets and 35% on our suburban portfolio. Now, while it's still fluid, given the timing of tenant notification dates, we are currently anticipating about half of these will not renew, and we are already in discussions with prospective tenants on the vast majority of these spaces. I also thought it was worth highlighting a few points involving the scheduled expirations on our street leases. and more specifically, focusing on those street tenants that we are assuming will not renew or exercise an option, meaning we currently expect to get that space back. We are projecting positive cash spreads of 15% on these street leases, and that's using today's lenses with our sober expectations as to where we see the market at the current moment. And should the economic rebound play out as currently anticipated and as Ken discussed, this could provide us with a meaningful opportunity for outsized growth above and beyond our current expectations. Now moving on to our balance sheet. As outlined in our release, we generated over $40 million of cash during the quarter, largely from retained cash flow from operations along with a small strategic core disposition, which given our already low leverage resulted in nearly a 5% reduction quarter over quarter of our outstanding indebtedness. In summary, we had a solid quarter that came in ahead of expectations, and this is driving our increased optimism as to how our portfolio is poised to benefit from what may be a tremendous rebound. Our liquidity and balance sheet is built to grow, and we are looking forward to what could be an exciting and profitable part of the cycle. I will now turn the call over to Amy to discuss our fund business.

Thanks, John. Today, I'd like to provide a brief update on each of our four active funds, beginning with Fund 5. First, During the first quarter, as deal flow began kicking in, we secured the unanimous support of our Fund 5 investors to extend the fund's investment period to August 2022. It felt great to have our investors stand alongside us and behind this successful fund, providing us with an extra year to put the fund's remaining dry powder to work. So far, we have allocated approximately 60% of Fund 5's $520 million of capital commitments. In response to the capital markets, we chose to focus this fund on acquiring out-of-favor 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, and 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. Due to our selectivity at acquisition, these assets have held up well during the pandemic. Since September of last year, our existing Fund 5 portfolio has maintained a cash collections rate of approximately 90%, and the portfolio has delivered a consistent mid-teens leveraged return. We have We have also been pleased to see solid leasing momentum within this portfolio. For example, since March of 2020, we have executed leases with an aggregate annual base rent of $3.1 million. We also have another 1.5 million of annual base rent currently at lease. In the aggregate, this represents approximately 8.5% of the fund's annual base rent. And while tenant improvement costs are up we have been able to hold on to yield, generally speaking. Looking ahead, we have approximately $200 million of equity available to invest. With leverage, this equates to $600 million of buying power. As noted in our earnings release, we have an approximate $100 million acquisition pipeline, which gets us one-sixth of the way to full utilization of these commitments. The new acquisitions are higher-yielding shopping centers on the East Coast, with going-in yields consistent with those of our existing Fund 5 investments. As we review potential new additions to this pipeline, it's great to see our fully discretionary capital finally getting the credit it deserves. For these acquisitions, we were part of a small group of buyers that was considered due to our strong sponsorship and credibility to Closed. For the same reasons, we are continuing to see interest from our lenders to finance these properties. Given the amount of capital on the sidelines and recovering retail fundamentals, this is also a good time to harvest properties, particularly in our older vintage funds 3 and 4. One area of focus is our grocery-anchored properties, which have gotten a pandemic boost and remain in favor in the capital markets. Finally, turning to Fund 2 and City Point, this property continues to benefit from the resilient Brooklyn Shopper. First, foot traffic is steadily increasing at the center. Last month was the busiest since the pandemic began one year ago, with a 27% increase in foot traffic over February. And while current foot traffic is approximately half of its pre-pandemic high, Remember that these counts exclude any benefit from Alamo, who plans to reopen on May 7th, and Century 21, who vacated at the end of the year. On the leasing front, we've seen strong interest on the former Century 21 space from both traditional retail users as well as commercial tenants, with multiple options for each space. Additionally, Decal Market Hall, who is currently open for indoor dining at 50% capacity and is seeing strong week-over-week sales. Currently, 26 vendors are open and operating, including four new vendors that have opened post-outbreak. We also have another seven vendors in our potential leasing pipeline, and we look forward to being able to open fully this summer. In conclusion, our fund platform remains well-positioned with a successful capital allocation strategy ample dry powder to continue to execute on it, and a portfolio of existing investments that continue to march towards stabilization. Now we will open the call to your questions.

Thank you. As a reminder, to ask a question, you will 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. Your line is now open.

Hi, good afternoon. The first question I had just regarding the, you know, the growth that you're seeing or the comments that you've made between sort of the suburban shopping center portfolio and also the street and retail portfolio, you've always compared and contrasted the growth between the two segments. There was a few hundred basis points spread in favor of the street and urban And I'm just curious, you know, the trends sound encouraging on both fronts over the next couple of years here, but was hoping that you can compare and contrast the spread and growth that you anticipate between the two segments in terms of thinking out over the next few years.

Sure. And apologies for the technical difficulty before. The way we should think about it, and I think, Todd, you're spot on, we're seeing – strong sales performance and strong tenant demand across the board. But the reality in our suburban centers is no matter how well TJ Maxx does, no matter how well Target does, those long-dated leases tend to have much less contractual growth. And we love them, they love us, but they ain't going to pay us more rent irrespective of their sales. Conversely, in our street portfolio... We tend to have higher contractual growth. Now, there's a transition period going on right now where we're seeing for 2021, perhaps even 2022, tenants are coming in and those who are moving quickly are getting, at least for their initial year, very attractive rents. And so the contractual rent growth is going to be significantly higher during that period. But what we're seeing over the long haul is that 3% contractual growth seems to be sticking. And so just as we compare and contrast, once we get reopened and back to a new normal, it is our expectation that the great streets that have that kind of demand are gonna have higher growth rates. We're still in the early stages of reopening, There's still a lot of moving pieces, but we continue to be encouraged from that perspective. And we think overall, both suburbia and then especially in these great streets, enough of the weaker tenants have left, enough new strong ones are coming in, that we think in a world that will be omnichannel, that these retailers who are going to take these powerful locations are both getting in at attractive rates, Rents are going to see very strong sales, and we're already seeing signs of that in terms of sales reports, and so we think that that trend could continue, Todd. It's still a little early to tell you whether it's 100 or 200 basis points and precisely the timing, but that's how it's feeling.

Okay, and then, you know, some of the commentary around investments. I was just wondering if you can comment. Was that predominantly investment? you know, focused or targeted, you know, around fund five? Or, you know, are you starting to see some potential opportunities that might pencil in the core? And, you know, in terms of deploying capital in the core to the extent that, you know, you're getting closer, you know, how should we think about, you know, those incremental investments being split between, you know, street and urban and shopping centers and the suburban shopping centers where, you know, you've been much less active over the last several years?

Sure. So the majority of the volume that we're referencing is for Fund 5, and it looks very similar to the assets that we have been buying prior to the lockdown. But it's beginning to shift even there where there are more value-added components because as retailers left and there's vacancy where we have a high level of confidence for retenanting, that works. And so while for the majority of Fund 5, the thesis was pre-COVID, pre-recession, investing in out-of-favor assets where we could get the majority of our return out of current cash flow, going forward it will be that, plus some interesting value-add opportunities. I wouldn't be surprised to see some of Fund 5 then go back to some of the more opportunistic and more value-add pieces of our business. We're good at that. We like to do it, but it's still a little bit early. Then on the core, most of those asset trades, everything froze during COVID because there was no price discovery around rent, and there was really no price discovery around the capital markets. we are starting to see that reopen. And unlike the more stable suburban space, especially in the, as I referred to in the prepared marks, the less unfavored pieces, there's a lot of disruption out there. And we're beginning to see some interesting conversations with stakeholders who are realistic about their rent expectations, realistic about value. It wouldn't surprise us within the Corps that there could be some real interesting opportunities Still a little bit early, but there because of the amount of disruption that our gateway cities went through, that a variety of other things, there really could be some very interesting opportunities there.

Okay, and just one last one if I could sink in for Amy. For Fund 5, do you anticipate fully deploying the remaining equity capital for $500 million of additional investments beyond the $100 million that's under contract, and Do you expect that to be predominantly comprised of high-yielding investments?

So we have about a year and a half remaining to go, and we are confident that we will deploy the full amount. And per what Ken just said, it will certainly be a lot of our higher-yielding assets, but we are starting to see some value-add opportunities. That's where we have capabilities, and I'd expect us to explore those as well.

Okay, great. All right, thank you. Thanks, Todd.

Thank you. Our next question comes from Flores Vendish with Compass Point. Your line is now open.

Thanks for taking my question, guys. You know, obviously, the tone of the calls has significantly improved from the last couple of quarters. Just wanted to maybe, if you guys could talk a little bit about your the lease spreads, which still are low for your historical perspective, if there's a difference between streets and suburban, particularly in new lease spreads, and if you can give some more color on that and also talk about what you're seeing, Ken, you'd mentioned some of the leasing that's occurring in Soho. what's happening to the rent levels there, and are you seeing stabilizations in market rents, and relative to your existing rents, do you feel good about where your existing space is leased at the moment?

John, why don't you start, and I can add anything else. Sure. Good morning, Flora. So in terms of what we're seeing on spreads, and I think just given the nature of our portfolio, and as we often cut up space, the spreads, you know, that we actually report aren't always, you know, a good portion of them aren't comparable. And so I think that, you know, really the way to look at it is what I outlined on the expirations. So we looked at, we have a number of street expirations coming up over the next several years. We're expecting on those streets that, you know, whether we report them in our spreads or not, and I'll put color on them as we do, that we're expecting those expiring leases to show a 15% spread on that. And keep in mind, these are with rents that have grown 3% in the prior term. So still feeling good and positive about that. And as we continue to execute on those, we will certainly update you.

And then just in terms of color, and it's true for Soho, it's true for a lot of these other markets. Keep in mind, rents peaked around 2017. And we've been hopefully transparent about the evolution from 2017 down until COVID-19. But rents had dropped and retailers were telling us pre-COVID that at the rents that the markets were at, they could make money. Now, when COVID hit and during that time period that first movers showed up, there was a discount at least for 2021, perhaps 2022. But what we are seeing for the first movers is that by 2022 or 23, rents were meeting or exceeding John's and my estimates of where that rent should have been even before COVID. And now we are finally again seeing multiple tenants with interest in the same spot and happiness is two tenants fitting on the same location because some of this is about rent to sales. But also we know some of this is about supply and demand. And so we are starting to see that confluence. It's going to take a while. But we welcome the refresh that we're going to see, and we welcome the kind of retailers that are showing up. And I think you will start seeing over the upcoming quarters and years some very positive trends in terms of rents from that.

Great. One more question, I guess, if I could. It sounds from the commentary that it's still perhaps a little bit early for some of the and urban opportunities, but that's probably where you're going to make your better, more attractive investments. Could you maybe contrast some of the things that you think about, and does that also mean that, for example, in New York you've been heavily focused on Soho, but would you consider going to Times Square or to other parts of Manhattan? And how does government leadership impact your thinking around New York and San Francisco in particular, two markets that are very out of favor for most of the investors at the moment?

Well, that is one heck of a third question because we could spend the next hour on it. Let me touch on a few things. One, there are some markets that we feel are going to see a rebound sooner and than others that are more dependent on one component. In other words, the vast majority of our portfolio throughout the United States works because of a live-work-play component, meaning we don't count just on residents, we don't count just on people showing up into the office, we don't count just on tourism, it's a confluence of all of those. And so places like SoHo are responding or will respond likely faster than some other areas that are heavily dependent on one component, doesn't mean that those won't work for us, but we just need to be careful about that. We do think there'll be opportunities across the board, and it's not just New York. Remember, New York is just one component of what we own. As it goes for leadership, I do not fall into the camp as it relates to any city that the recovery of that city is inevitable. There's a level of arrogance and complacency with that, and it is essential that political... leadership that businesses and communities all step up. New York has rebounded wonderfully in the past, but it had that kind of leadership. And I think it's critical for our political leaders to understand that the universal sign of welcoming people back to New York is not raising the middle finger. It is embracing them, whether they're tourists, businesses, local communities, or residents. And I think, based on the political leadership that I have spoken with in the various different cities, that the vast majority of political leaders understand that. And so I am hopeful. But as I said, I do not think it's inevitable, and we need to watch these things closely. Thanks, Ken. Sure.

Thank you. Our next question comes from Linda with Jefferies. Your line is now open. Hi. Good afternoon.

When you talk about New York Metro leasing leading the way and new leases being signed, can you give us some color on the types of tenants? You know, how might they be similar or dissimilar to the other types of tenants that vacated?

Sure. And I think the first important thing is as we were heading into the crisis, Linda, we were very concerned about some of the younger brands, some of the digitally native, whether they'd get to the other side, whether they'd have the funding and the wherewithal. And now if we look backwards, those retailers who had a digital connection with their customer were able, in fact, to do quite well because of that digital connection. So the thought that the Allbirds of the world or the Warby Parkers, et cetera, were going to be a moment in time and go away? Well, we've certainly seen that that's not the case. So some of the leases that we have been signing are in those younger, interesting concepts. And what's so exciting about that is the way they think about the world, the way they think about their stores goes beyond just four-wall EBITDA because the power of the store is far in excess of the number of eyeglasses or shoes, et cetera, that they're selling. Now, the counterbalance to that, and again, this is true for New York Metro, it's true for the country, these companies are not going to open 1,000 stores. They're going to be very selective, and that's why we like how our portfolios throughout the U.S. are set up for that digitally native piece. Then the other surprise as we're climbing out of this crisis was how well luxury did. notwithstanding a lockdown, notwithstanding a virtual halt to international tourism, the U.S. consumer has stepped up and having stores is critical for them. And then finally, in between, a bunch of retailers who over the last few years have gotten their act together, they're stepping up as well. So I think it's that combination, whether you want to think of it as luxury, as more bridge or Lululemon or aspirational. And then some of these digitally native are doing really exciting things. And we have that right kind of real estate to capture that.

Thanks. And maybe just a follow-up to that. I mean, your earlier comment about luxury retailers signing around Russian Walton, but not necessarily filling all the vacancy broadly, how do you think luxury retailers are approaching their street retail presence post pandemic?

What we're seeing is, And again, not just in our portfolio, but as we walk around SoHo and we see the luxury tenants seem to be using this as an opportunity to upgrade and expand their locations. They're recognizing, again, they may not have a larger store count in the future, but these stores are going to become more powerful, partially because of the different Shifts in channels, meaning perhaps less is sold through department stores. Perhaps there are other changes that they're thinking about. So we are encouraged, we're also encouraged by the collaborations. You're seeing it not just in how luxury is producing sneakers, but also who they want to be near. So around the corner from our St. Laurent is a sneaker stadium. And years ago that would make no sense, and right now it makes a lot of sense. Stay tuned, but I think you're going to see some very exciting things.

Thank you. And just a quick one for John. Can you talk a little bit about the Home Depot disposition in the quarter, maybe some color on the cap rate and the type of buyer and whether we should expect more dispositions for the remainder of 2021?

Yes, that was something we looked at and had the opportunity that came up late in. And we had actually talked about it on our Fourth quarter call-in was in play, but it was a Home Depot long-term lease, really no growth associated with it beyond just the 1% or 2% that was there. So there was a triple net lease buyer that had a very low cost of capital and return expectation, and we traded that in the fours. So I think certainly we always look at across our portfolio and business plans with a given asset, but this one just made a lot of sense for us.

And was it a private buyer or a public REIT?

This was a private buyer in this case.

Thank you.

Thank you. Our next question comes from Katie McConnell with Citi. Your line is now open.

Hey, it's Chris McCurry on with Katie. Just a quick follow-up question. Can you provide some more color on the types of investments you guys are targeting under Fund 5? And is the pipeline for the remaining $500 million still consistent with some of these out-of-favor East Coast shopping centers?

Yes. Let me spend a minute to just explain what we didn't see. We saw going into the crisis, it was very likely that there was going to be massive disruption in the debt markets. And due to government intervention, both fiscal and monetary, due to a light touch from a regulatory perspective, we didn't see the debt at a huge discount buying opportunities that perhaps we thought six, 12 months ago. What we are seeing now as owners of a variety of shopping centers and other retail are climbing out of this, they're recognizing a few things. One, If this is not core to what they own, probably a good time to dispose of it. Two, if there's a fair amount of capital required to restabilize the asset, even if there's clear tenant interest, it's not cheap to re-anchor, it's not cheap to release. And then finally, if they are looking for liquidity for other components of their portfolio. So that in general is creating deal flow. That is similar to Fund 5, although, again, most of our Fund 5 investments were in anticipation of some type of a recession, certainly not a global pandemic. They have held up very well. Our current cash flow is great. Now we are seeing and trying to step in front of growth, and so we will capture some of that lease-up opportunity. The final piece of this is keep in mind we do a wide variety of things, and The most exciting part of my job is I don't really know day-to-day what the next best, most exciting opportunity will be. Having fully discretionary capital available is what enabled us to do Mervyn's and Albertson's, to step up and buy in Lincoln Road in Miami, to do a variety of other deals. I'm not prepared to talk about them right now on this call. But I would tell you that the range of potential investments for the discretionary fund five is pretty darn wide. And as things reopen, I do think we're going to see some more interesting opportunities than simply cash flow. But there is nothing wrong with simply cash flow.

Got it. And now that you are seeing more deal flow, to what extent are you seeing cap rates move? And how is that? different between your suburban and street portfolios based on the assets you're looking at?

Yeah, so it's still a little tricky. What I'd say is I don't think we have seen a meaningful move in cap rates one direction or another. But remember, base rates have shifted. Borrowing costs are flat to down now. What you have seen is significant shifts in net operating income, or potential lease and lease up. And so I think it's really been more about coming to an understanding with a seller as to where they think their year three, four, or five stabilized NOI is and the cost to get there than it is on the going in cap rates. If I was to make a prediction, once an asset has been cleansed of and gone through the horrific COVID crisis, and you have some visibility as to where NOI, I think cap rates come down. I think borrowing costs flat to down, and leveraged yields remain attractive compared to so many of the other asset classes out there.

Got it. Thank you.

Thank you. Our next question comes from Craig Schmidt with Bank of America. Your line is now open.

Thank you. Ken, the chatter on the death of New York Metro Retail is very different from your leasing results on your portfolio. I was wondering if you had any idea of what you think accounts for the disparity between these views.

The disparity, just to make sure I understand, Craig, the disparity between just the overall narrative of the vacancies on the streets and things like that compared to what we're seeing. And that's why I tried to, in my prepared remarks, caution everybody, the vacancy is not going away tomorrow. But tenants are showing up. And remember, they're showing up, they're thinking not just one or three quarters ahead, but one, three, five, ten years ahead. And what they're seeing is a lot of their competition is cleared out. And if they can be in the pole position as things reopen, they're going to be in a unique position. Now, for landlords like us, we can afford to be flexible for 2021, and we can afford to be fair in 2022, and then we're going to start seeing some really nice growth. Those retailers who move first are not only capturing attractive going in rents day one, but they're going to capture outsized sales. If what you're looking at is midtown Manhattan, you're going to have to be patient. The return of business, the return of full New York, that's a summer to fall transition. But if you spend time in some of the neighborhoods, you're already seeing it now.

And just, I mean, when you're dealing with such an elevated vacancy, how do you win those leases? I mean, it sounds like possibly some of it is the way you structure the leases.

Yeah. So, again, it's not like one size fits all. And for a tenant who's opening up this summer, there's two good things happening. One, they're getting good, attractive first-year rents. I can live with that. Our numbers reflect it. It's fine. The other benefit that we're seeing, much to our pleasant surprise, is the sales have been really strong. This notion of pent-up demand, we're seeing it month over month in our sales reports. So great for them for 21, and then they're stepping up to real rents because they recognize the opportunity for these stores to and they recognize the long-term value. We have some vacancy, so we're not holding a lot of inventory as much as we also have some great cash flow. And thus, if we're hovering around 90% and we'll grow from there, we've got several hundred basis points of lease up over the next few years, and that's going to feel pretty good.

Okay. Thanks for that. I appreciate it. Sure.

Thank you. Our next question comes from Hong Zeng with JP Morgan. Your line is now open.

Yeah, hi. Thanks for taking my question. Yes, Ken, you've talked about good demand from discretionary retailers. I guess with respect to sales trends, how have discretionary sales done in recent history compared to your more central segments?

So, And, John, maybe you want to also add any color that you're seeing through day tax. Still a little bit early, but we have been really impressed with the sales results we're seeing even the month of March for some of these markets, which we're still working through lockdown. The sales results have been, in some instances, stronger than pre-COVID. I attribute it to pent-up demand for now, and we'll watch these carefully, but we also should not lose sight of the GDP numbers, the savings rate of the U.S. consumer, and a whole host of other factors that many of our retailers are saying may have legs beyond just pent-up demand.

Another thing, and Ken just mentioned it, is that You know, we have, just to frame it, we get probably it's under 20% of our tenants' report. But it does give us a good sense, you know, given it's a broad range of tenants, I do think it's probably representative direction of our portfolio. And looked at it really two ways. I looked at if we look over month-over-month sales, so if I look at March 21 compared to February 21, those were up nearly 100% just in that period. And that's when the world was starting to reopen in a lot of our markets. And these were some of the big streets. So Chicago, particularly North Michigan Avenue, Soho, et cetera, were up, like I said, over nearly 100% just over that period. And secondly, just following up to what Ken just said, year over year. So if we look at March 21 compared to March 20, I think this time in March of last year was really when the pandemic was really starting to cause concern. We're up of that same under 20% of our portfolio reporting. those rents are up 60%. I'm sorry, the sales that report are up 60%, and those are in the street markets as well. So both incredibly encouraging trends, and we're looking to see that go forward. Just anecdotally, we're all walking the streets and our tenants and see the activity. So really looking forward to where April is starting to play out. But the pent-up demand that we're seeing in the leasing is showing up in our tenants' cash registers as well.

Got it. And I think last quarter you talked about potentially returning to 2019 NOI levels in late 2022, early 2023. Just given kind of the optimism, the general optimistic tone of this call and the renewed leasing volume, do you see yourself returning to those levels a little earlier or is it still too early to tell?

Yeah, so, I mean, in my remarks, I did say we are certainly on track to late 22, 23, and I think just given the acceleration, I think it's, you know, we're seeing that trending earlier. I mean, stay tuned. We have a lot of calendar in front of us, but we are definitely ahead of where I thought we would have been three months ago.

Got it. Thank you.

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

Great. Thank you all for joining us. I apologize for the technical difficulty. I apologize for John for having to do it three times, but you know what? Compared to COVID, this is a walk in the beach. Please keep your eyes open for these trends. We're seeing it. We try to just call it like we see it, and we are seeing a lot of positive activity coming But we still have a ways to go, and so we look forward to speaking to you again next quarter and, more importantly, seeing many of you or as many of you as possible in person in the near future.

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