Acadia Realty Trust (NYSE:AKR) Q3 2023 Earnings Call Transcript

Acadia Realty Trust (NYSE:AKR) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good day and thank you for standing by. Welcome to the Q3 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. [Operator Instructions] Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, John Demoulas. Please go ahead.

John Demoulas: Good morning, and thank you for joining us for the third quarter 2023 Acadia Realty Trust earnings conference call. My name is John Demoulas and I am an analyst in our finance 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, October 31, 2023, and the company undertakes no duty to update them.

The exterior of a modern shopping center, with its clean lines and well landscaped outdoor areas.

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: Thanks, John, great job. Welcome everyone, happy Halloween. I’ll give a few comments, then I’ll turn the call over to AJ Levine who heads up our Leasing and Development division, then to John, and after that, John, Stuart, AJ, and I will take questions. As you can see in our earnings release, we had another solid quarter driven by strong same-store growth of nearly 6%. And this growth is hitting our bottom-line earnings as well. I’ll let AJ discuss the leasing environment and our achievements last quarter, but our goal of creating superior top-line growth and having that growth translate into bottom-line earnings growth remains on track. On previous calls, I’ve walked through in detail the drivers of improving tenant demand.

So I’ll try not to repeat myself today other than to say that even with current macroeconomic concerns, the consumer remains fairly resilient and more importantly, while retailers’ quarterly results may vary, tenants are looking past this short-term uncertainty and are continuing to execute on their multi-year growth goals. And now that we are a couple years past the lockdowns of 2020, it’s worth taking a moment to look at how the retail real estate recovery is playing out. Some of what we’re seeing in our results is well understood and broadly discussed, but other components are only recently beginning to be appreciated. The suburban segment of our portfolio was the first to bounce back from the early days of COVID. The resilience in this segment is pretty well understood.

Going forward, we expect market rent growth to continue at a similar rate to economic growth. And the key issue here will be increasing capital expenditures and operating expenses, which is reducing net effective rent growth. Then in terms of street retail, first we saw our rebound in that portion focused on the local neighborhoods ranging from Greenwich Avenue in Connecticut to Armitage Avenue in Chicago. For this segment and for a variety of reasons, market rents recovered to pre-COVID levels pretty quickly and have grown in excess of 20% and in some cases as high as 30% since then. Also, since CapEx as a percentage of rent is significantly smaller, net effective rent growth has been strong as well. The supply-demand balance is again favorable to landlords, tenant rent-to-sales ratios are healthy and we should be able to see net effective growth here also at or above the contractual growth rate of 3%.

The issue here is that tourism is generally not a driver of sales in the neighborhood segment, and increased return to office might be a bit of a headwind. Then what is probably most surprising and generally not yet appreciated is the recovery of major market street retail, whether Soho in New York or Melrose Place in LA or many of the other corridors in our portfolio. Given that over half of our street retail falls into this segment, it’s a recovery we are watching carefully. A couple years ago, it was unclear how key streets were going to respond to hybrid work, to subdued international tourism, and to a shift by many families to the suburbs or Sun Belt cities. We have more clarity now. Hybrid work is not a headwind for these corridors. The recovery of international tourism is only beginning to show up.

The pace of urban out-migration has slowed and in some cases reversed. And most importantly, retailers are more focused today than ever on controlling their customer experience in an omnichannel world by having their own physical stores. Retail rents for key corridors first recovered to 2019 levels between one and two years ago, and we thought they might level off from there. We were wrong. As evidenced by some of our recent leasing accomplishments in key streets, market rents are now 20% to 40% above 2019 rents. This means that on a net effective basis, market rents since 2019 have grown in these streets more than in any other component of our portfolio. Our recent Broadway, Prince Street lease in Soho is an example where the recent spread of 45% after only two years is a good approximation of market recovery there since 2019.

But we’re also seeing meaningful growth in Melrose Place, the Gold Coast of Chicago, and Street in Georgetown. And as opposed to other segments of our portfolio, these markets are in earlier stages of recovery and based both on tenant demand and tenant health, market rents for this segment seem to have more room to run beyond this current rebound. And along with strong contractual growth, we should be able to recognize this NOI growth sooner as well since we have more mark-to-market opportunities in this segment. Now, to be clear, not all markets in our portfolio have yet recovered. Markets that have lagged some are downtown San Francisco, North Michigan Avenue in Chicago, and Madison Avenue here in New York. But in recent months, Madison Avenue is quickly recovering, and I’d expect other markets to follow as well.

Now I appreciate that it is still hard for some to reconcile this tenant demand and performance with the perceptions around return to office or urban flight. Additionally, we recognize that this growth may not be fully appreciated until we are past some of the macro concerns around a looming recession and elevated interest rates. But as we continue to post these gains, they become harder to ignore. Thus, as it relates to internal growth, we are on track for our multi-year growth goals, and while we expect a slowdown in the economy will eventually create a reduction in tenant demand, we’re not seeing it yet. Turning now to the capital markets. Well, the good news as it relates to the consumer, the job market, and our leasing performance is the bad news or headwinds in the Fed’s focus on reducing inflation.

Furthermore, the inverted yield curve and elevated interest rates are not just impacting borrowing costs but also creating uncertainty as to real estate values. Thankfully, as it relates to Acadia and as John will discuss, we have nicely hedged our interest rate exposure for our core portfolio and our maturity schedule for the next couple of years is also in good shape. The real question is the impact on the value of high-quality cash flowing real estate. And the markets are fairly divided on this issue. While no one believes we are quickly returning to the era of free money, sellers want buyers to assume that the 10-year treasury recovers to its recent 3.5% rate or lower and that the economy has a very soft landing. And buyers want to transact on the assumption that the 10-year treasury is at 5% forever and that the landing is hard.

And thus we have a wide bid-ask spread and limited transaction activity. And while this debate continues, the inverted yield curve is also causing too many investors to remain focused on short-term investments and debt-like instruments rather than taking duration and equity risk. This pricing impasse will likely end over the next few quarters. We’re beginning to see some distress and turnaround opportunities emerge, and we’ll make sure we position ourselves to participate in them. We’ll be respectful not to add unnecessary complexity, not to lever our balance sheet, and not to grow for growth’s sake. But given our institutional capital relationships and our ability to identify opportunities even when our stock price is not advantageous, such was the case in Lincoln Road in Miami after the GFC, or our participation in the privatization of Albertsons Supermarkets, or the dozen other transactions that we participated in.

We will come up with ways to see that our shareholders benefit as external growth opportunities arise. And 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, they can meaningfully add to our external growth. As it relates to Fund V investments, we have an asset under agreement which fits our target profile and investment returns and we will round out the balance of Fund V with that. For future investments of this style, we’re going to continue to rely on our institutional relationships to add to that platform. Given our 20-year track record of raising and managing third-party capital for the benefit of both the institutional clients as well as the public shareholders, the key is first and foremost, finding the right opportunities.

And as time marches on, we suspect those opportunities will show up. So to conclude, it was another quarter of validation of our thesis, solid top-line growth hitting our bottom-line. As you will hear from AJ, our leasing activity is robust and as you will hear from John, our multi-year above-trend NOI growth plan is intact. And with that, I’d like to thank the team for their hard work this last quarter, and I’ll turn the call over to AJ Levine.

AJ Levine: Great. Thanks, Ken. Good morning everyone. So just to introduce myself, I oversee Acadia’s Leasing and Development team, which is ultimately responsible for driving organic NOI growth for our $5 billion open-air portfolio, ranging from best-in-class street assets to open-air shopping centers, both wholly owned and in our funds. And because of our diverse portfolio, we have a unique perspective on what’s happening, across asset classes and within retail. And I and my team have direct access to a wide range of retailers from top-line luxury to grocery, F&B, specialty retailers, all the way to our discounters from Cartier to Whole Foods, from Lululemon to TJX. So, today what I’ll discuss is what we’re seeing at the asset level on our streets, in our shopping centers, and what we’re hearing from our retailers.

And what we’re seeing today is incredibly strong demand from retailers across the board. As Ken mentioned, our retailers continue to tell us that because of their performance over the past 18 to 24 months, and because of their focus on the importance of the physical store towards achieving and sustaining profitability, they are seeing past any short-term choppiness and remain focused on long-term growth. We’re also seeing a continuation of the landlord-friendly supply-demand dynamic that started in 2022 and that’s again driven by strong retailer performance, a flight to quality, healthy tenants in terms of both balance sheets and rent-to-sales ratios, and record low levels of supply. And that’s all translating into consistent rent growth in most of our core markets and helping us make significant progress towards our goal of increasing core NOI by $30 to $40 million over the next several years.

So what does this progress look like? We’ll start out with leasing volumes. And just to clarify, my team is completely agnostic to core and fund leasing. Our focus will always be on best execution across platforms, but the numbers I’m about to mention are for our core-only at our pro rata share. So last year, meaning full year 2022, we had one of the most productive leasing years we’ve ever had on record, certainly over the five years that I’ve been with Acadia. My team signed nearly $9 million of new core leases, representing about 6.5% of our in-place ABR. Now fast forward to 2023, and this year is stacking up to be even stronger. My team has already signed over $8 million of new leases during the first nine months of 2023 and we’re expecting to sign another $2 million to $3 million of deals during the fourth quarter, resulting in a total of $10 million to $11 million of ABR of new deals in 2023 or a 20% increase over an exceptional 2022.

So in the aggregate, that’s about $20 million of ABR or about $25 million of NOI from new leases. So I say this not just to give the teams some well-deserved recognition, they certainly deserve it, but really to highlight the meaningful progress that we’ve already made towards achieving our internal growth goals. In addition to beating our volume goals, we are consistently exceeding our budgeted rents. This is true for our suburban portfolio as well as on our streets. For instance, what we accomplished in New York City in the third quarter is a great example of what we’re seeing across our high growth streets. During the quarter, we signed three leases in New York City with two new leases signed in Soho, a cash spread of 45% and 95%. And we also signed a lease in Williamsburg and Brooklyn at a 55% spread.

And our payback period for the capital that we had to put into those deals was about a year of rent on average. So that’s one of the benefits of street versus suburban leasing, those significantly shorter payback periods. Another benefit of street leasing is fair market value resets, which gives us another bite at the apple to mark-to-market rents. And over the past 12 months, we’ve benefited from five fair market value resets across our high-growth streets at approximately 25% mark-to-market. And that was done at no cost to Acadia and the spreads alone equate to just under a penny of FFO. So for a company of our size, operating in a street and urban leasing environment with the growth that we are seeing today, we can meaningfully impact FFO with a relatively small number of lease transactions.

And that leads me to another important point. My team is constantly looking for opportunities to mine the portfolio and proactively take back space when conditions are right. We are in a moment in time right now where an engaged hands-on team can make a material incremental impact by unlocking these spaces and bringing them to market. So this is not just about leasing up vacancy. For two of the leases we signed this past quarter, we proactively recaptured those spaces before the previous tenant’s lease expired. And from constantly speaking with our retailers, we knew about several tenants that wanted those spaces at market rents, which were substantially higher than what we were getting at the time, approximately 45% and 55%. That’s the double-digit growth that Ken mentioned and that we’re seeing across our streets.

Again, this is all driven by sales that remain well above 2019 levels and the incredibly low supply we’re seeing in our streets. In Soho, for instance, most of the prime space has already been spoken for. Melrose Place and Armitage Avenue are both 100% occupied with a waiting list and Greenwich Avenue is not far behind. On M Street, for those smaller to medium-sized spaces, they are at a premium, leading to spillover onto Wisconsin Avenue where we also own as our specialty apparel and aspirational brands continue to push to secure market — secure space in the market. Again, that’s driven by healthy competition — where that’s driven healthy competition for space, both vacant and occupied, and multiple offers for us to choose from. And it’s giving us meaningful pricing power and allowing us to hand-curate our streets with tenants that will improve the overall market.

That’s where we really excel. So I think Armitage Avenue is a perfect example of that. But to be clear, this is not unique to Soho and Williamsburg. This is not unique to Armitage. This is consistent with what we’re seeing on most of our streets. Last quarter, the story was Melrose Place at 30% spreads. This quarter, the story is Soho. Now, shifting to our suburban centers, our suburban portfolio continues to see quality top-line growth and stability. We’re seeing very healthy competition for our junior boxes, although those deals do tend to come with more relative costs and a longer payback period. Some exciting news from the quarter, we delivered our house of sport to DICK’S Sporting Goods down in Brandywine in Wilmington. They’re expecting to open in late 2024.

And that was one of our two former Bed Bath & Beyond boxes in our core portfolio. And finally, City Point in downtown Brooklyn. The momentum that we continue to see in downtown Brooklyn is just incredible. Keep in mind, this is a market that’s already added 27,000 new residential units, including 1,200 directly above our project. NYU has a tech campus in downtown Brooklyn with 7,500 students. It’s home to the Barclays Center. It’s home to Brooklyn Borough Hall, the Metro Tech Center, with over 25,000 employees directly across from City Point. And in response to this incredible growth and the accelerated maturation in the market, the curation at City Point remains very unique. Not only do we have anchor tenants like Target and Trader Joe’s, but we also have an Alamo Drafthouse that’s one of the top theaters in the country in terms of volume per screen.

We have a 60,000 square foot Primark that opened last year and continues to drive tremendous traffic to the center. We’re averaging over 600,000 visitors a month and traffic has increased 16% year-over-year. We’re also home to the largest food hall in Brooklyn with 40 unique vendors that is exceeding its pre-pandemic sales volume on a per stall basis and is now 95% leased. Fogo de Chao, who we signed earlier in the year, is on schedule to open in December. So they’re going to anchor the north side of our Prince Street passage. Court 16 opened this past quarter. That’s 20,000 square feet of indoor tennis up on the fourth floor. And speaking of openings, the one plus acre park directly across from our Goldstreet retail is on track to open in the first quarter of 2024.

So that park will be downtown Brooklyn’s backyard and really a connection point for everything that’s happening in the neighborhood. And with the park’s opening, we’re finally able to activate some of our most valuable space on the street that we’ve been strategically holding back from the market. And perhaps the most exciting news for City Point this past quarter is that just last week we signed a new lease with Sephora to anchor our south entrance. So they’ll join a lineup that already includes Lululemon and McNally Jackson and Joybird, and that’s an absolute game changer for City Point and a major validation of our team’s efforts. So now we have both entrances anchored with Fogo de Chao on the north end and Sephora and Primark on the south, and we can continue to curate and fill in the remaining spaces with young, relevant, exciting tenants.

And we’re doing this all while exceeding our budget, both top-line and on a net effective basis, and we remain on track to meet and exceed our projections. So stay tuned for more on City Point. We should have more exciting news to announce soon. And hopefully that gives you a flavor of what we’re seeing within our portfolio and on our streets. So with that, I will hand things over to John.

John Gottfried: Thanks, AJ, and good morning. We had another strong quarter. As AJ walked us through, the volume of deals and the rates we are achieving are continuing to exceed our expectations. And notwithstanding the rapid rise in interest rates, we have substantially mitigated our earnings exposure for the next several years through our use of interest rate swaps and managed debt maturities. And this gives us increased confidence to reaffirm our multi-year same-store NOI growth projections and more importantly that this top line growth will continue dropping to our bottom-line earnings. Now I’ll provide some further color on each of these and starting with our third quarter results. We reported FFO of $0.27 per share. It’s worth reminding everyone that as we had anticipated, embedded in our third quarter results is the NOI impact from the tenant rollover at North Michigan Avenue and Bed Bath and Beyond that we have been discussing for the last several calls.

And with this known rollover, our third quarter core NOI is at its trough with meaningful growth in front of us as our signed but not yet open pipeline starts to kick in. And in a few moments, I’m going to walk through a preliminary 2024 earnings bridge that highlights our current expectation of once again delivering strong same-store NOI growth as well as year-over-year earnings growth in 2024 and beyond. In terms of our 2023 full-year earnings expectations, for the third time this year, we have increased our FFO to $1.26 at the midpoint after adjusting for the $0.05 gain that we discussed last quarter. And at $1.26, this results in year-over-year earnings growth of about 6%. Now moving to same-store NOI. Driven by the profitable lease up within our street portfolio, we reported same-store NOI growth of 5.8% for the quarter, which once again exceeded our internal model.

And with growth of 5.9% for the nine months, we remain on track to come in at the upper end of our initial 5% to 6% full year 2023 guidance. It’s worth highlighting the correlation between our top line growth, meaning same store NOI, to our bottom-line earnings growth, both of which we anticipate being about 6% in 2023, and we expect that this trend should continue in 2024 and in the years following. Although a bit premature to release our 2024 guidance, I want to spend a few moments highlighting a few preliminary observations on our core portfolio, which comprise the vast majority of our NAV and earnings. First, we are on track to deliver 5% plus same store NOI growth in 2024. And secondly, in addition to projected same-store growth, we are also on track to achieve total NOI growth in 2024, inclusive of our redevelopment projects.

And this is even in factoring in the meaningful roll-over that we have been discussing for several years on North Michigan Avenue in addition to the bankruptcy of Bed Bath & Beyond. With that in mind, I’m now going to walk through the key drivers that bridge the $0.27 of FFO that we reported this quarter to our projected 2024 quarterly run rate that we expect to land in the $0.30 to $0.34 range, which if you are so inclined to annualize a midpoint, mathematically gets you to $1.28 for the year. Now let me walk through the pieces. Starting with our first and most impactful driver, our core portfolio. We anticipate that the growth in our core portfolio will add an incremental $0.01 to $0.03 to our quarterly run rate. With this growth being driven by the $8.3 million of ABR or nearly $10 million of NOI coming from our signed but not yet opened pipeline, as adjusted for our current expectations of potential tenant rollover and reserves.

With a potential upside in the $0.01 to $0.03 quarterly range, coming from our team continuing to beat our leasing goals. Secondly, notwithstanding the significant rise in interest rates, we anticipate reducing our 2024 quarterly interest expense by about $0.01 or $0.02, which we expect to achieve without earnings dilution, primarily through reducing leverage with retained cash flow, monetizing non- and low EBITDA contributing assets, along with other balance sheet initiatives. Third, through a combination of fully deploying Fund V, the continued realization of fund profits and promotes, NOI growth at City Point, along with G&A initiatives, we anticipate that this increases our quarterly run rate by another $0.01 or $0.02. Thus when putting together these pieces, we are on track to achieve strong year-over-year earnings growth in 2024, particularly after adjusting for the $0.08 of the non-cash gain that we recognized in the second quarter of 2023.

And keep in mind, this run rate is before layering in any accretion from 2024 external growth assumptions. I also want to quickly share how we are thinking about City Point from a 2024 earnings perspective. AJ has already talked about all the exciting progress we have made over the past few months at the asset level, so I won’t repeat any of those updates. As a reminder, last quarter we estimated and are reaffirming net incremental earnings accretion of $0.04 to $0.06. This accretion factors in both the additional NOI growth that we are projecting upon stabilization, along with the potential to further increase our ownership. And as we mentioned last call, if we were to increase our ownership in City Point prior to stabilization, this would likely create short-term earnings dilution.

However, based on recent discussions with our partners, our expectation is that our ownership will remain unchanged and thus we are projecting that our partners loans will remain outstanding throughout 2024. And should any of these assumptions change, we will certainly provide you with an update. Now transitioning to core leasing and occupancy. As AJ mentioned, we signed several new leases in New York City during the quarter at average spreads exceeding 50%. And these leases represented over $4 million in annual base rents at our share. And just to put this in context, a 50% spread on these handful leases created incremental and unbudgeted NOI of about $1.5 million, resulting in over 1% annual FFO growth as compared to our prior in-place rents.

Now moving to occupancy. During the quarter, we increased our core leased occupancy to 95.3% at September 30th, resulting in a 20% sequential increase in our signed but not yet open pipeline to $8.3 million of ABR at our share or about 6% of our in-place ABR. And in terms of timing, we anticipate that approximately 15% of the $8.3 million will commence during the fourth quarter of this year with an expectation of about 50% commencing in the first half of 2024 and the remaining 35% in the second half. And as a reminder, this $8.3 million relates solely to our core operating portfolio, meaning it excludes any signed but not yet open leases from core assets that are in redevelopment, or those residing on our fund business including City Point, which if we were to include our share of these leases, it would nearly double our pipeline with an additional $7 million of ABR of executed leases that have not yet commenced or over $15 million at our share when aggregated with the $8.3 million.

Lastly, I want to touch on a few items on our balance sheet. With nearly $900 million of interest rate hedges coupled with minimal upcoming core maturities, our balance sheet is well insulated from the turbulent interest rate and capital market environment. That’s irrespective as to where base rates may go for the next several years. We anticipate nominal impact, if any, on our core earnings through 2026 due to financing costs. Furthermore, our balance sheet goals are on track. With the actions that we have set out to accomplish of moderately reducing our core leverage and getting metrics back to our target levels well underway. Our goal within the next six to nine months is to get our core debt to EBITDA in the mid to low 6s and then firmly into the 5s within the next 18 months.

And just to level set the magnitude, given our relatively small size coupled with the core EBITDA growth in front of us, the dollar amount of deleveraging that we need to achieve in order to hit our metrics is very manageable at about $100 million. And as I shared earlier, we remain confident that we should be able to accomplish our balance sheet goals in an earnings-neutral manner. So while we remain cognizant of the macro uncertainties, our progress this quarter has strengthened our conviction on achieving our multi-year internal NOI growth goals, along with the actions we are taking to ensure that this NOI growth will show up in our bottom-line earnings. And with that, we will now open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Floris van Dijkum with Compass Point. Your line is open.

Floris van Dijkum: Hey, good — I guess good morning guys. Thank you for taking my question. So again, another quarter of solid NOI growth. And it sounds like most of that NOI growth is going to — should translate into earnings growth, which is going to set you apart from some of your peers over the next 12 months, I suspect. Maybe touch upon some of the balance sheet initiatives. And also, you talked about some potential asset recycling on a neutral basis. Would you also be looking to potentially reduce exposure to a market like Chicago in that instance?

Ken Bernstein: All right. So let’s do that actually in reverse order, John. Let me start off in terms of exposure. Markets like Chicago would be logical for us on a disciplined basis for us to reduce our exposure. We don’t have anything against Chicago in some of our markets, Rush/Walton, Armitage Avenue, as AJ mentioned, are leasing very well. But we do need to recognize that in the public markets having too much exposure to any one city and some of the headwinds that Chicago faces would make sense to reduce that. So that would be a market that you should expect us on a disciplined basis at the right time to reduce our exposure. As it relates to the balance sheet and other initiatives, John, why don’t you cover those?

John Gottfried: Yeah. Hi, Floris. I think as I mentioned in my remarks, I think it’s — our target is going to be to do this in an earnings-neutral fashion. So think of things such as like in Albertsons where there’s no EBITDA coming from that as we monetize that, that will be used to deleverage as well as retain cash flow and with the earnings growth in front of us, that will be also another source to deleverage along with a couple of other things that we have in the works that’s getting us there.

Floris van Dijkum: And then if I can have a follow-up on San Francisco maybe a little bit. Obviously, you’ve still got these two really neighborhood centers, if you will, at one with the Whole Foods that still not got its certificate of occupancy. Maybe if you can give an update on that and also maybe give an update on what the status is on the former Bed Bath space at 555 Ninth?

Ken Bernstein: Sure. So let me set the table and then AJ, in terms of leasing progress, leasing demand. City Center, as we’ve talked about in the past, Whole Foods is working through their local approvals. Thankfully, with some of the changes that have been occurring, we have seen an increase in community support for their opening and an increase in support with the city. So Whole Foods is pleased with how that is progressing, and it remains on schedule for an approval process next year. The leasing around that is relatively small shop space, but that will be a nice incremental boost as well. 555 Ninth, AJ, I’ll let you give some color there. But to remind everyone, we had an oversized Bed Bath & Beyond that we recaptured below-market lease, created some earnings noise this year that I apologize about, but we are going to split that in two since it was two-level space, two junior anchors, one on each level, and then shop space.

Why don’t you talk about that a little further, AJ?

AJ Levine: Yeah, sure. So as Ken said, 555 Ninth it’s a redevelopment. It always has been. Bed Bath was in 75,000 feet on two levels and the plan has always been to split that up into three spaces, right? Two anchors Ken mentioned and then the small shop space where you can really drive rents. So even in the best of times, I think it takes a while for that to come together. We are off to a great start at the center and that we leased the box on the second open-air portion of the center to the container store, and we are getting good preliminary interest on filling portions of that Bed Bath box.

Floris van Dijkum: Maybe if I…

Ken Bernstein: Happy Halloween, Floris.

Floris van Dijkum: Yeah, sorry. Thank you. Maybe last question. Thoughts on, City Point looks like it’s going to be a massive driver that’s not going to be captured in your same-store pool. At what points — what are the steps required for you to have that be part of your same-store pool? Is it increased ownership? Is it more stabilization? Because I mean, $7 million of SNO pipeline at City Point alone sounds pretty substantial.

Ken Bernstein: Yes. Floris, so here’s how we’re thinking about it. It’s really consistent with the way we do our same-store. We will put — so the key driver will be once that hit stabilization will be the year after stabilization to not create what I think would be an inappropriate same-store growth in that situation. So I think that would be one is getting the asset to a level of stabilization. And secondly, as you pointed out, this is still residing within a fund and ultimate ownership is still being played out. So I think that will be a secondary factor, but I think it’s really getting to the point of stabilization. And really, what we want to use our same-store metric for is that’s going to be a level of growth that’s going to hit our bottom line. And those are the types of assets that are going to drive that.

Floris van Dijkum: Thanks, Ken.

Operator: One moment for next question. Our next question comes from Ki Bin Kim with Truist. Your line is open.

Ki Bin Kim: Thank you, and good morning. So on the $0.30 to $0.34 of a recurring quarterly FFO run rate, how much of that $0.32 is transactional income or promote income?

Ken Bernstein: Yeah. So Kim, what I will just start with is preliminary. So we’re not giving full detailed guidance. But what I would say is you should expect to see stability from that portion of our business for the next couple of years. So if I — again, not giving guidance, I would say it would be a similar level to what we have this year.

Ki Bin Kim: Okay. And going back to your comments about possibly monetizing some of your non-contributing assets, how does that manifest itself ultimately? And are the book value reflective of what you think those assets might be worth? Or as we get closer to cut that time point, could there be kind of further impairment charges?

Ken Bernstein: Yeah. So I would say that our book value should be the best proxy as the accounting rules would drive us to impair otherwise. So I would think book value would be an appropriate metric.

Ki Bin Kim: Okay. Thank you.

Operator: One moment for our next question. Our next question comes from Linda Tsai with Jefferies. Your line is open.

Linda Tsai: Hi. What percentage of your $8.3 million signed but not occupied are high-value street rents? And how does that compare to 2Q’s SNO?

Ken Bernstein: Yeah. So, Linda, I think just given the leases that AJ walked us through, I would say, disproportionately amount both in the — compared to prior quarters as well as the $8.3 million. I’d have to do the math, but in my head, it’s in the 75%-plus range, I would estimate, which is a higher percentage.

Linda Tsai: And then in terms of monetizing the lower growth assets next year, just wondering if those sales you expect them to be chunky in terms of first half versus second half?