Acadia Realty Trust (NYSE:AKR) Q2 2024 Earnings Call Transcript

Acadia Realty Trust (NYSE:AKR) Q2 2024 Earnings Call Transcript July 31, 2024

Operator: Good day, and thank you for standing by. Welcome to the Acadia Realty Trust Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference may be recorded. I will now hand the conference over to speaker host, Ethan Gomez. Please go ahead.

Ethan Gomez: Good morning, and thank you for joining us for the second quarter 2024 Acadia Realty Trust earnings conference call. My name is Ethan Gomez, and I’m an intern in our acquisitions 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, July 31, 2024, and the company undertakes no duty to update them.

During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia’s earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue, and we will answer as time permits. Now, it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today’s management remarks.

Ken Bernstein: Great job, Ethan. Thank you to you and the rest of the summer interns for bringing some great energy here this summer. Welcome, everyone. I’m here with John Gottfried and A.J. Levine. I’ll give a few comments before handing the remarks over to A.J. Then, John will discuss our earnings guidance, our balance sheet metric, and after that, we’ll take some questions. As you can see from our earnings release, our strong second quarter performance is reflective of both the operational tailwinds that our sector is experiencing, as well as the successful execution by our team of several important initiatives. In light of this strong performance, we’ve increased our full year earnings guidance and increased our quarterly dividend.

More importantly, we see this momentum continuing. While there’s always multiple drivers of our growth, there are effectively three critical areas of focus for our business. The first is driving strong internal growth, most significantly coming from our street retail portfolio. The second is maintaining a solid balance sheet. And then third is the incremental earnings growth beginning to hit the bottom-line from our highly-differentiated investment activity. So first, with respect to internal growth, our same-store NOI growth has averaged over 6% for the last two years and we see this multiyear growth trajectory continuing. A.J. will walk through the details of this progress, but all of this activity supports our goal of generating superior top-line growth and then having that growth hit the bottom-line.

Our second key area of focus comes from maintaining a strong and flexible balance sheet. John will elaborate on our balance sheet metrics further, but in short, we are now positioned with a well-hedged balance sheet, strong liquidity to fuel growth, limited maturity exposure, and solid access to attractive debt. Our third and increasingly important driver comes from contributions from external growth. This includes both our on-balance sheet acquisitions for our core portfolio, as well as growth through our investment management platform. Our focus for on-balance sheet investment activity is to grow the street retail segment of our core portfolio. It’s our view that this segment will produce the highest risk-adjusted returns in the open-air sector.

We are focusing our street retail acquisition efforts on properties in key corridors that are accretive to earnings, accretive to NAV, as well as accretive to our long-term internal growth trajectory. We believe that there is still a capital market dislocation with respect to the pricing of street retail investment opportunities, and this dislocation is providing going-in yields that do not account for the superior growth rate when compared to other open-air formats. As the capital markets begin to normalize, sellers are beginning to emerge and opportunities are beginning to pencil out. Along these lines, last quarter we made progress on several transactions. We are finalizing our diligence for high-quality street retail assets in key shopping corridors, both in Manhattan and Brooklyn, for approximately $75 million.

And in addition to that, we have funded what positions us to add an additional 11% interest in the Georgetown Renaissance collection, a portfolio in M Street Georgetown, where we already own a 20% stake, and where we hope to add even further to this position. For those of you less familiar with the recovery we’re experiencing in Georgetown, over the last several years, this iconic corridor has seen a meaningful improvement in merchandising and tenant demand and tenant performance. The addition of new tenants, including Aritzia, Alo Yoga, Faherty, Veronica Beard, and SKIMS, just to name a few, has triggered strong growth on a street that had previously suffered from outdated merchandising and underperforming tenants. We have seen many of our retailers post sales growth of over 40% since 2019, and tenant sales growth is a great indicator of future rent growth.

Then, behind these acquisitions I just mentioned, we have a growing pipeline of properties that also meet our acquisition criteria for our core portfolio. Now, deals are not done until they’re done and we are going to remain disciplined, but it feels as though the stars are beginning to align. Then, complementing our on-balance sheet investments, we’re continuing to see opportunities to grow our investment management platform where we are generally focused on open-air suburban shopping centers where we are going to leverage our institutional capital relationships. There are a few initiatives in progress here. First, as we had previously announced, we formed a strategic partnership for our property, the Shops at Grand with JPMorgan, where we retained a 5% interest in the investment, plus retained the management as well as potential upside.

This transaction is an example of our intention to migrate some of our stable but lower-growth assets out of our core portfolio and into the investment management platform. Last quarter, we also completed a new acquisition in Tampa, Florida of an open-air community center for $31 million designated for our investment management platform. Given the strong demographics of The Walk at Highwoods Preserve and the value-add upside, we have strong institutional interest from investors in this asset. But most importantly, as it relates to external growth, keep in mind that for a company of our size, it doesn’t take much volume to move the needle. While every transaction is going to differ in terms of long-term accretion, we are currently targeting about 1% earnings accretion for every $200 million of gross investment.

And keep in mind, we are historically used to doing multiples of that in volume. So looking ahead, we remain very bullish on our ability to continue to add value by driving internal growth, by maintaining a strong and flexible balance sheet, and by adding additional growth through our strategic new investments. And with that, I’d like to thank the team for their hard work last quarter, and I’ll turn the call over to A.J.

A.J. Levine: Great. Thank you, Ken. Good morning, everyone. So, another highly productive quarter in the books and the trends that we’ve been seeing play out over the last several years appear to be sticking. We’re seeing no signs of a slowdown. Our leasing pipeline is the largest it’s ever been, and the team continues to post double-digit spreads throughout our high-growth streets. So, to help understand why we continue to see this high level of productivity, let’s touch on two of the critical factors that drive market rents: supply/demand and rent to sales. So, as it relates to supply/demand, as you can see from our results, tenant demand continues unabated, and there has been no new supply added to our streets. And driving that demand, amongst other factors including strong performance, is a continued focus on DTC and the tenant’s desire to better control the interaction with the consumer.

And all this has resulted in a historically favorable supply/demand dynamic for landlords. In terms of rent to sales, along with strong and consistent sales growth in markets like M Street and Madison Avenue and Soho amongst others, tenants remain disciplined and rent-to-sales ratios sit well within a healthy acceptable range. A lot of that sales growth comes from strong consumer demand, but let’s not forget about the impact of inflation on sales and rents. Inflation alone has driven sales over 20% since the start of 2020, and strong retailer performance is driving it even further. And as Ken mentioned in relation to M Street, as well as other areas, where we see strong sales growth, strong rent growth inevitably follows. In the background of all these trends, the team continues to work hard to increase occupancy and drive NOI across the portfolio.

In the second quarter, we saw a significant pickup in leasing velocity, signing approximately $2.8 million of new core ABR at Acadia share, which is a nearly 150% increase over the activity from Q1. So, no slowdown here. Year-to-date, within just our core portfolio, we have signed approximately $4.3 million of ABR, again at Acadia share, and as I mentioned, the pipeline remains robust. In addition to the $8 million of executed leases in our signed but not yet open pipeline as of June 30, we are also in advance negotiations for an additional $10 million of ABR of core leases, with substantially all of it coming from our street and urban markets, including Soho, Armitage Avenue, the Gold Coast in Chicago and Henderson Avenue in Dallas, each of which are markets where we will see the highest annual contractual growth at 3% per annum, along with more frequent opportunities to mark to market through FMV resets.

Additionally, we are incredibly excited about the momentum we’ve seen in Chicago as recently as the last 24 hours, not just on the Gold Coast but also the surrounding areas, and we expect to share some very positive news in the coming weeks, if not sooner. So, stay tuned. Circling back to Armitage Avenue. Last quarter I told you about the market dynamics that make a street like Armitage ripe for outsized growth, strong tenant performance, healthy rent to sales, barriers to entry, high tenant demand and very low levels of supply, and the prevalence of FMV resets that provide leverage to pry loose space and more frequently mark to market. And since the end of the first quarter, we’ve signed two new leases in the market and have another two in active negotiation at very strong double-digit spreads.

And again, those rents will all grow at the contractual 3% per annum, which is the historical contractual standard for street retail, and are all subject to FMV reset at the end of their initial term. I also mentioned that these dynamics were not unique to Armitage. Over the last year, we’ve seen the same dynamic, similar results play out in Soho and Williamsburg and Melrose Place, and we expect to see this story play out across most of our high-growth streets. Some of the activity will come from organic lease up of vacancy and expiring leases, but we also continue to accelerate positive mark-to-market spreads through our pry-loose strategy. So, let’s touch on the pry-loose strategy for a second. In addition to driving NOI, the frequency of FMV resets and the impact that has on our ability to pry loose space allows us to better curate our streets and create the best ecosystem to promote strong sales growth and long-term market performance; striking that balance is just one of the areas where we truly excel.

Now, all of these factors, all this momentum applies to City Point as well, where the wind is firmly at our backs. In terms of that curation, Sephora is now open and exceeding projections, adding a noticeable increase in traffic to Prince Street. In the first quarter, we saw the same effect on the opposite end of Prince Street when [Fogo] (ph) opened its doors. The park is open as well and is packed with young families eager to shop Prince Street and Primark and Trader Joe’s and dine at our food hall, which continues to post record sales each month. And Alamo Drafthouse, which was recently acquired by Sony, has completed their expansion into five additional theaters. This is all being reflected in strong quarter-over-quarter and year-over-year sales growth, which we anticipate will only accelerate as Sephora and these other factors drive additional traffic and the market continues to mature around us.

In the meantime, the leasing team at City Point is taking advantage of this momentum and unlocking those spaces on Prince Street and fronting the park that we’ve been strategically waiting to bring to market. Tenant interest at City Point has never been stronger. So, in summation, landlord-friendly supply/demand dynamic, healthy tenants posting consistent sales growth and significant room to run on rents. And with that, I will turn things over to John.

John Gottfried: Thanks A.J., and good morning. We are pleased to report another strong quarter, with our operating results and key metrics coming in ahead of our expectations, along with an active and productive few months on the capital markets front. Through our refinancings and interest rate management, we have a core balance sheet with virtually no debt maturities or exposure to base rates for the next several years, which means that the 5%-plus of internal growth that we are projecting will continue to show up in our bottom-line. Additionally, during the quarter, we got our core debt to EBITDA back into the 5s on a nondilutive basis, beating the goal that we had set for ourselves. And lastly, we doubled our liquidity through the expansion of our credit facility along with the execution of our inaugural $100 million unsecured private placement bond.

So, in putting this all together, our balance sheet is now poised with both the liquidity and flexibility to pursue the accretive external growth opportunities that we are seeing. I will now provide some further color. Starting with our second quarter results, consistent with the quarterly run rate that we laid out a few calls ago, we reported FFO of $0.31 a share, which on a sequential basis is $0.01 ahead of the first quarter after adjusting for the $0.03 of one-time items that we discussed on the last call. And as we look towards the second half of the year, our base case model has us adding about $0.01 a quarter as our signed not yet open pipeline continues to come online, with a projected range of $0.31 to $0.33 for Q3 and $0.32 to $0.34 for Q4.

In terms of our core leasing metrics, we increased both our physical and leased occupancy rates during the quarter. I want to quickly highlight that our sequential occupancy statistics were impacted by a mix issue given the second quarter sale of Shops at Grand, which was a 100,000 square foot fully occupied asset. When adjusting for the sale, our total core occupancy increased 20 basis points during the quarter, with our street and urban sequentially increasing 40 basis points. I also wanted to remind everyone that given our portfolio mix, not all occupancy is created equal. So, while our overall core occupancy is nearly 95% leased, we still have upside as our street and urban occupancy is only 86.9% occupied and 89.7% leased at June 30, which, given the higher rents and lower CapEx load as a percentage of NOI, adds further tailwinds to our ongoing growth, particularly in light of the trends that A.J. and his team are seeing.

Additionally, we have further increased our signed but not yet open pipeline to $8.1 million, which represents about 6% of our ABR at our pro rata share. In terms of timing, approximately one-third of the signed not yet open portfolio — pipeline is anticipated to commence during each of the third and fourth quarters of 2024, with the balance anticipated in 2025. Keep in mind, the $8.1 million is at our pro rata share and represents core same store only, meaning it excludes any leases signed in our core redevelopment pipeline as well as within our investment management platform, including City Point. Additionally, the entire $8.1 million is incremental ABR, meaning it excludes any leases that we have executed on space that is currently occupied.

Moving on to our guidance. As outlined in our release, we have also raised our full year earnings guidance. It’s worth reminding that, consistent with our past practice, we don’t include accretion from external growth in our guidance until the transactions close. Thus, our guidance doesn’t factor in the accretion from the investments currently under agreement. But as Ken mentioned, we are targeting about 1% FFO accretion for every $200 million of investments. Now moving on to same-store NOI. As outlined in our release, we reported 5.5% of same-store growth for the quarter, which was driven by growth of 12% coming from our street portfolio, and we saw this throughout all of our key street markets, reflecting the powerful combination of lease-up, fair value resets, mark to market on new leases, along with a 3% contractual growth built into our street leases.

And when looking forward into 2025 and beyond, we are seeing a continuation of these trends with our street portfolio continuing to outperform our suburban assets by about 300 basis points to 400 basis points. Additionally, as reported in our release, we have also increased our dividend by 5.6%. The decision to increase our payout was based upon consideration of our continued growth along with our taxable income projections. And following the increase, we are projecting that we will maintain our conservative AFFO payout ratio in the 65% to 70% range. Now, moving on to our balance sheet. We have no meaningful core debt maturities along with a fully hedged balance sheet for the next several years, which means that the internal growth has and will continue dropping to our bottom-line.

And we have been incredibly active over the past several months with our focus being on reducing our overall leverage on a non-dilutive basis, getting our debt metrics, primarily our debt to GAV and debt to EBITDA, back to our target levels, and expanding both our liquidity and availability of capital. And we have made significant progress on all these important initiatives. In terms of reducing our leverage, we have de-levered on a non-dilutive basis by approximately $150 million, or about 10% of our pro rata debt during 2024. And through the combination of this lower leverage and increased EBITDA, we have reduced our net debt to EBITDA by nearly a full turn with our core portfolio back into the 5s. This has enabled us to get our leverage metrics about where we want them with even further improvement of our ratios as the internal growth continues to show up in our results.

And while debt to EBITDA is certainly an important metric, we are equally, if not more focused on our overall leverage levels, with our core debt as a percentage of gross asset value currently residing in the mid 30% range. It’s worth reminding that when assessing relative balance sheet strength at comparable leverage levels, a lower cap rate portfolio, such as ours, can afford to operate at a higher debt-to-EBITDA ratio as compared to a higher cap rate portfolio. Additionally, it’s also worth pointing out that we have financed, refinanced, and/or extended nearly 80% of our outstanding debt, or nearly $1 billion over the past few quarters. And we achieved this volume of capital markets activity without increasing our borrowing costs or diluting our earnings.

Lastly, through the expansion of our corporate revolver, capital recycling, and strategically sourcing a new avenue of capital, we have achieved one of our important balance sheet initiatives of increasing our liquidity and expanding our access to capital. As outlined in our release, we completed our inaugural unsecured private placement bond. We are very pleased with the execution and pricing of the $100 million bond, which was done with a single top-tier investor and is slated to close in mid-August. And upon closing, the $100 million of proceeds will be non-dilutive, if not slightly accretive. The private placement market is something we have been strategically targeting for a while. Not only does this market provide us with an additional source of liquidity, it enables us to extend debt duration beyond what currently exists in the bank markets, all of which improves our overall cost of capital.

Our balance sheet is one of our key drivers of our business, and it’s ready for the accretive external growth that Ken discussed. And we will accretively fund this growth on a leverage-neutral basis, whether it be through the issuance of our equity and/or capital recycling within our core and investment management platforms. Before turning the call over to questions, I wanted to share a quick housekeeping item related to our third quarter earnings call. Due to a scheduling conflict, we are currently planning on releasing our earnings in the morning and doing the call later that same day. This is a one-time event, and we expect to go back to our regular schedule releasing our earnings the night before our call. But just want to give everyone a heads up.

And with that, we will now open up the call for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question coming from the line of Jeffrey Spector with Bank of America. Your line is open.

Andrew Reale: Hi, this is Andrew Reale on for Jeff. Thanks for taking our questions. We’ve spoken previously about the fact that Soho rents are, call it, a half to two-thirds of their peak levels in 2015 or so, whereas sales are well above where they were at the time. Just given where sales are today, is it realistic to believe that Soho rents can return to these prior peaks? And if not, where do you think Soho rents top out relative to the previous highs?

Ken Bernstein: A.J., why don’t you take that one?

A.J. Levine: Yeah, look, I think this somewhat goes back to the idea of the F&B resets, which we talked about, right? And the ability to unlock a lot of those rents that are sub-peak and mark to market based on sales performance, right? If we didn’t have the ability to do that, then we couldn’t take advantage of the strong sales. I do think there is a lot of room to run to continue to approach prior peak, again, just based on the performance that we continue to see.

Ken Bernstein: Yeah. The tenant sales would indicate — when we think about healthy rent-to-sales ratios, would indicate that there are a variety of retailers that will be prepared to approach prior peaks as that space turns out and it becomes available. We’re also encouraged by the fact that our retailers have been very thoughtful and disciplined, so it doesn’t feel like rents are growing in excess of what retailers can afford.

Andrew Reale: Okay, thanks. Can you quantify how rent to sales compares today versus where it was at prior peaks in Soho?

A.J. Levine: Yeah, I mean, like rents in Soho, I mean, it’s a very nuanced market and it’s a relatively large market and you’re going to see some variation there. I think prior-peak rents were, or I’d say occupancy costs were pushing well north of 20%. When you look at our portfolio specifically, as well as anecdotally from talking with our tenants, those occupancy costs are living in the mid-teens range at this point. But again, given the sales growth that we’ve seen, even if those occupancy costs continue to creep up, we still have a lot of room to run in terms of rents.

Andrew Reale: Okay, thank you. And then just any more color on your expectations for the volume of external opportunities heading into the back half? I heard some chatter that potential sellers might be sitting idle in anticipation of rate cuts, but the $75 million you have in advanced negotiation maybe suggests otherwise.

Ken Bernstein: Well, I think that what you saw over the last several months until relatively recently was sellers sitting on the sidelines with some amount of FOMO, fear of missing out, because they, “Geez, I’ve waited this long, maybe I should wait a little bit longer.” I think there’s much more clarity, perhaps not for bond traders, but clarity over the next 12 to 24 months of what the landing looks like and when cuts might occur. So, we’re starting to see sellers say, “Okay, I do need liquidity. It is time to transact.” And we’re very encouraged by that cadence. How that translates through into specific volume, stay tuned.

Andrew Reale: Great. Thanks for the time.

Operator: Thank you. And our next question coming from the line of Linda Tsai with Jefferies. Your line is open.

Linda Tsai: Yes. Hi. Question for A.J. Just in regards to Ken’s comments about post-pandemic retailer sales growth of over 40%, are these mostly digitally native, or are there any traits that you would highlight that these retailers possess collectively?

A.J. Levine: Yeah, I mean, frankly, I think we’re seeing fewer and fewer digitally native in general as we see the continuing shift away from digital exclusive or digitally native more towards DTC, but no, it’s not unique to digitally native. We’re seeing it across the board, from some of our more traditional retailers to emerging brands that are exclusively focused on brick-and-mortar DTC.

Ken Bernstein: Just to add to that, Linda, first of all, almost across the board, wherever price inflation has been since 2019, most retailers have been able to pass that through to the consumer. Obviously, at the lower end, that’s been a little bit tougher for some of our retailers, but the majority of our assets are attracting a more affluent shopper, and there the ability to pass inflation through has been pretty straightforward. On top of that, though, and what A.J. was pointing to, whether it’s athleisure, advanced contemporary, some luxury, and then retailers across the board, they’ve been able to do better than just passing inflation through. They’ve been able to capture sales in their stores, as you’ve seen a migration out of wholesale, out of the department stores, and into the individual stores, as you’ve seen the consumer come back to these key corridors, and that’s where in corridors like M Street, but it’s true for the vast, vast majority of our portfolio, we’re seeing a broad variety of retailers achieving very strong sales growth.

And then, our goal, and A.J. touched on this, is to make sure as those sales grow, that we, sooner rather than later, are able to capture it in our rental growth.

Linda Tsai: Thanks. And then just on external growth, in terms of the $75 million of Manhattan and Brooklyn portfolios, is this an opportunity you’ve been working on for a while, or did it come up more out of the blue? Just wondering if this is indicative of some of the capitulation you had spoken of earlier.

Ken Bernstein: Yeah. And let me be clear, I wouldn’t define this as capitulation by sellers. Some of these deals we’ve been working on for a while, and some are coming up more quickly. What you have is an environment three, four, five months ago where buyers wanted sellers to believe that the 10-year treasury was going to 5%, that there was a hard landing in front of us, and pricing accordingly. And sellers were like, geez, there was a sub 4% 10-year treasury not too long ago. We want you to price that way. And there was a pretty meaningful standoff. And where sellers of cash-flowing assets, or sellers that didn’t have an immediate reason to have to liquidate, those sellers went to the sidelines. I think right now there’s much more clarity, much more clarity as to what borrowing spreads are like.

And as John indicated, at least for high-quality borrowers, spreads are back, liquidity is back, and fundamentals remain strong. So, this isn’t seller capitulation as much as buyers and sellers coming much closer to an understanding of what the next five years should look like. And when we look at those choices, we think that the street retail that we’re focused on is looking very attractive and sellers need to move on, and so they’re agreeing with us.

Linda Tsai: Thanks. And then just the last one, if I could sneak this in for John, just from where you’re sitting today, and without giving guidance, how are you thinking about the level of gains and promotes in ’25 versus ’24?

John Gottfried: Yeah. So again, and I’ll repeat your caveat without giving guidance, but I would say, Linda, we are seeing a consistent level of activity in ’25 as we’re seeing in ’24. And we reaffirm that with a balance sheet that’s fully hedged. The 5%-plus of internal growth, we see that continuing for our bottom-line into ’25.

Linda Tsai: Thanks.

Operator: Thank you. And our next question coming from the line of Todd Thomas with KeyBanc. Your line is open.

Todd Thomas: Hi. Thanks. Good morning. First question, John, just as it pertains to the guidance, can you just talk about the guidance increase a little bit more at the low end? Sounds like there’s no pending or future investments embedded in the guidance that have not closed. So, just curious if you could shed a little bit more light on what drove the increase.

John Gottfried: Yeah, I think, Todd, for near term, we’re going to have — any further guidance adjustments are going to be based off of the closing of the external growth that Ken mentioned. Internally, what — so what drove the guidance increase this quarter was we are seeing rents coming in, our leases commencing quicker than we anticipated. We have a large signed not yet open pipeline. That’s a piece of it, and tenant helps. So, we think we have a — we’re continuing to see strength of our retailers consistent with what A.J. is saying on his side is that our reserves that we had set up, we are not needing the reserves that we had embedded in our guidance. So, really improving both internally, getting our stores opened and the — we did have a handful of acquisitions that did close that helped feed it. So, a combination of those is what brought our guidance up the $0.01 at the midpoint.

Todd Thomas: Okay. That’s helpful. How much more reserves are embedded in the guidance for the balance of the year?

John Gottfried: Yeah. So we had — in our full year guidance side, we had about $0.03 is the way to think about it. So, we had about $0.03 when we put our guidance out in February. And I would say that for the balance of the year, call it another $0.01 or so of reserves is what we are projecting, but continuing to see very positive trends on the tenant side.

Todd Thomas: Okay, that’s helpful. And then just shifting over to investments and the investment management platform. Sounds like you’re certainly seeing an increase in transaction activity. With regard to the strategic relationship with JPMorgan with their real estate income trust, it sounds like there are additional asset contributions being contemplated from the Acadia core portfolio. Can you just talk about how much volume you’re eyeing for contributions, and whether assets have been identified already from the core portfolio, and maybe the timeline to complete additional contribution transactions? And then, are you also looking at third-party deals as well?

Ken Bernstein: Yeah. In fact, I would emphasize the third-party deals more so. We may migrate some more of our suburban assets over from the core portfolio, but we don’t feel the urgency. We like that portfolio fine. Some of this was a move towards non-dilutive deleveraging. And as John walked through from a balance sheet perspective, we’re getting where we want to from that perspective. If we think we can migrate core assets accretively, we’ll do it, but we’re also very confident in our ability to identify, as we have done for a billion and a half of transactions in Fund V, a variety of third-party transactions as we did recently down in Tampa, and as we’ll continue to do. It’s a good core competency of ours. It’s a good way to add incremental accretion.

But the final point of all of this, Todd, is expect the majority of our external growth to come from the additions of street retail. That’s the area that we’re most excited about, and we think we have the most differentiation and the ability to move the needle in ways different than perhaps the more traditional open-air retail.

Todd Thomas: Okay. Got it. And with JPMorgan though, any future deals, whether they’re contributions from your portfolio or third-party deals? Are they all likely to be structured in a similar format, 95-5, and with similar terms, or will each deal be different within that structure?

Ken Bernstein: They might be different, but, and I guess I would say I’ll let JPMorgan speak for JPMorgan, for the non-traded REIT that we transacted with, they’ll probably look very similar, but they would point out that they have multiple different buckets of capital. Neither of us are on any form of exclusive relationship, but it’s a good relationship and we’re constantly comparing notes about different opportunities. I would say both sides are relatively agnostic as to whether it’s a new transaction or an existing asset. Glad we got the relationship kicked off with an existing asset, but look forward to do many more with them, irrespective based on the investment opportunities we see. And we’re encouraged kind of by deal flow we’re seeing. So hopefully that works out great.

Todd Thomas: Okay, great. Thank you.

Operator: Thank you. And our next question coming from the line of Craig Mailman with Citi. Your line is open.

Craig Mailman: Hey, good morning. Ken, just want to go back to pricing on street retail. We’ve seen a couple more trades. You guys are getting more active. We saw one of your other public peers get more active in Williamsburg. Where — can you kind of give us a range of where street retail pricing is in Manhattan versus Brooklyn versus maybe kind of what you’re contemplating on M Street, if you can collapse that structure a little bit more just to give us a sense of return expectations in your different markets?

Ken Bernstein: Yeah, and I apologize upfront of being perhaps broad and vague, but going in yield is just one component. And then what do you see as the total growth? There are still leases out there from prior peak, and we touched on this before, as related to a question in Soho. Prior peak, we’re still not back to. So, there are leases that are above market. Those are going to trade at a very different cap rate going in yield than leases that were done, let’s say, during COVID that perhaps are at half of market. What we’re seeing now, to try to simplify this a bit, leases that were relatively recently signed have 3% contractual growth, and to the extent that they have fair market value resets that A.J. was talking about, those feel pretty darn compelling in the — and I’m going to use a broad going-in yield, but in the 5% to 7% range.

And I’d say the way we’re thinking about this is if we can start in the 6%s and have conviction that we’re getting into the upper sixes or unleveraged sevens in relatively due course, that feels pretty compelling to us given the long-term trajectory. How do we get there in the thinking of that? Well, in open-air retail in general, the best supermarket-anchored shopping centers are probably trading in that range with a growth rate of about 2%. And the street retail that we’re talking about has a growth rate that should be double that. And the way we get there is 3% contractual growth plus upside. That feels pretty compelling if our going-in yields are the same. Now I appreciate that supermarket-anchored retail is more defensive. Certainly, its necessity profile did great during COVID, but based on the sales growth we’re seeing, based on the tenant demand, based on the shift out of wholesale and into these corridors, both tenant performance and tenant demand make us very bullish on this opportunity set, as long as, what I said in my prepared remarks, as long as we can acquire accretive to earnings, accretive to NAV, and accretive to our long-term growth.

We’re starting to see those opportunities. This is a specialized skill set. So, while there is competition, there’s a lot less competition in this arena than in other components of open air. So, we’re pretty excited about it. I realize very vague answer. It could be a ten cap, could be a four cap, but what we’re seeing trades, occasionally in the low 5%, not us, and occasionally in the high 6%sis those probably have some hair on them and everything else is falling in between.

Craig Mailman: So, from an un-levered AR perspective, I think you said, what, around a 7%-plus is kind of the target? Is that a good way to think about than cap rate?

Ken Bernstein: I think it’ll be higher than that. That’s just the yield that it grows to. So, if you buy a yield at a 6% and over the five years through contractual growth and fair market value resets, the un-levered yield grows to 7%, that probably equates more to a 8% or 9% un-levered and then obviously higher on a levered IRR.

Craig Mailman: Got you. That’s helpful. And I guess the other kind of question I have just kind of long term as your underwriting rents, right, for street, you’ve clearly seen the ability to raise rents. Part of that is the 20% cumulative inflation. If that kind of normalizes here, what do you think is a better long-term market rent growth figure beyond the 3% annual bumps? Like, what do you think is a blended kind of market rent growth over a couple of year period for street and a normalized period of time versus the post-COVID environment?

Ken Bernstein: Yeah. So — and let’s make a distinction between market rent growth and our internal growth, because as hard as A.J. and his team will try, they’re not going to successfully mark all of our assets to market in 12 to 24 months. Retailers enjoy below-market leases for a long time. Albeit in street retail, for a much shorter time period, we have more fair market value resets more mark-to-market opportunities than we do in our suburban, but there’s a distinction between fair market value rents and existing portfolio. With that caveat, if we approach what we’ll define as normalized rents and normalized rent to sales, and that could happen in the next few years, then I guess what I would tell you is our expectation within a range is that market rents should only grow consistent with tenant sales growth.

Because if tenants want, if we were to pick the advanced contemporary, and if they want to be at less than 20% rent to sales, then market rents should, at that point going forward, grow only consistent with sales. But take a step back for a second and don’t lose sight of the 2010 to 2020 period, which I defined as a decade of deflation. It was probably more disinflation, but for that time period, a variety of our retailers were in price wars, were in migration to e-commerce, and so sales declined. During that period, certainly the 2015 to 2020 period, it was hard to see rents go up at all. So, we are now in a point where it feels like inflation will be a tailwind for us, tenant performance will be a tailwind for us, and the ability to see retailer sales grow, not every quarter but over time, makes us bullish that it will be 3%-plus for the foreseeable future.

Stay tuned if we change that tune. Thank you.

Craig Mailman: Great. Thank you.

Operator: Thank you. And our next question coming from the line of Michael Mueller with JPMorgan. Your line is open.

Michael Mueller: Yeah, hi. Two questions. First, for the Manhattan Brooklyn portfolio acquisition, just curious if you can share what’s prompting the seller to sell today. And for the second question, you talked about the upside in the street urban portfolio. So, if you look at the SNO NOI coming online by year-end, where would that push your street occupancy to by year-end, which I think is 84.7%, if I’m not mistaken?

Ken Bernstein: John, why don’t you take the SNO piece of this first?

John Gottfried: Yeah. So, Mike, in terms of dollars, let’s start there, because that’s probably the more impactful of our signed not yet open. There’s — within the street piece is about $5.5 million of the $8 million. So, it’s a significant portion of our yet-to-open is coming from there. So, I think we’re still — that’s, I think more in terms of dollars and percentages, but I think we are — we will get fairly close to the 90% mark by the end of the year is our guess in terms of overall occupancy percentage, but still room to run on that given we’re getting to 90% and we have our street, we think we get to 95%-plus, given just the activity that A.J. and his team are seeing. But I would say within — by the end of the year, in projected openings, I think probably the 90% range is a good target.

Michael Mueller: Great.

Ken Bernstein: And then, in terms of seller motivation, realize there’s a lot of finite life funds, there’s a lot of debt coming due. There’s a lot of CapEx needed to restabilize assets. So, every seller has different motivations. But compared to two, three, four months ago, sellers are saying, “You know what, I’ve waited this long. I need to do some transacting.” And we’re starting to see that and be encouraged by it.

Michael Mueller: Okay. Thank you.

Operator: Thank you. And our next question coming from the line of Ki Bin Kim with Truist. Your line is open.

Ki Bin Kim: Thank you. Just a couple of follow-ups here. On the New York City pending acquisition, can you just talk about some of the longer-term upside? Is this something that you have to kind of re-merchandise over time to get to those higher yields?

Ken Bernstein: It’s going to be a combination. And I certainly don’t want to get to the point where when we close these deals, we’re all bored by what we’re talking about. But I would say that A.J. and his team look forward to re-tenanting wherever there’s a tenant that’s either underperforming or a chance to bring in that roster of tenants that you see us work with, whether it’s on Armitage Avenue or Melrose Place or elsewhere. So, it will be a combination of attractive going-in yields, in some cases, lease-up and others. We’ll try to find that right blend.

Ki Bin Kim: And going back to your comments about street retail sales being up 40%, I wasn’t sure if you meant — if that was referring to your whole portfolio or the M Street portfolio, but my question is, in your M Street portfolio, when I look back at 2019 or 2020, the ABR hasn’t really changed over that timeframe. Certainly, your tenants have. So, I’m just trying to better gauge where that mark-to-market opportunity is. And just given that that rents haven’t really changed, maybe you can help me better understand how much more dynamic that market might be today versus four or five years ago?

Ken Bernstein: Yeah. And so, the answer is much more dynamic. I wish that every time a retailer called me and said, wow, my sales are up 40%, I was able to say, great, pay us 40% more. But leases are leases. So, I think what you are seeing is a delay, a lag between sales growth and rent growth, and that’ll play out — again, the 40% I was mentioning was related to M Street, although again, we don’t get great sales data across the board, but we’re seeing that in many of our dynamic markets. And it can take somewhere between two and five years for us to catch up, even with aggressive pry-loose and fair market value resets.

Ki Bin Kim: Okay. Thank you.

Operator: Thank you. And our next question coming from the line of Paulina Rojas-Schmidt with Green Street. Your line is open.

Paulina Rojas-Schmidt: Good morning. And I see Walgreens is an important tenant for you. I know they are evaluating potential store closures. Have you talked to them at all about how they are thinking about the stores in your portfolio?

Ken Bernstein: Paulina, what was the retailer again for store closures? Was it…

Paulina Rojas-Schmidt: Walgreens.

Ken Bernstein: Got it. Sorry. A.J.?

A.J. Levine: Yeah. I mean, we have no indication at this point that Walgreens is closing any of their stores in our portfolio. Several of them — and we don’t have a ton in terms of just total number of Walgreens have recently extended leases. So, yeah, I mean the simple answer to the question is they seem to be well-performing locations and there’s no indication that they’ll be closing any of them.

Paulina Rojas-Schmidt: Thank you. And then, if I remember well, you’re mostly on variable [CAM] (ph), right? I think that’s the case, but correct me if I’m wrong. And my question is, I have seen other REITs benefit in this cycle from fixed CAM. So, my question, if that were the case you were mostly variable, do you think differently about the mix because of your strictly retail exposure, perhaps?

Ken Bernstein: Yeah. So, Pauline, I would say the vast majority of our leases are variable. We pass through the actual expenses to the tenant. I think there’s pros and cons of each. I mean, operationally that certainly reduces disputes if it’s a fixed CAM, but I think for just operationally and aligning interest, I think our preference is to do on a — is on variable, but we evaluate that all the time. Tenants have different views of it, but at this point, our preference is to stay with a variable, and particularly in times of inflation certainly is something we would like to keep as variable.

Paulina Rojas-Schmidt: Okay. And the last one, can you remind me how frequent are percentage rents in your portfolio?

Ken Bernstein: A relatively small amount. So, not a big piece of what we did I think during COVID on a couple of leases that to get spaces activated. We saw a slight tick up in it, but not a big piece of what we do. It’s well under 1%.

John Gottfried: It’s much more common, of course, in the street portfolio than in shopping centers. And just to be clear, that’s in addition to a market base rent. So, it’s upside, it’s not sort of in exchange for a market rent.

Paulina Rojas-Schmidt: Thank you very much.

Operator: Thank you. [Operator Instructions] And I see we have no further questions in the queue at this time. I will now turn the call back over to Mr. Bernstein for any closing remarks.

Ken Bernstein: Great. Thank you all for joining us. We look forward to speaking to you next quarter. Enjoy the rest of the summer.

Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.