Acadia Realty Trust

Thank you for standing by, and welcome to the fourth quarter 2021 Acadia Realty Trust 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 that portion of the call, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Joe Rizzoli. Please go ahead.

Good afternoon and thank you for joining us for the fourth quarter 2021 Acadia Realty Trust earnings conference call. My name is Joe Rizzoli and I am a property accountant in our accounting department. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934. and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of 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, February 16, 2022, 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 earning press release posted on its website for reconciliations of those non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue and we will answer as time permits. Now it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.

Thanks, Joe. Good job. Welcome, everyone. Good afternoon. We had a strong quarter, and we will delve into the details in a minute, but first a few observations. While not ignoring the impact of Omicron on our healthcare system and the lives of many, from the perspective of our portfolio performance and our business plan. We remain very much on track as evidenced by our fourth quarter results and our forecast for this year. We did not see an impact on our collections, on our tenant interest, on leasing progress or investment efforts. If anything, from a transactional perspective, it may have helped nudge certain sellers off the sidelines, and we're seeing that reflected in our increasing investment volume. In terms of leasing and tenant performance, last quarter we continued to see a meaningful improvement in fundamentals after a very scary 2020 and frankly a few years of headwinds for many of our retailers even prior to that. The reopening that began in early 21 gained steam throughout the year. As a result, our second half NOI last year increased over 5%, and it looks like this above-average growth has several more years in front of us. These longer-term tailwinds have several important drivers. On a macro level, our retailers' performance, their balance sheets and business models are, with few exceptions, stronger today than pre-COVID. And the recognition by our retailers of the critical importance of brick and mortar real estate in an omni-channel world is certainly clearer today than it has been for many years. This re-embracing of physical stores is happening faster than we expected. And we are seeing this from a wider range of our retailers and formats. For instance, As it relates to Acadia and our street retail portfolio, we are seeing it from luxury retailers who are doubling down in our corridors ranging from Melrose Place in Los Angeles to the Gold Coast in Chicago, as well as here in Soho. Last year, we expanded YSL in Chicago, had solid renewal spreads in Melrose Place, and are busy signing leases in Soho. We're also seeing it with our digitally native retailers. the Warby, Parkers, and Allbirds of the world, as well as those brands who thrive around them. These DTC, direct-to-consumer retailers, are now showing up in force on many of our corridors. For instance, on M Street in Georgetown, last quarter we added Glossier, Sur La Table, and Gloss Lab, and in Soho we added Fila. And we continue to see it at our Armitage Avenue assemblage in Chicago as well, which continues to benefit from our curating a critical mass of the right retailers and where last quarter we profitably added Jenny Kane and Faherty. And especially as it relates to those markets that were hit hard during the pandemic, we are seeing a significant rebound in tenant activity And given this increase in tenant demand, it's beginning to look like the rental growth trajectory will be stronger than we had previously anticipated. And that obviously bodes well for our forecast of multi-year NOI growth. For instance, in Soho, after several years of rental headwinds that started around 2017, tenant performance and rents are now, in many instances, exceeding pre-COVID levels. And the reopening and acceleration of demand, it's still in its early stages. So as it relates to our SOHO assets, given our current in-place rents and available occupancy, even before any further market rent growth, we have nice embedded NOI growth that we have begun harvesting, and then assuming increased tenant demand continues, that growth will likely be even stronger than we anticipated. Keep in mind that given the headwinds of the last several years, market rents in SoHo could increase by an additional 50% from where they are today. and still not be at prior peaks. But tenant sales performance for many of our retailers is already well on its way to prior peaks. Now, some folks will say that rents will never get back to prior peaks. Well, given the recovery we're seeing, I doubt that. But if one defines never as being five years from now, Well then, if you do the math, that still looks pretty encouraging to us. Drilling further into our portfolio, we see tailwinds and above average growth from multiple drivers. This will first come from the lease up of valuable vacancy in our portfolio over the next year or so, as well as the profitable re-tenanting of other spaces. Example of both of these last quarter include in Lincoln Park, Chicago, on North Avenue. Last quarter, we signed a lease with Backcountry to replace a former Pier 1 and adjacent tenant. Then in the suburban side of our portfolio last quarter, we signed BJ's Wholesale Club at our Westchester, New York, Crossroads Shopping Center. That will replace our Kmart at that center at triple-digit spreads. Now, while the short-term impact of Omicron is passing quickly, we certainly will be focused on supply chain and longer-term inflationary pressures on both our retailers as well as our portfolios. And as we think about which segments of our retailers and our portfolios that are likely to be the most resilient in an inflationary environment, ultimately it's going to come down to where consumer spending will remain strong, which retailers have pricing power to hold on to their margins, and then which real estate portfolios can capture that growth. And from that perspective, while I think most segments of our portfolio should be in good shape, our street portion of our portfolio seems to be particularly well positioned. First of all, From a structural perspective, our street leases generally have stronger contractual growth and more fair market value resets than in our suburban assets. Thus, we'll have the ability to capture inflation-related growth sooner. Additionally, operating expenses are a much lower percentage of occupancy cost for our street-based retailers so the inevitable rise in operating expenses should be less impactful at our streets. Now, since inflation will likely result in increased top line sales, the rent to sales metrics, which have been a headwind during the deflationary period of the last decade, should reverse. That means the discussion with tenants will be less about top-line sales growth, and then more about their bottom line. And here again, street and flagship stores have an advantage in an omnichannel world where those national retailers, whether they're luxury or advanced contemporary, operate at higher margins and seem to be able to absorb this impact. But while we'll ponder the pros and cons of inflation, keep this in mind. Deflation is worse. it is becoming increasingly clear that we are past the highly promotional and deflationary pricing environment that existed in the past decade, where the consumer was trained that if they waited, almost everything would be less expensive. This decade-long trend was a significant contributor to the retail Armageddon, and most retailers seem to understand that this race to the bottom, it diluted their brands, it reduced their connection with their customer, and it was just not sustainable. Going forward in conversations with our retailers, they seem to understand the importance of curation and the risks of ubiquity. Most importantly, they understand the critical nature of their physical stores in terms of customer acquisition and retention, as well as profitability. So as we look out over the next few years, from an internal growth perspective, whether from lease up, re-tenanting, or contractual growth, we are increasingly encouraged by the rebound and rental growth trajectory we're seeing. Then turning to the new investment side, after a very quiet 2020 when lenders were highly accommodative and owners were fairly frozen. In the last quarter and now looking forward, we are seeing a nice growth in investment opportunities at attractive prices, both for our fund platform as well as for our core portfolio investments. On the fund side, and as Amy will discuss, Last quarter we added a $72 million investment and have an additional $120 million under contract where we have completed our diligence, but the closing is still subject to the typical closing conditions. These deals continue to be consistent with our Fund 5 higher yielding investment strategy that we have been successfully executing over the past several years. Then with respect to core acquisitions, We closed on $66 million and have a meaningful pipeline under agreement, but here our pipeline is still subject to our completing our review. The deals already closed are in markets we're very familiar with. In Soho, we added one of the best corners on Green Street, and in Washington, D.C., we added to our portfolio there with our acquisition of a portfolio of buildings on 14th Street. So in short, we are pleased with the external growth activity we're seeing, and as John highlights in our guidance, we are still seeing accretion levels of about 1% per 100 million of investment activity, whether it be core or fund. So this activity can really move the needle for us. Finally, I want to thank our entire team for their hard work last year during a year of recovery but also a year of whiplash we are now clearly seeing the fruits of your labor and i'd like to congratulate those of you who received much deserved promotions and last but not least i'd like to thank chris conlon for his over a decade of contribution to acadia's performance chris as coo oversaw our leasing and development areas and so much more he will be missed But of all of his great contributions, none was more important than the pipeline of talent he built, talent that is ready, willing, and able to step up and continue the efforts that Chris started. And with that, I will turn the call over to John.

Thanks, Ken, and good afternoon. Let me first start by addressing the 8K that we filed last evening. As outlined in the filing, during the course of our year-end audit, actually within the past few days, we identified two fund investments acquired about a decade ago that were incorrectly recorded as consolidated investments rather than as equity method investments within our GAAP financial statements. In plain English, this means we need to amend our prior year GAAP financial statements to show these two fund investments on a net basis rather than gross. And in terms of impact, while we need to fix this, the netting down of these two fund investments does not change any of our previously reported pro rata financial information or any individual line items within our pro rata financial statements or any of our prior operating metrics. Furthermore, this does not change any of our pro rata share of core or fund net operating income, our net income, our FFO per share, or our net worth. Rather, they simply reflect reclassifications between individual line items within our GAAP financial statements and our team is actively working through the process of updating all of our filings. We fully expect to meet the SEC reporting deadlines, enabling us to access the capital markets in the ordinary course. Now moving on to our results. We have had an incredibly active few months with our fourth quarter, full year 2021, along with our 2022 guidance exceeding our expectations on all fronts. As Ken mentioned, we are continuing to see elevated demand for our space with over $13 million of executed leases to date, representing approximately 10% of our core ABR, along with meaningful amounts of external growth in both our core and fund businesses. Starting with the quarter, our fourth quarter earnings of 29 cents a share came in ahead of our expectations, and this was driven by ranked commencement on new leases, an improved credit environment with core cash collections exceeding 98%, along with the accretive impact from the approximately $250 million of external investments that we closed during the year, including $100 million in the fourth quarter. And for the full year 2021, we generated $1.10 of FFO, which came in 10% above the high end of our initial range after adjusting for the fund promotes that were included in our guidance. And this meaningful beat in our earnings was playing out throughout the year. And it was driven by a combination of our core portfolio rebounding at a pace and velocity well beyond our expectations, along with a meaningful accretion from our external investments. As Ken mentioned, our core portfolio started its rebound in the second half of the year, with our six-month same-store NOI growing approximately 5% and over 3% in the fourth quarter. I want to focus on a few points within our same-store results for the fourth quarter. As highlighted in our release, our same-store growth this quarter was driven by our street and urban portfolio, outperforming our suburban portfolio by over 300 basis points. It's also worth noting that our percentage increase this quarter is fairly clean, meaning that it was not materially impacted by current or historical cash recoveries, as the amount of recoveries in the fourth quarter of 2021 roughly approximated what was recognized in the comparable fourth quarter of the prior year. And more importantly, we are seeing the strength continuing into 2021, and in fact, for the next several years, with growth expectations ranging from 5% to 10%. Now transitioning to our 2022 guidance. At $1.23 midpoint, we are projecting overall FFO growth of approximately 12% in 2022, or 10% growth in our FFO run rate when adjusting for anticipated fund profits and the one-time benefits from cash recoveries. Our 2022 guidance reflects the continued strength that we are seeing across our key earnings drivers, meaning strong internal growth from both lease up and profitable leasing spreads, meaningful accretion on our external investments, and the monetization of profits from our fund business, starting with internal growth. Our core NOI is anticipated to grow 5% at the midpoint in 2022. And this is the number that we actually intend to report, meaning it incorporates the expected headwinds from cash recovery accounting that occurred in 2021. And to highlight in our supplemental, we anticipate that our core NOI, excluding cash recoveries, will grow approximately 10% when including the redevelopments and our new acquisitions. The projected internal growth in 2022, as well as we are expecting for at least the next several years, is poised to be above trend. And this growth is driven by a continuation of lease up, profitable spreads of new and renewed leases, along with contractual rental growth. In terms of growth from lease up, our signed but not yet occupied spread within our core portfolio is at a historic high of 320 basis points, representing approximately $5 million of pro rata ABR. And this includes key street leases across all of our geographies that are anticipated to commence in the first half of this year, including many of the names that Ken mentioned, including on Lincoln Park and Armitage Avenue in Chicago, Soho in New York City, and Washington, D.C. And keep in mind that in addition to the $5 million of signed but not yet occupied space, this excludes the incremental amounts from any locations that have been pre-leased in advance of an existing tenant vacating. such as the profitable retenanting of 565 Broadway in SoHo. So at a 93% leased occupancy, we still have several hundred basis points of growth with high-quality space remaining, and our leasing team is off to a great start to the year, with an additional $6 million, or roughly 5% of our core ABR, in advanced stages of lease negotiation. Again, on some of our key street locations in SoHo, Lincoln Park, Chicago, along with several deals at our suburban shopping center in Westchester, New York, following the profitable recapture of Kmart and our re-tenanting to BJ's. I also wanted to highlight the 30 basis points decline in our core build occupancy this quarter. This is actually an instance of addition by subtraction. This decline was driven by the recapture of Kmart at Crossroads in December, representing approximately 100 basis points of build physical occupancy. we replaced this roughly six dollar rent at multiples of that with a new bj's lease that is expected to commence in the fourth quarter of 2022. and from the fund perspective we are seeing similar strength in our leasing efforts with a signed but not yet occupied spread of approximately 200 basis points representing approximately two million dollars of abr at our share secondly We are seeing strong spreads on both new and renewed leases, with cash spreads on our new leases in excess of 200% this quarter. As outlined in our release, in addition to the triple-digit spread we recognized on the retenanting of Kmart at Crossroads, we also reported high double-digit spreads in our street portfolio, primarily within our New York Metro portfolio. Lastly, our portfolio benefits from strong contractual growth. As a reminder, our in-place street leases typically provide for 3% contractual growth, which when blended with our suburban assets results in blended annual contractual growth of approximately 2%. Lastly, I want to spend a moment on the profit expectations from our fund business. As outlined in our 2022 guidance, we anticipate 6 to 10 cents of profits, with an expectation that roughly half of this will come from fund investments other than from our ownership interest in Albertsons. And we should be able to operate at this similar run rate for the next several years as our team works to harvest the embedded promotes across our various fund platforms. So when we put the pieces together, Core NOI is expected to be strong in 2022 and well poised to strengthen even further in 2023 and beyond. We have a strong and growing external investment pipeline with over $135 million of deals completed since our last call. And as Ken mentioned, we capture about a penny of FFO for every $100 million that we invest, whether it's a core or fund deal, which means that we don't have to buy large portfolios to generate meaningful levels of accretion from our external investments. So between our strong internal growth and our growing external pipeline, we are well poised to deliver above-trend growth for the next several years. Lastly, I want to touch on our balance sheet. As outlined in our release, we issued approximately $115 million of equity under our ATM since our last call, at a gross issuance price of approximately $22.50 to fund our external growth, including those investments that have closed to date, as well as to pre-fund our core pipeline on a leveraged neutral basis. Our balance sheet is in great shape, with no meaningful core debt maturities or capital funding needs, ample liquidity on our corporate facilities, along with various avenues to access capital. And this puts us in a position of strength as we continue to see and accretive investment opportunities. Lastly, and as outlined in our release, we have increased our quarterly dividend by 20%. And at this payout level, I expect our AFFO payout ratio to be in the mid-60s, enabling us to retain meaningful amounts of operating cash flow to accretively fund our internal and external growth. And assuming that our business continues to achieve the growth goals that I have outlined, we are well positioned to have similar growth in our dividend over the next few years, in order to meet our tax requirements. In summary, we had a strong quarter with an optimistic outlook on our 2022 earnings, with increased optimism on our expectation of multi-year internal and external growth. 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 our fund platform, beginning with Fund 5. First, deal flow remains strong. During the fourth quarter, and as detailed in our press release, we completed a $70 million acquisition located in a suburb of New York City. We acquired the property at a cost of approximately $180 per square foot, which represents a substantial discount to replacement cost. The 385,000 square foot open-air shopping center is anchored by a high-performing ShopRite supermarket, in addition to PetSmart and Best Buy. Not only was the property acquired at an attractive going-in yield, but also we have an opportunity to add value through the retenanting of two junior anchors totaling 60,000 square feet. Looking ahead, we have $120 million of fund acquisitions in our near-term pipeline. The thesis here is consistent with the properties in our existing high-yield portfolio. Overall in Fund 5, we've been acquiring properties in the 7s and 8s on an unlevered basis, and have been able to generate a mid-teens current return on our invested equity using two-thirds leverage. As a result, over our typical five-year hold, we can generate most of our total return from operating cash flow. Since 2016, we have been assembling a $1 billion portfolio of hand-picked, high-yielding suburban shopping centers in Fund 5. As previously discussed, we see a tangible opportunity for outsized performance in this fund due to cap rate compression. In fact, based on our current projections, an eventual sale of the Fund 5 portfolio at a blended 7% cap rate would bring our projected IRR into the low 20s and our projected multiple to a 2x on equity. While it's still too early to declare victory, our cost basis in these assets is attractive, and we are well positioned to execute on a variety of opportunistic transactions at the right time. Including this pipeline, we have now allocated approximately 85% of our $520 million of Fund 5 capital commitments. This is now the appropriate time for us to be engaging with our existing investors on Fund 6 and it comes at a good time given the strong recovery and operating fundamentals for retail real estate and the strengthening appetite for this product type in the capital markets. In the meantime, we still have approximately $200 million of gross buying power in Fund 5, which we expect to deploy before the end of the fund's investment period in August of this year. On the disposition front, we have also been quite active. For example, in February, we completed the $66 million sale of Fund 3's Cortland Crossing, a 130,000 square foot ShopRite supermarket anchored property in Westchester County, New York. And there are still embedded profits in a couple of remaining investments in this fund. Additionally, in January, we completed the $24 million sale of Fund 4's Mayfair Shopping Center, a 115,000 square foot supermarket anchored property in Philadelphia. This was one of two remaining shopping centers in our original eight-property Northeast grocery portfolio, and the last center is also under contract for $22 million. Turning to the balance sheet, as of year end 2021, the fund platform had $860 million of debt maturing in 2022, of which $590 million has no extension options. Excluding mortgages on properties sold in 2022 or currently under contract, as well as the outstanding balances on two subscription facilities, which are used as short-term bridges for debt and equity, we have $420 million of expiring debt to address this year. Of this amount, approximately 40% or $160 million is spread over six loans and is expected to be refinanced or extended in the normal course of business. The balance or $260 million pertains to City Point, our mixed-use property in downtown Brooklyn. The City Point debt matures during the third quarter. Although we are still several months away from the maturity, we are currently in the market to refinance the property and are pleased with our progress so far. At the property level, we continue to see strong momentum. On the sales front, those tenants who report sales had a very strong December. For example, Hahn Dynasty, Lululemon, and McNally Jackson all registered all-time sales highs. And as it relates to new leasing, construction is well underway on our new Primark, who is expected to open in the second half of this year, replacing Century 21. Additionally, in February, we executed a 4,000-square-foot lease with Six Point Brewery, adjacent to DeKalb Market Hall, on the concourse level. In addition to new tenants, downtown Brooklyn is welcoming new residents with 22,000 new residential units completed or actively under construction, a new skyline with the tallest tower in Brooklyn topped off as of last fall and located adjacent to our Fulton Street entrance, a new green space with a one-acre park currently under construction adjacent to our Gold Street entrance, and even New York Fashion Week with City Point hosting its first runway show last weekend. If you haven't been to downtown Brooklyn in a while, come visit us. So in conclusion, heading into 2022, our fund platform remains well positioned with a successful capital allocation strategy and a portfolio of existing investments that continue to march towards stabilization. Now we will open the call to your questions.

Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone number. To withdraw the question, press the pound or hash key. Please stand by while we compile the Q&A order. First question comes from Flores Van Ditken with CompassPoint. Your question, please.

Great. Hey, guys, thanks for taking my question. You know, Ken, maybe if you could touch on, you know, a lot of your competitors have been talking about the compression of cap rates as growth expectations are rising. How does that relate to the streets and urban portfolio? And are you seeing signs of that? And how will you plan to operate or how does your investment philosophy change as a result of maybe higher growth or lower cap rates?

Sure. And obviously, they're correlative, meaning if you have better visibility as to growth, you're going in yield arguably could be less and still achieve your returns. What I would tell you is we tend to do better when you have a more liquid market. In 2020, things were frozen. What we're seeing now is is better visibility in terms of street and urban growth rates, but folks are still fairly cautious or scared in terms of competition. So we actually think this is a unique window right now where if we can buy assets in some of the key streets, we mentioned we acquired a building in the corner of Soho. So to pick Soho, for instance, but it's true for many markets. If you can buy an asset at today's market rents, we believe that you're going to see substantially higher growth, both contractual, because street rents have higher growth, and then mark-to-markets, which happen sooner, just because of the bounce back. As I mentioned, that bounce back, rents could increase 50%, and you're still not at the prior peaks. We have that conviction. There's some other folks out there, so it's not as if there's no competition, but there's far less than for some of the other areas that institutions are starting to pile into. We welcome the capital markets recovering the way they are, but we do think we will see, with increased conviction, good buying opportunities.

Great. And, and, and maybe if you could touch on the, uh, the billion of, uh, uh, you know, basically higher yielding suburban, uh, assets in your fund five. And as you think about, um, you know, monetizing that, and, and, uh, I know Amy, you know, talked about a cap rate at 7% would, you know, basically double your equity already, uh, or roughly, um, But, I mean, what we're hearing in the markets and what we're seeing in terms of other cap rate evidence, I mean, 7% yields appears to be fairly conservative. Are there any near-term things that might cause you to pursue a portfolio trade, or is this more likely to be split off in parcels over time?

So I'm not in a predictable. what avenue we choose over the next year or two but your numbers are correct and and i agree with amy's analysis as well let's start with what was our thesis around this and and keep in mind it's somewhat of a barbell approach on one hand we we like very much so the growth potential that we see in the street and urban markets we prefer not to have gone through a global pandemic but we already are seeing rents that are pre-pandemic levels, and we see strong, strong growth rates there. The other end of the spectrum is what we have been doing in Fund 5 over the last several years, where we were able to buy out of favor retail, not counting on much, if any, NOI growth, and it has lived up to our expectations. And by that, I mean not a lot of growth, but that's just fine when you're buying in the 7s and 8s, when you're levering two to one, you're clipping mid-teens returns. What do we do with that portfolio as there is recognized cap rate compression? Does it get recapitalized? Does it get sold one off? Well, as Amy pointed out, we still have a couple hundred million dollars, a few hundred million more of acquisitions that we've got to get done before we really have that fund fully invested. But I do feel like that thesis has been well-validated. The team has done a great job executing it, and we'll have a lot of different choices to ponder as to the best way to maximize the value for all of our stakeholders there.

And does that lead you to raise more money in Fund 6? Is that the thought process? Yes.

Well, we'll see. So if you dial back six to 12 months ago, not only was the $72 million acquisition not done, but the next $120 million, and we still have another $200 million above that, and our investors at that point would say, well, what does the recovery look like? Now that volume is renormalizing, I feel as though we have a very good thesis to continue the execution for Fund 6 of what we're doing on Fund 5, and I'll leave it at that for now.

Thanks, Ken. That's it for me.

Sure.

Thank you. Our next question comes from Todd Thomas with KeyBan Capital. Your question, please.

Hi, thanks. Good afternoon. First question, so look, it sounds like there is a lot more activity in the core and in the funds than you've seen in some time. And so I just wanted to circle back to cap rates a bit. Can you share the going in cap rates on investments completed in both the core and in the funds since the start of the fourth quarter, I guess, and what you expect maybe to achieve during the year? If there's sort of a way to bracket pricing or provide a sense of pricing, that would be helpful. And then what does the $300 million to $500 million investment assumption that's in the guidance look like for the year between the two segments of the portfolio?

So let me touch on the last question first. so that I don't forget it. And the answer is, I don't know, Todd. The nice thing about the dual platforms is we can respond to opportunities as we see them, but not feel overly obligated to do something we don't want to do. For instance, if the public markets are not open for us to acquire assets accretive to NAV, accretive to FFO, we're not going to push that. And then you probably see us be more active on the fund side. But in general, over any extended period of time, it is generally a nice split of about 50-50. But in any given year, it's never 50-50. So that's that piece of it. Terms of cap rates. And And you touched on this, and I'll try to answer it, but it's a moving target. To state the obvious, a lot of cap rate pricing is dependent on what's the growth rate look like, what's your levered returns look like, and all of the moving pieces around that, as well as then what is the competitive bid. We tend not to be particularly impacted by what the competition is doing as much as does the pricing work. Terms of fund yields For the assets we have been successfully acquiring, and there's an increased percentage of off-market and private sellers as opposed to during the earlier days of the retail Armageddon where we were mainly buying from public REITs, that marketplace we've been able to hold on to are going in cap rates in the sevens, perhaps eights. But the difference is those cap rates may be down a bit where we see more lease up, more value add, more growth. But I don't really care for that thesis whether you buy at 8 with no growth or perhaps even a little negative growth or you buy in the 6s and 7s with growth as long as we can get a decent chunk of our return out of levered cash flow. With potential upside, and in the case of Fund 5, it looks to be somewhat asymmetrical upside, great. And there are going to be well-marketed trades that get a lot of bidders that you'll point out that cap rates are substantially lower. Fine. You won't see us be the winning bidder on that stuff. So that's the fun side of the business. Same, similar math when we think about our core, but much higher growth rates. As we've outlined, our internal growth, at least for the next few years, is looking 5% plus. So that's a pretty high hurdle. What we're shooting for on acquisitions is probably about a 4% growth rate. For the foreseeable future, through a combination of contractual growth, think of contractual growth as somewhere between 2% and 3%. and then mark to markets depending on the assets, the leases, the timing, et cetera. And so far in the pool of assets that we have either acquired or are in our pipeline, that looks readily achievable. Not every single asset, not every single day, but overall blending to a 4% growth rate feels pretty good and exciting to us. Going in yields, therefore... range in the fours and fives. The pool of assets that we have either acquired or are looking to acquire is probably going to blend to a going in five. But this, again, we are using our network of sellers. These are significantly off-market deals where you're now seeing a a fair amount of activity around lenders forcing transactions, whether through foreclosure or otherwise, partners forcing transactions, and I give our team credit that we are one of the first calls for those kind of assets especially. We are one of the first calls, and thus there is enough price discovery for us that we can get in at a fair price.

Okay, that's real helpful. And John, the question for you on the guidance, last quarter you commented that you thought 25 to 27 cents was the right range to think about from an FFO standpoint, excluding the promote income and ACI stock sale gains. You did a little better than that this quarter. Does that imply that the run rate heading into 2022 is a little higher, or should we still be thinking about that $0.25 to $0.27 range to start the year, just given maybe some of the move-outs that you previously discussed in SoHo, San Francisco? Will we see that sort of step back a bit, or has the range potentially changed?

Yeah, Todd, thanks. So, yeah, I think the range has changed, I think, for the reasons outlined in the script. So I think the short answer is yes. So between we're in an improved credit environment, the investments that we put to work, and the leasing that we've done, I think that that range certainly has improved since the $0.25 to $0.27 that I said for the first half of next year. I think this feels like the new normal.

Okay, great. Thank you.

Our next question comes from Linda Tsai with Jefferies. Your question, please.

Yes, hi. Ken, back to your comments on rents being able to grow another 50% and not being at prior peak, but sales being well on its way to prior peak. What does this translate to in terms of current occupancy ratio, and what do you think the market is willing to bear in terms of a steady state occupancy cost ratio?

So let me point out a few things. My 50% comment is factual. It's just math, meaning rents peaked in 2017. They dropped, and it varied building by building and deal by deal, but they dropped significantly. We've been talking about that for five years now. And so the rebound of 50% is just pure math, and that doesn't get you to the prior peaks. But sales. For those retailers that have figured out how to use these streets, and Linda, you can remember a few years ago, even pre-COVID, the jury was out as to whether luxury retailers were going to continue to dominate these streets, and the answer is yes, they will. The jury was still out as to whether the Warby Parker and Allbirds of the World and the other digitally native were ever going to need stores, and yes, they will. So let me explain now occupancy costs. When you're talking about occupancy cost for luxury, it's very different than when you're talking about occupancy cost for digitally natives or advanced contemporary. So I don't want to give a one percentage, one size fits all. But if you just intuitively do the math, occupancy cost as a percentage tend to now be 20, 30, 40, 50% less than what retailers were bearing during the prior peak. Different world, different choices. But what we are sensing from retailers is they've got a lot of glide path if their top line and bottom line continues to grow. And this is before we even think about things like inflation. So what does this mean for rents? Well, there's two things that drive our leasing team's ability to rent space. One is rent to sales, and it's an important one to watch because Just because a retailer wants the space that they can't do the business sooner or later, that comes back to haunt us. But the other then is supply and demand. And that is a key driver. And so when you have 10, 20, 30% vacancy on a given street, it doesn't really matter how strong the retailer sales are. And in some instances we saw that they're gonna negotiate for low rents. Well, thankfully, You didn't see a lot of long-term leases getting done during the COVID crisis and otherwise. Thankfully, retailers held on to the 3% contractual growth more often than not and have allowed fair market value resets. So assuming we see increased demand, which we are seeing, many of our streets The spaces are spoken for. If you want to come to Rush Walton Corridor, you kind of have to call us. If you want to be on Green Street, you kind of have to call us. Armitage Avenue, the same. So we're past the rent-to-sales conundrum. The rent-to-sales ratios, the tenant health ratios are much stronger than they used to be. We're back to a good supply-demand dynamic, and the right retailers are showing up. And that's why, again... We don't have to get to prior peaks tomorrow. I don't even wish that. What I wish is over the next five years, you get a rational layer of growth, which will be higher in our street portfolio than in the other components, and that excites us.

Thanks for that, Keller. And then just one more follow-up. In terms of the Century 21 at City Point, that's 70% backfilled by Primark. Any updates on the 30% of the space remaining?

You know, the good news is we're seeing solid momentum at the asset, like I mentioned, with Six Point coming as well as other tenants in our pipeline. So we look forward to continuing to share updates there.

Great. Thanks.

Amy doesn't want to tell you what's in our pipeline.

Thank you. Our next question comes from Kibin Kim with Truist. Your question, please.

Thanks. To actually kind of follow up on that last question, can you just provide some more details or color in terms of what you're seeing in your forward leasing pipeline? Not necessarily for CityPoint, but I'm asking more about the street and urban segment of your portfolio.

Sure. And Amy, now you're off the hook. So what has been a pleasant surprise If you dial back to pre-COVID, there was a lot of concern, and we felt like, you know what, after three or four years of rental declines that retailers were ready to step up. But then COVID happened, and now let's see where we are. As a result of a combination of the cleansing process that had occurred during the retail Armageddon, the confirmation process that had occurred as a result of Omnichannel, actually working we are now in a position where luxury retailers are stepping up and meaningfully so and they're stepping up in ways that are different than you saw five ten years ago the luxury retailers are not simply counting on their mall-based tenancy they're not simply counting on their department store sales, they're recognizing they need to get in front of their important customers in these key areas. And the sales are supporting this. These are not just showrooms. So expect to see in many of the corridors we're active in and other corridors that we're not yet active in, luxury continuing to show up. That's trend number one, and our leasing team's excited by that. Trend number two is that because Omnichannel has worked for so many of the digitally natives. What you are seeing today compared to two, three years ago, where some of those online retailers said, we never need to open stores, as they've been going public, as they've been growing, they're all acknowledging that the store is the most profitable channel for them. And so expect to see the Warby Parker and Allbirds of the world open up stores in these corridors and that combination plus everything in between is leading to a much stronger leasing environment than we certainly expected a few years ago or feared during covid and we're in a position because we have enough vacancy to lease up we have enough of the right spaces we're in a position to capture that all right

So how does that all translate into, you know, dollars and cents, meaning your street and urban retail portfolio is at 90% lease today as a 4Q, you know, I'm not trying to get as specific as like what's exactly embedded in your guidance for 2022, but I'm just trying to kind of figure out like, when does that get back to 94%, 95%. John? Yeah.

Keeping the way I would think about it is, you know, we put out multi-year multi-year guidance that, you know, we think we grow to five to 10%. So. you know, rather than expecting when do we RCD at what period, I would say, you know, the late 23, 24 timeframe is where I would model that we should be at that level that we view at full occupancy, the 94, 95%.

Okay, and just last question for me. In your past 2021 lease rolls, you know, how much of high-priced street retail has rolled, and what does that mark-to-market look like for those group of assets, and I realize you're not rolling a ton of leases every year. So I'm asking more specifically about like if, you know, more about mark to market on lease roll in places like Soho versus like Flatbush, right? So more Gold Coast versus some more, you know, suburban type of location. So the higher priced price point leases that have rolled, what has your experience been so far on mark to market?

Let me take a first step at that, Sean. So let's be clear. It really depended on vintage in and vintage out. If you were talking about a 2017 lease, vintage signed, rolling out during COVID, oh my gosh, that would have been horrific. Thankfully, we're really careful of not buying into that 2017 peak. So we avoided the peak. And along the way, we've had our fair share of valleys, but nothing as precipitous as that would be. Rents dropped by anywhere from 20% to 50% in the different markets that you just touched on, less so on Armitage Avenue, less so in Melrose Place, but somewhere in that range. And if you were capturing that peak and valley in a Soho, boy, that would hurt. Thank goodness we avoided that. And so what we have said is we've cleansed through in Soho, for instance. We've cleansed through most of the above market. And even at today's market rents without further appreciation, and I expect further rental growth, even at today's, we have material upside through the lease up of some of those spaces that we lost over the last few years, as well as positive mark to market. So, John, what might you want to say?

Yeah, no, I think that explains it. Maybe give a couple of examples to Nick and Kevin. So if we look at the Gold Coast in Chicago where we did have high lease rollovers, so we lost Mark Jacobs on the corner of Rush and Walden, and we backfilled that profitably with our existing tenant expanding that space as well as adding Veronica Beard there at a positive spread. So I think that's one example where we've been able to see rolls. Again, we look at Melrose, similar, and we talked about the spread that we saw at Melrose, also a higher dollar lease. And then I think the last thing I'd point out, just SOHO in general, is that we put out, and I'm losing track of years when we put this out, but it's still a relevant data point, is that we showed that our NOI from our SOHO assets doubles over between, and I'm going to I have to remember the exact time, but during this period of the 23-24 that I mentioned to you. And we're on pace to do that. So I think, again, there's some occupancy fill up in there, but that's also driven by rental rates as we're replacing tenants that were at a basis that we are now exceeding that basis of rents that they were paying at that period in time. So we are seeing positive spreads as we roll, and our experience is supporting that.

Final point on this. not every single store will be positive spread. In our numbers, taking into account the growth we see, are going to be wins and losses. It's just we're now seeing far more wins than we either thought, and we're seeing fewer losses.

Okay, thank you.

Sure.

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

Great, thank you. Just wondering if you could walk us through your additional capital raising plans for this year to fund external growth, and what are the main drivers of the higher interest expense that you're assuming for this year?

Hi, Katie. So I think the capital drivers, one is we've raised a decent amount of equity to fund what we think is our near-term pipeline, so with $115 million that we're we're confident gets us to closing what we have expected in the near term. Additionally, and you think of the various capital sources within our business, we have some structured finance loans that we're continually getting proceeds from. So that's a source of capital. And also our dividend payout ratio, given where it's at, even with the 20% raise is enabling us to retain cash flow, as well as, as Amy mentioned, as we monetize some of the fund investments, that is a source of of capital for. So that's just internal cash flow. And then, you know, we need a cost of capital on the equity side. You've seen we have issued at a $22.50 price, and we're able to deploy that accretively. So I think that's the other piece of it. And our higher debt assumption factors in, again, the investments that we – I'm sorry, jumping to your second question in terms of the higher interest expense. First of all, we're hedged. So if you look at our long-term debt profile, we have long-dated interest rate swaps that are are locking in our interest, our interest over a very extended period of time. But as we added the nearly $250 million worth of investments throughout 2021, that's the biggest driver of on a go forward basis. We added those throughout the year. That's sort of the full year impact of those investments in 22. Got it.

That's helpful. And then it sounds like the overall tenant health and leasing environment continues to be really strong. but just wondering within your same store in Hawaii guidance, what you're assuming for new bad debt expense in 2022. And are there any specific closures or watch list tenants to be aware of so far for the first quarter?

Yeah. And I think we're at a point in the cycle, Katie, where our watch list is, I don't want to say virtually non-existent, but it's virtually non-existent. And I think that, you know, the, the weaker retailers have, have moved out and what we're seeing. And I look at them very closely. Our tenant sales are, strong and growing. So what I would say the way I would think about our, or the way I did think about our credit reserve is that I am assuming in our, what I'll call our low case, that we stay at a 98% collection rate and a roughly 2% reserve. And our higher case is going to go back to historic norms where we have ranged between 50 to 125 basis points. So that's the way that we have modeled our 46% range as well as the NOI range.

Great. Thank you.

Thank you. Our next question comes from Mike Mueller with J.P. Morgan. Your question, please.

Yeah, hi. I guess following up on key bins, you don't have a lot of street expirations in 22, but in 2023, it looks like about 20% or so rolls. Can you give us like a rough sense of a bracket as to where you think that group would roll to? And does anything in particular stand out during that year?

It really runs the gamut, Mike, and it's a bit early. So I don't have any specific numbers around it. There's some tenants that we're going to expect getting the space back and re-tenanting, and then there's others where we're in conversation right now. about expanding long-term. So my guess is over the next six months, we'll have much better visibility.

Got it. Okay. That was it. Thank you. Sure.

Thank you. Our next question comes from Craig Smith with Bank of America. Your question, please.

Yes, thank you. Just thinking about Fund 6, will you continue with the existing investor base or are you going to try to bring in some new names?

What we have found historically, and it varies fund by fund, but usually there are new investors that come join in. The world evolves. The core fund investors that have been with us over the decades are the endowments and foundations, but then there's always new folks, and we welcome that. So, You know, the first key was we had to find profitable investments to put the money to work because until Fund 5 was well on its way, hard to talk about 6. We're now at that point, and Amy and I are looking forward to starting those conversations.

And thinking about the more seasoned endowment investors, how do they react during the COVID crisis?

You know, it ran the gamut because, to some degree, they're also heavy investors in tech and did quite well there. They have been supportive of us over the decades, so they know that we're watching carefully. But we were trying to communicate with them as regularly as we were communicating with all of you because it was a scary time period when a large percentage of retailers stopped paying rent for a period of time. Thankfully, we're past that. Thankfully, our collection rates are where we want them. And retail, pre-COVID, there was questions about whether retail was an investable asset class. Now, as it relates to the kind of stuff we do, the answer is yes, it is. And so the question is, what's price? What returns? What does the profile look like going forward? And we're looking forward to having that conversation.

Okay, thanks.

Sure.

Thank you. And I'm not showing any further questions. Thank you.

Great. Thank you all for your time. We look forward to speaking with all of you again soon.

And with that, we close our program today. Thank you for your participation. You may now disconnect. Have a wonderful day.