Acadia Realty Trust

Good day and thank you for standing by. Welcome to the Q2 2023 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 the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mackenzie Tepper. Please go ahead.

Mackenzie Tepper Good morning and thank you for joining us for the second quarter 2023 Acadia Realty Trust earnings conference call. My name is Mackenzie Tepper and I am an intern in our marketing 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 FDC, forward-looking statements speak only as of the date of this call, August 2, 2023, 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 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. Great job, Mackenzie. Thank you to you and all of the summer interns. It's been a pleasure to work with all of you. Welcome, everyone. I'll give a few comments, then I'm going to turn the call over to Stuart and then to John. As you can see in our earnings release, we had another solid quarter. Same property NOI growth was a strong 5%, and our earnings were ahead of forecast as well. And this is not just one good quarter in isolation. For more than two years now, our same property NOI growth has averaged just under 7%, and we've raised our earnings forecast six times. And notwithstanding, the most anticipated recession in my career And the fact that retailer quarter over quarter performance has been choppy, retailers are continuing to look past any short-term shifts in consumer demand and are continuing to pursue key locations. On our last couple of earnings calls, I discussed the likely drivers of this continued growth. And while I run the risk of this feeling like Groundhog Day, let me briefly reinforce a few key drivers. In terms of macro trends, first of all, the threat of the retail Armageddon has passed. While online retailing is here to stay, retailers recognize that physical stores are their most profitable channel in an omnichannel world. Second, tenant demand, especially in our key corridors, is quickly outpacing existing supply, and retailers are stepping up to secure these must-have locations. Whether it's brands establishing their own stores or luxury retailers continuing to double down on key streets, the demand is there and the rental growth is following. Then more micro or specific to our portfolio, the combination of increased tenant demand coupled with several hundred basis points of potential occupancy gain in our street portfolio positions us for several years of above average growth. And while there's solid growth throughout our portfolio, both suburban and street, a further differentiator for us is the continued strong growth we are seeing in our key streets. As Stuart will discuss, this growth contrasts significantly with a narrative of shoppers moving out of key cities or the negative impact of hybrid work on retail in markets like New York. In fact, Over the past year, as vacancies have been spoken for, market rent growth for the majority of our street portfolio is continuing to accelerate. Soho, Williamsburg, M Street, Rush Walton, Armitage, Melrose Place, Henderson, Greenwich, Westport. These corridors are not only performing better than pre-COVID, but notwithstanding macro headwinds, tenant demand for our locations is not declining. It's not leveling off. It's increasing. And when demand increases, along with adding occupancy, there are additional ways we can further drive growth. One example. In SoHo, at one of our locations on the corner of Prince and Broadway, we signed a lease for that space in October of 2021 at a rent that exceeded pre-COVID rents. and was a positive indicator for the rebound of SOHO. However, recently we were able to negotiate the recapture of the space, and last week, less than two years later, we executed a new lease at a 45% spread to the prior lease. John will discuss the significant economic impact of this lease, but all of this bodes well for our continued growth. Another driver of additional growth is from fair market value resets, which is a feature unique to the street portion of our portfolio. Not only do our street leases have higher annual contractual growth, the way these FMV provisions work is, upon a tenant exercising its renewal options, the rent resets to the greater of fair market value or a fixed percentage. This year, for the first time in a while, we have achieved resets ranging from increases of about 20% up to nearly 50% increases above prior rent. All of this simply reinforces our view that not only are our internal growth forecasts of 5% to 10% on track, But as John will discuss, we see upside potential beyond simply remaining on track. And to be clear, our growth assumptions also include a sober outlook for our re-tenantings in slower to recover markets such as San Francisco or North Michigan Avenue, as well as conservative credit loss if and when the looming recession becomes a reality. But even after taking this into account, we expect our leasing progress to more than compensate for any of these retenancies. Turning now to external growth and the transaction markets. Given the volatility in the capital markets and borrowing costs significantly higher than two years ago, transactional activity remained muted last quarter as many sellers are still on the sidelines. We are starting to see a gradual increase in deal flow, and we are hopeful that we'll be able to close on some compelling and accretive opportunities this year. Since it doesn't take much volume to move the needle for us, even a few acquisitions, whether on balance sheet in conjunction with capital recycling or utilizing our institutional capital relationships, this can be added meaningfully to our external growth. In July, Fund 5 acquired Cypress Creek in Tampa, Florida for just under $50 million, consistent with our other Fund 5 investments, going in yield within the low eights, and we expect levered mid-teens IRR on this transaction. This center is well-leased with anchors including Burlington Coke Factory, Total Wine, HomeGoods, and over time there's ability to add value through releasing opportunities as well. The team remains... active with several deals under review, and we will be successful in deploying the remaining of capital in Fund 5, even in this quiet market. More importantly, to the extent that additional opportunities arise, we're in a position to leverage our institutional relationships for continued growth. So to conclude, we recognize that macro news headlines continue to create uncertainty and concern for commercial real estate in general. Nevertheless, our leasing fundamentals remain strong, and our internal growth is exceeding our expectations. And even though this strong growth has been showing up for a couple years now, we still have several years of tailwinds on internal growth in front of us. Along with this strong internal growth, the uncertainty in the capital markets is beginning to create interesting investment opportunities that will enable us to add external earnings growth to our strong internal growth. And with that, I'd like to thank the team for their hard work this last quarter, and I will turn the call over to Stuart.

Thank you, Ken. I will spend a few minutes addressing the narrative and press reports suggesting that a new hybrid work paradigm is impacting street retail. There is a view held by some that there must be headwinds for urban retail in places like SoHo in New York, or Melrose Place in LA, since these cities are experiencing weak office attendance or changing commuting trends. Such views gain momentum with reports and articles linking the stalled return to office and hybrid work with negative implications for all urban retail without specifics. These reports generally conflate amenity-oriented retail located in office-dense submarkets, which are dependent on office workers and commuters, with dynamic retail quarters which have completely different traffic drivers. Office attendance is just not relevant for the vast majority of our portfolio. Under 5% of our annual base rent is from tenants which we believe are office worker dependent. Now the data does show that as a result of hybrid work, foot traffic is still significantly below pre-pandemic levels in office-oriented central business districts such as Midtown Manhattan. At the same time, what we see in our key retail quarters is that one, foot traffic is virtually unchanged and two, tenant demand and rents are stronger than pre-COVID. We are seeing diminished availability and we are benefiting from multiple tenants competing for spaces. We have a highly differentiated street portfolio and key high growth quarters such as Soho and Williamsburg in New York City, Armitage Ave and Rush Walton in Chicago, Greenwich Ave and Westport in Connecticut, Georgetown in D.C., and Melrose in L.A. We have examined statistics which are segmented by submarkets. For example, we looked at foot traffic data in four New York City submarkets, Midtown, the Financial District, SoHo, and Williamsburg. Year to date, compared to the same months in 2019 pre-pandemic, foot traffic was down 27% in Midtown and down 32% in the Financial District. But over that same period, foot traffic was only down 1% in SoHo and it was up 6% in Williamsburg. And while the foot traffic is about flat in SoHo, as Ken highlighted, demand for our space is stronger than pre-COVID. According to Cushman and Wakefield, the occupancy rate in Soho has increased over 10% from pre-COVID at 4Q19. Also, despite reports of migration away from New York City, apartment rents and occupancy are at near peaks, with rents up over 6% from June of last year. And this strength is not limited to New York City. In the Gold Coast of Chicago, Anina Bing, an aspirational luxury brand, had a very strong opening in the past few weeks with the highest sales volume in its 20-store chain. In Washington, D.C., Alo Yoga had a very successful opening of its flagship store in our M Street Georgetown portfolio. As an aside, we have a signed lease for another flagship, Alo Yoga, at our fund asset at 717 North Michigan Ave. in Chicago, which will open soon. Also in Georgetown, at our Wisconsin Avenue redevelopment, we completed the retail leasing and have reached 100% lease up. In LA on Melrose Place, in the past four months, we have had three leases with these fair market value rent resets, and the average increase was 29%. One final point. Not all occupancy and not all occupancy pickup is created equal. While our overall portfolio is 92.2% leased and 95.2% occupied, let me rephrase, 92.2% occupied and 95.2% leased, our street portfolio is currently 85% occupied and 88.5% leased. The NOI gain through this lease-up will be disproportionately impactful to our bottom line. Our average in-place street rent is $84.50 per square foot as compared with our overall portfolio average in-place rent of $32.50. Based on our current leasing activity, including the street leases within our Sign Not Open pipeline, we expect this differential to widen out further. And now I will turn the call over to John. Thanks, Stuart, and good morning.

We had another outstanding quarter with each of our key operating metrics exceeding our expectations, resulting in another strong beat for the quarter. and raising our full-year earnings guidance. This call marks the seventh anniversary that I've been fortunate enough to sit in the seat, and I can say without hesitation and by a long shot that this is the strongest leasing environment I've experienced during my tenure. The demand for our space is extraordinary, whether it's in Soho or Williamsburg in New York City, Georgetown in D.C., Melrose Place in L.A., or Armitage Avenue or the Gold Coast in Chicago. And with that demand, it's pushing rents, and our portfolio is well-positioned to capture that growth. whether it's from multiple tenants bidding for the same space, such as what we saw with the opportunistic retenanting that we completed in SoHo last week, or through our ability to capture outsized growth from fair market resets, such as we did on several occasions on Melrose Place in L.A. And this is enabling us to not only gain further confidence in our multi-year growth projections, but seeing real opportunities to exceed them. Now I'll dive into the quarter, starting with our second quarter FFO before special items. We reported FFO of 36 cents, which significantly beat our quarterly model. The outperformance was driven by better than anticipated operating results within our core portfolio, for both an improvement in tenant recoveries, along with a robust and strengthening leasing environment. And along with cash recoveries, primarily within our fund portfolio, coming in above our expectations. As highlighted in our release, our quarterly results included an $0.08 non-cash gain associated with the termination of the below-market Bed Bath & Beyond lease at 5559 Street in San Francisco. As we had discussed on the first quarter call, this gain resulted in an incremental $0.05 of unbudgeted FFO, as we had conservatively assumed $0.03 of earnings throughout the year within our initial guidance. And now while I'm not suggesting this gain deserves any outsized level of prominence, It is worth highlighting that the accounting does capture the economic reality, as it highlights the value created now that we're able to capture market rents well in excess of what MedBath was previously paying. Now moving on to our full year guidance. For the second consecutive quarter, we increased our full year earnings outlook. And on an apples to apples basis, when stripping out the incremental five cents associated with the unbudgeted gain, this gets us to $1.25 at the midpoint which represents an increase of about 3 percent above our initial guidance. And in terms of our assumptions for tenant credit, given the macro backdrop and lingering risk of a recession, we are continuing to hold what we believe are prudent and conservative levels of reserves within our updated guidance for the balance of the year. Turning now to same store NOI. Our second quarter same store NOI of 5 percent was in line with our expectations, particularly given the headwinds from cash recoveries in the comparable quarter from the prior year. And with year-to-date same-store growth of just under 6%, along with profitable lease-up commencing in the second half of the year, our model has us trending towards the upper end of our initial 5% to 6% four-year guidance, with an opportunity to exceed it. In terms of spreads, we reported gap in cash spreads of 22% and 13%, respectively, for the second quarter. And as highlighted in our release, it was our street portfolio that drove this growth. with cash spreads in excess of 30% from leases on Armitage Avenue and Lincoln Park in Chicago and Melrose Place in L.A. It's also worth pointing out that if we were to measure the cash spread since inception on our street leases, the 30% cash spread from the street increases to over 60% when factoring the contractual rental growth that we received during the lease term, which ranged from 3% to 4% annually, along with a compounded annual growth rate, or CAGR, in excess of 6%. And as we start the third quarter, we are seeing these same trends continuing, if not actually accelerating on our key streets. As Ken mentioned, I'll provide some of the economics of the Broadway and Prince Street lease that we signed in SoHo last week. The 45% cash spread translates to an incremental annual NOI of approximately $900,000 when compared to the prior lease that was signed less than two years ago. Additionally, inclusive of the payment to terminate the prior lease, as well as the upfront costs associated with tenant improvements and leasing commissions, our payback period is less than a year. Additionally, so far during the third quarter, inclusive of the SOHO lease I just mentioned, we have already signed or renewed nearly $4 million of street leases within our core portfolio at an average cash spread of about 40%. And just to put this in context, given our size of 40% cash spread on $4 million of AVR, generates about 100 basis points of same-store growth and adds more than a penny a share, about 1% of incremental FFO growth. Next, I want to provide a quick update on our multi-year internal growth projection and reaffirm that we continue to see $30 to $40 million of incremental core NOI growth over the next several years. And I'm often asked whether we have any potential upside to those projections, and the short answer is absolutely, and in fact, it's playing out. Within those projections, we had assumed conservative assumptions on market rents. Thus, we didn't assume opportunistic retenanting, such as we accomplished last week in Soho, nor do we assume the extraordinary growth from fair market resets within our street leases, as we have experienced in several leases in the past few months on Melrose Place in L.A. Now moving on to core occupancy. In terms of occupancy, our leased occupancy increased 60 basis points to 95.2% on June 30th. During the quarter, approximately 40 basis points of occupancy commenced, contributing approximately $1.7 million of ABR, predominantly from street leases. Additionally, our leasing team further increased our sequential signed by data open pipeline to 300 basis points at June 30th. And this 300 basis points represents $6.8 million of ABR at our share, or about 5% of our in-place core ABR. And in terms of anticipated rent commencements on the $6.8 million, we expect that about half of it will commence in the second half of the year, with the vast majority expected to commence during the first quarter of 2024. And this represents an acceleration from our prior quarter's estimates, primarily due to our tenants' strong desire to expedite their openings, along with the resolution of supply chain issues. Please note that given the timing of commencements, we won't get the full benefit in our reported results until the subsequent full annual or quarterly period. I also want to highlight that the $6.8 million of signed but not yet open leases relate solely to our core operating portfolio. Thus, it excludes any core assets of redevelopment as well as our share of any lease up within our fund portfolio, which if both of these were included, it would double the ABR in our signed but not yet open pipeline at June 30th. I now want to provide a quick update on CityPoint. From a leasing perspective, we remain well on track with our stabilization plan. At June 30th, we have approximately 60,000 square feet of leases signed but not yet open, including Fogo to Chow, Court 16, DIG, the expansion of Alamo, and several others. And our leasing pipeline continues to expand with several new and exciting retailers and advanced stages of negotiations. I also want to give an update on the projected FFO accretion we expect to achieve upon stabilization of the assets. As a reminder, we currently own about 60% of CityPoint, with the potential to increase our ownership to nearly 100%. As we've said in the past, we anticipate increasing our ownership in CityPoint over time. And while we don't have any specific update at this time, we don't expect a significant impact, if any, to our 2023 guidance. And keep in mind, the incremental cash outlay, should we have the opportunity to acquire all or a portion of our remaining partner's interest is not overly significant. If we were to acquire all of the remaining ownership interest, the additional outlay would be about $15 million after taking into account the $65 million of previously funded partner loans from last year's recapitalization. And upon stabilization, the anticipated earnings accretion relative to our current FFO run rate ranges from about six cents if we were to acquire all of the remaining interest or approximately four cents if we maintain our current 60% ownership. This four to six cents of projected net accretion factors in all the components of the investment, including the projected NOI growth upon stabilization, the interest income on the partner loans, future funding costs, et cetera. Please keep in mind that the timing of a partner's decision to convert their interest prior to stabilization of the asset may create some short-term earnings implications given the structure, But nonetheless, in the near term, we are projecting 4 to 6 cents of incremental accretion, representing growth of nearly 5% of our current earnings. Lastly, I want to touch on a few items on our balance sheet. Our balance sheet remains strong, with no meaningful core maturities for the next several years, and virtually no exposure to base rates within our core until 2027, given our nearly $900 million of interest rate swaps. And within our core portfolio, while the reset in rates was particularly painful, we are optimistic that the worst is behind us. In fact, during the second quarter, we successfully completed about $250 million worth of refinancings and extension of fund loans. And as you'll notice within our supplemental, the all-in borrowing costs within our funds remain virtually unchanged from the prior quarter. So all else being equal, given the duration of our debt and interest rate contracts in our core, Coupled with the reset of rates within our funds, we expect nominal impacts from interest rates on our earnings over the next several years. In summary, we once again had another very strong quarter with momentum continuing to build as tenant demand for our locations remains elevated, fueling further confidence in not only achieving but exceeding our multi-year internal growth goals. We will now open up the call for questions.

Be back. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit yourself to two questions and one follow-up each. One moment for our first question. And our first question will come from Flores Van Dijkum of Compass Point LLC. Your line is open.

morning guys so nice nice results you know encouraging on what's happening in Soho maybe if we can if you can provide us with a little bit more detail on the you know the the demand you saw from tenants for this space I believe it was a feeler that was in the space before and If you could also give a little bit of view on what's happening to lease terms in terms of bumps. Are you seeing any... Your peers are all talking about raising bumps in their suburban portfolio. How does that look like for your street spaces? And maybe also touch upon... In particular, one of the office REITs just sold an asset, I think, in Spring Street as well. Presumably, you're looking at some of these opportunities as well. Where do you see the potential for external opportunities in your street retail portfolio?

All right. Well, technically, Flores, I think that was more than one question, but let me at least start taking a stab at it for you. Let's start with contractual growth. I do think that it's going to be a multi-year education process in terms of, in suburbia, getting especially junior anchors accustomed to perhaps a higher growth rate. And given the duration of those leases, even if we are successful, it takes about 50 years when you take into account the options to turn a shopping center. So I'm in favor of it, and I think, depending on your view of inflation, I think it would be healthy for us to get higher bumps to keep up with whatever our view of inflation and growth is, but I think that will take a while. Contrasting that with street retail that, for historic reasons and otherwise, has generally had about 3% annual contractual growth, which is about 100 basis points higher just in terms of contractual growth, has had fewer option periods, and where the option periods show up, as I mentioned in my remarks, we often can get fair market value resets. All of that enables us to have more what I have referred to as bites of the apple. Now, I'll concede over the last five, six years, none of that really mattered because we went through a global pandemic, rents were declining, the retail Armageddon, and now that's beginning to turn. And so I do think we will see higher contractual growth in our street portfolio than in our suburban. We will see more bites of the apple and thankfully, increased tenant demand. is resulting in pretty significant rental growth. So let me use the SoHo example. We signed a lease a couple years ago with Bila. We were very excited about that at the time. We not only mentioned that it was at a rent that was better than pre-COVID at a time when people were still very concerned, but we also thought it was a healthy spread and made all the sense in the world. Fila was still working through a bunch of its design decisions. And I give our leasing team credit because they were aware of several retailers, both retailers looking to relocate, but as well as new retailers coming into the cell phone market that were interested in the space. And they were able to negotiate a termination at a fair price, which the payback period will be very short, and then sign a very accretive lease. That doesn't happen every day, but those kind of opportunities tend to show up in places like Soho, where the rebound in rents have happened quickly at a time when, as Stuart mentioned, the overall narrative is still negative. So I credit our team with creating that incremental close to 100 basis points of growth, and we're working on other situations as well, Again, no promises as to when it shows up or which quarters, but when you have a rebound like that, we spend a lot of time making sure that we're positioning ourselves for it. I'll get into the acquisition market conversation floor later in the Q&A. I want to give some other people a chance to ask their questions.

If I can follow up, perhaps, with... On the funds, I noticed that you acquired an asset in Tampa. How much more dry powder do you have? And remind us again, I believe it's end of the third quarter or certainly before the end of the year that you have to invest that. Do you think all of your dry powder will get used up before that goes away?

Yes, we do as it relates to the existing dry powder of Fund 5. And so I don't think it will go away. I think it will go to good use. We're seeing just enough opportunities. And then as I mentioned before, to the extent we see additional opportunities, just because it doesn't fit into the existing investment of Fund 5, we're going to find good ways to do those as well.

Thanks, Ken. Sure. One moment for our next question.

And our next question will come from Kybin Kim of Truist. Your line is open.

Hi, can you hear me? Yes. Good morning.

Hi. So you guys made some favorable remarks about street retail picking back up. I was wondering if you can just make those comments a little more tangible to us and maybe try to quantify how much improvement you're seeing from tenants?

Sure. And there's two ways that we think about this. One is tenant's long-term sales trajectory, call that tenant health. And then the other is obviously supply and demand and tenant demand. And SOHO is just one example. But also, Stuart and John talked about in Melrose Place, a fair market reset, in one case 20%, in another case 50%. But whether you use a 45% increase in SOHO over two years or a 50% increase in Melrose Place over five years, you're seeing a very nice trajectory. Now remember, there's contractual rent growth of 3% to 4% on top of those spreads. But in general, I think what you will start reading in the next year or so, because it takes a while for the narrative to change, is that market rents in these must-have markets have grown disproportionate to many of the other markets in our suburban portfolio or otherwise. That's after several tough years. but it is a very healthy and welcomed rebound and a rebound, frankly, that is in excess of what we had anticipated.

Okay. So when you think about that, as it pertains to your Soho lease rate of 81% or M Street at 89%, both of which saw a nice pickup in leasing, I guess, how does that strength and demand translate into when these retail corridors can see much more optimally. Is that a 24 event? I'm just curious about how long it takes.

Yeah. So what's frustrating in all cases is the amount of time it takes from the point that a retailer says they want space to the point that they get open. Some of it's within our control. Some of it's within the retailer's design control. And so we are actively negotiating in almost every space in every one of these corridors. So my guess is it's a 24 event. I am not changing John's guidance that he walked through in terms of rent commencement dates or otherwise. But if you were looking for new space in SoHo as a retailer, you would find most of the spaces are spoken for and you got to move fast. So my guess is there's active dialogue. And it's not just SoHo. We're now thankfully seeing it on Madison Avenue as well. There's active dialogue on most spaces. Our portfolio should see that as well.

Okay. And when you say Madison Avenue, are you talking about the Sullivan Center type of area? No, Madison Avenue in New York City. Oh, I'm sorry. Wrong Madison Avenue. Thank you, guys. Sure.

One moment for our next question. And our next question will come from Todd Thomas of KeyBank Capital Markets. Your line is open.

Hi, thanks. Good morning. First question, I guess, just quickly following up on SOHO and the lease transaction that you discussed at 565 Broadway. Are you seeing other opportunities across the street and urban portfolio to maybe get back space from tenants that are in place paying rent and operating where they're either underperforming or looking to close and in situations where rents have now risen where you could profitably backfill? And then, sorry if I missed this, but what's the timing for the commencement at 565 Broadway?

Yes, Todd, the easy one first. It'll be in the first quarter of next year. So first quarter of 24.

And now, yes, Todd, we are constantly reviewing both also for a tenant health perspective. So this is not just about capturing upside. This is also about curation and making sure we have the right tenants in the right locations. And when we don't, making these shifts. Now, we do that in the suburbs as well. It's just much more difficult, much more expensive to replace a TJ Maxx with a Burlington coat. And the kind of spread we need there to make it impactful just has a different outcome. But tenant review and then the ability to profitably monetize on it requires both strong tenant interest. Thankfully, we saw that in the case of SOHO. Rental increases and the ability to capture those. So the short answer is yes, the leasing team is actively doing that. It's the pivot that has occurred over the last 12 months after several tough years where we are seeing market rent increases, and you will see them too. This is not just unique to Acadia. In these key streets, that is enabling us to meet the needs of those retailers who want to get in. And then when retailers say, you know what, maybe this is not the right space for me, us being able to let them out as well.

Okay. And then second question, John, can you discuss or provide a little bit of detail around the impact in the 23 guidance and also maybe discuss some considerations around the model for 2024, you know, as it pertains to 664 and 840 North Michigan Avenue, just in terms of the lease expirations at those assets and, you know, tentative plans around the redevelopment of those assets?

Yeah, so, Todd, in the 24, that's an easy one. Both of them are actually very straightforward. 24, we're not assuming that we get those leased out. Those are very conservatively pushed out into the later years. What I would say in Chicago, and again, this isn't changing my model, but we are seeing signs of life and tenant interest, et cetera, that's showing up, but that's not one that I have in my model, and our model, the 30 to 40 million, has an incredibly sober expectation of what rents we get there, but similar to what we're seeing across other markets, chance to beat that. In terms of this model, it's the leases start rolling off in back half of the year and into the first part of next year. But I would say with the growth we have from the signed but not open, and I also want to highlight that the signed but not open is actually double what the 6.8 I put in there, given the other pieces of that. As Ken mentioned in his remarks, that's going to offset this role, and we're continuing to believe that we should be able to produce FFO growth that's gonna be our same storefront.

Okay, that's helpful. So yeah, I hear you about the S&O pipeline, but for these two assets, is there any cost capitalization that will begin or that will offset the ABR coming offline as we think about 2024?

You're going to make me dig out my CPA again. So, Todd, unless we are shoveling in ground, doing active construction work, we are not anticipating capitalizing in our model any cost for the balance of this year. And stay tuned for next year. We haven't put out guidance, but conservatively, my model has us flowing through whatever cost of the asset to the bottom line. So, anything we would do related to that would be incrementally additive to our FFO, but right now, that's not in our... balance of 23 guidance, and as I'm thinking about that statement where we should have growth in 24, that's not assuming we're capitalizing all the costs associated with it.

All right, great. Thank you.

And one moment for our next question. And our next question will come from Craig Schmidt of Bank of America Securities.

Your line is open.

Hi, this is Lizzie Doigen on for Craig. I just wanted to clarify, and apologies if I missed it, on the exact credit loss impacts, just the assumptions for reserves for the full year as a percentage of revenue again, and how much of that was recognized last quarter.

Yeah, so Lizzie, we're in the, call it the low 200 range of, of revenues for the year. And we've maintained, you know, I think we were at 270. We've maintained that heightened reserve for the balance of the year. So call it, you know, low 200s as a percentage of revenue against the six-month revenue. And, you know, we have a heightened, you know, we've kept that in our numbers, the 275 that we put out at the beginning of the year.

Okay, great. Thanks. And just on the, you mentioned earlier on the the 5% of same-store NOI growth achieved this quarter. You know, that also factors in, you know, still headwinds from prior period collections. And we can see that impact, you know, outlined in the supplement. But just curious what, I guess, if you could quantify more of that impact, you know, How could we see that start to burn off going into the rest of the year? Maybe if you could just discuss expectations around that level of impact.

Yeah, so I think the first half, we really saw the credit loss starting to burn off. First half of last year, it trickled in. So Lizzie, I would think that that headwind is largely behind us, which is, in my remarks, suggested that we are trending towards the upper end, if not exceeding it as that's largely behind us.

Okay, great. That's it for me.

Thanks.

Thanks, Lily.

One moment for our next question. And our next question will come from Craig Millman of Citi.

Your line is open.

Hey, good afternoon. Maybe I just want to drill into the 30 to 40 million of NOI growth expectation that you guys talk about here. I know 75% of that's coming from street and urban. But just given the positive commentary around demand and rent growth, I mean, could you walk through maybe kind of some of the basic assumptions there on kind of absorption timeframes versus what you may start to see given the demand? Some of these unanticipated bumps like what you're getting at Broadway, and just kind of give us a sense. I mean, this is through 2026. Should we expect that? I know, John, you said there's potentially room above this, but at least from a timing perspective, I mean, do you guys anticipate that this could come sooner than 2026, given the momentum that you're seeing on the demand and rate side?

Let me first address this kind of bigger picture, John, while you gather your thoughts, because we have in prior calls kind of walked through each of the different drivers of the 30 to 40. But just big picture, and Craig, you're spot on. We are seeing improved retailer demand. We are seeing rents coming in higher than we expected. But counterbalancing that, it still takes a long time to get tenants open. And economists, which I am not one, are still forecasting a recession at some point in the next 12 months. So we're going to continue to stay very focused on what we think will be exceptionally strong growth if we simply stay on track. And we have certainly given indications of the ability to beat that, more so on the rent per foot. as opposed to timing because timing is very dependent on a variety of issues but with all of those pros and cons in mind john the key drivers and and we will have this in our investor deck we have had it in the past but the key drivers of that 30 to 40. yeah so so craig key drivers is again of that 30 to 40 starting with just the contractual growth so we have the contractual growth which

averages to above 2% over the next several years. That I think is the easier part in terms of lease up. So in terms of, and this is net lease up, and this is after we have the well-known rollovers that we have been talking about for the past couple years. The net lease up in the earlier years of the model, where we have the North Michigans and the Bed Baths rolling, That is going to, in terms of 24, 24 is going to be in terms of the growth period, while still we are seeing that north of the 5%. 24 is gonna be one where that's going to be where we're gonna feel the offset from the rollover, but the significant leases were happening. So I would say if I had to, and we're not giving 24 guidance, that 24 will be towards the lower end of the five to 10% as the leases that we've already signed are gonna offset the rollover. And then I would say 25 is really the year of acceleration, Craig, where it's as we're seeing the impact of the rollovers behind us with the lease up that we still have in front of us and getting the right commencements up. I would say if anything where I get more comfortable on my commentary around growth upside, I think it's in 25 I feel much better about than I would have last year. last quarter. So that lease up is a good component of it. And then a handful of redevelopments. And when I say redevelopment, this isn't a redevelopment that we're not assuming that we're doing ground up or incurring capital. These are starting with city center in San Francisco and already leased Whole Foods that we've spent the capital on. Several million dollars of growth there that we think shows up by the time they get their permitting. Opening is a 25 event. So a little bit of redevelopment, that's part of that, but not one where what we don't have is capital redevelopments in there. That would be incremental to the 30 to 40 million. And then the last piece of it is fair market value, and alluded to this in my remarks. When we did this 30 to 40 million dollar assumption, that was a spot estimate of market rents at that point in time. So when I went to our leasing team, wasn't saying, on a very good day and multiple contenders, it was, guys, if I said you have to get this lease normal course, what would it be? And this goes back a couple of years. So Craig, that's where we're seeing the upside of this is that we are beating those projections. And that's where I see that upside happening. And again, I think that's a 25 event as we get to the 88% that we have the lease in Soho. We have some great space in the Gold Coast of Chicago that that's where I see the upside really kicking in is from, from these market rats, both in terms of total increasing the 30 to $40 million, but also, but also timing. So, you know, when I shut it down in there, I know I threw a lot at you, but as Ken mentioned, we will lay this out more articulately in our, in our investor books.

No, no, that's really helpful. I'm just kind of getting at the fact you guys have a different, a differentiated strategy, right? And these assets are, relative to just traditional open air, right? The CapEx as a percent of NOI is lower. I'm just kind of curious, is that trending even lower given the rise in rents? And it just sounds like, you know, one of the issues that has been is your same source has been good. It hasn't necessarily translated to commensurate AFFO growth given the leverage. It sounds like by 25, that's when the switch should flip here and you should start to see that commensurate AFFO growth relative to your same-store growth? Is that a fair way to think about this, given the proportion?

Yeah, and I would say that we hope in... Sorry, I was talking over there. I would hope to say that, you know, we're going to start seeing that in 24, certainly, but 25, absolutely.

Great, thank you.

One moment for our next question. And our next question will be coming from Carlos Consuega of Jefferies. Carlos, your line is open. Again, Carlos, your line is open.

Oh, that's odd. This is Linda from Jefferies. Hi. My question was on... CityPoint, you know, how are discussions with your partner progressing? And, you know, at what point would a decision need to be made?

I think it's going to be a multi-year process, Linda. And as John walked out, walked through, is the delta between our current ownership, 60% and 100% in terms of the earnings, positive earnings impact is 4%. versus 6%. So it's not like there's this huge difference. I would expect some of our investors are going to stay in long term and others will cash out. John also mentioned not a significant cash outlay. So while quarter to quarter it might have some impact, I think we really should be thinking about this in a multi-year context over the next one, three, five years. And we'll keep you posted as to that. More importantly, is the positive leasing traction that John mentioned and getting that open because whether we own 60% or 100%, it's an important asset and it is nice to finally see these tailwinds.

Thanks. And then can you talk about what drove cash recoveries above expectations this quarter?

Yeah, it's really within our funds. So we had a couple of, we were able to collect on some old accounts within our our funds, the diligence of our legal team. So this was really focused on our funds, not within our core and certainly not within SAMHSA. Thanks.

And one moment for our next question.

Our next question will come from Michael Mueller of JP Morgan. Your line is open.

Hi. I apologize if I missed this at the beginning of the call, but for the acquisition opportunities that you're starting to see more of, are they predominantly in the funds or are you seeing somewhere the math is working on balance sheet acquisitions?

So in terms of opportunities out there, I'd say it's more across the board than just when we say funds, the what we've been doing the last several years in terms of Fund 5. So we're starting to see opportunities in street retail. We're starting to see opportunities or continue to see some opportunities in Power Center. How we fund the Michael and making the math work is either dependent, if we're trying to do it on balance sheet, it's probably in conjunction with capital recycling because our stock has gotten beaten up and it's hard to make that math work. on just a straight-up fashion. But we have over the cycles always found ways, if there's good accretive opportunities, to either capital recycle or leverage our institutional relationships. Let's see where things play out. I do give our team a lot of credit because they are beginning to see opportunities where there's significant rental growth, and yet the market's not there yet. So where we can see those type of outsized opportunities, it's my job, it's John's job to make sure we find the right way to add them to our portfolio while not increasing our leverage and making sure that they're accretive. And that math is always tough at this point in the cycle, but there's also outsized returns at this point in the cycle, and that's why we're kind of looking forward to figuring this out.

Got it. Okay. Thank you.

Sure.

And one moment for our next question.

And our next question will come from Paulina Roas-Schmidt of Green Street. Your line is open.

Good morning. I hope I didn't miss this, but regarding the lease you signed in Soho, not effective rent. of these utilities compared with the e-placed rent you have for similar assets in the neighborhood?

So Pauline, your question is the net effective rent of this compared to the other assets in the neighborhood?

Yeah, I'm trying to have a sense of the market.

Yeah, so I would start with the limited cost.

because it makes it a little bit easier. No, and I would say that the cost, in my remarks, it's under a year, and this is a 10-year lease. So 10 years, you know, from a payback. So we get payback within a year. So I would say mark-to-market, can maybe help you out as we think as this would go to the rest of our portfolio. But, yeah, I'm trying to see how we extrapolate this to our...

We picked up about 45%. The net effective was very similar to that because it's not an expensive lease as opposed to in the suburbs. Or just by contrast, we celebrated a few years ago getting back a Kmart in Westchester, putting in BJ's. The net effective incremental gain in this one lease is very similar to our share of that large re-anchoring in Westchester. So the net effective gain is just under a million dollars, and that feels pretty darn good. That 45% increase in market rents, and this is our best proxy, because we signed that lease two years ago. That 45% over 24 months is a pretty clean number. There's no real cost movement. And so whether you say rents have increased by 40% net effective on that corner, 42, I think that's all open for debate. But it's a meaningful rebound that we are starting to see in multiple locations, and that makes us feel pretty good. Final point around that, there were three tenants vying for this space. We can only accommodate one in this location. The other two are not going to go home. They're going to go find other spots in SoHo. So I think you're going to see this continued trend. And it's a very nice, healthy rebound. I don't think nor am I even encouraging us to believe that you could see this kind of market rent growth for many, many years. That wouldn't even be healthy. But it is very encouraging after several tough years to see a rebound like this.

Yes, a related question. So I see in your presentation you mentioned You say that your street portfolio has a mark-to-market ranging from 10% to 50%. Can you remind me where your key corridors fall within this range?

So Pauline, I think when we think of our key corridors and we break down our street portfolio, 70% of that street, we're saying these are in these very high growth high-growth markets. So that's going to be in New York, that's going to be Soho, that's going to be Williamsburg, that's going to be Melrose Place in L.A., it's going to be Georgetown, Westport, Greenwich, Connecticut, and Gold Coast of Chicago and Armitage Avenue. So those are the markets where we see on the low end, somewhere ranging from 10%, but in others, as we experience in Melrose Place in L.A., 50%.

Then it's a question of when do we get to those spaces. And that's where it will take some time. But after several years of headwinds, these kind of increases are very welcome.

Paul, just on that point, what I would say is in that slide, and that's where if I'm visiting the slide in my head of the one you're looking at, that's where we say that we have a 10% CAGR over the next several years. What I will tell you when we put that slide together, SOHO that we just signed wasn't built into that. So that is incremental to that piece because that was never part of that. Meaning that growth, where the 10% growth, that we were not assuming that in that, that was incremental to that is my point.

Yes, I understand. Okay, thank you.

As a reminder, if you would like to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.

Again, as a reminder, to ask a question, please press star 1-1.

I would now like to turn the conference back to Ken Bernstein, CEO, for closing remarks.

Thank you for joining us. Everyone enjoy the remainder of the summer, and we will look forward to speaking to you next quarter.

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