Ken Bernstein: Stay tuned, Linda. I think we’ll give more color on that. But I think what I would say from a run rate, I’m just picking the midpoint, the $0.32, I think between those range of those three drivers is the way to think about it.
Linda Tsai: Thanks. And just one last one for AJ. AJ, I think you’ve spoken in the past about the high demand of luxury retailers as they move outside of department stores to better control their brands. What do discussions with those retailers look like today as sales — there are some reports that they’re slowing down a bit?
AJ Levine: Yeah. So those discussions continue. We continue to see those luxury brands and some of the aspirational brands pivot away from wholesale and department stores and really establish their own brick-and-mortar presence where they can control the narrative, where they can interface with the customer directly. As I had said, because of their performance over the last two years, frankly, and because they’ve acknowledged the critical nature of that physical store, most of them continue to see past that short-term choppiness, Linda, and are still focusing on long-term growth. So no slowdown in that sense.
Linda Tsai: Thank you.
Operator: One moment for our next question. Our next question comes from Craig Mailman with Citi. Your line is open.
Craig Mailman: Hey, good morning. Ken, maybe I want to go back to your earlier comment on where kind of the mark-to-market is on some of your street assets given the rising rents, particularly in New York, and as we think about that versus where interest rates are going and what that could do to kind of stabilize cap rates here. I’m just kind of curious, your thoughts as you kind of look at your blended implied cap rate here in the 7s and half of your portfolio is the Street assets. Kind of how you connect the dots on that valuation versus what you’re seeing from a mark-to-market and CapEx needs perspective versus other portfolios in the market or kind of private market comps?
Ken Bernstein: Yeah. And there are certainly, as you just pointed out, a host of factors to try to digest at this moment in time, let me do my best. First of all, the growth, which was what I was discussing and that piece of it, in a period where interest rates are high, where the market is confused, where macro events seem to take control versus micro events like growth. It is hard to say here, what is the value of an asset that’s growing at 5% a year versus assets that might be more stable, growing at 1% or 2%. And I think there is that confusion right now. So I’m not going to tell you, well, this is the cap rate you should ascribe to that. But over any extended period of time, if you see more growth, we all know that the markets will reward that.
Second point, CapEx. We’ve been talking about this for a while, and there is a meaningful distinction or at least there was a meaningful distinction between the CapEx expenditure relative to rent in our suburban portfolio versus in our streets. It’s as a ratio of rent, higher rent to CapEx, it’s much healthier in the streets. That used to be the case. Now that’s the case times 2 or 3 because not only have CapEx gone up due to inflation, but the interest cost to carry that CapEx has gone up as well. And thus, that distinction is also one that we are, as an industry, only beginning to digest. Third and final point. Your guesstimate of what inflation looks like over the next five, 10 years is as good as mine, probably better. We’re going to operate under the assumption that it’s going to be more important going forward to capture NOI growth, sooner rather than later.
And the distinction I make between our suburban centers and our street retail and AJ certainly touched on this as well. In the streets, we have higher contractual growth. I think that’s going to become more important. In the streets, we have fair market value resets. I think that’s going to become more important. And in the streets, we have less CapEx. So that’s a long-winded way of saying who the heck knows where values are. The markets are certainly debating it. But we think that over the next year or two, the markets will settle down and they will recognize the importance of growth and less CapEx, especially if we go through an era of higher growth, which should be good for our rents, good for our tenants, and we should be able to deliver on that piece for that segment of our portfolio.
So that’s a long-winded way, Craig, of trying to touch on all those pieces in a very confusing time period.
Craig Mailman: I very much appreciate the thoughts. And I guess this leads to the question because you guys were able to pick off some of these street assets coming on the financial crisis you noted, right. But maybe even in distress with some of the mark-to-market pricing on a going in may not look as good as people would think. But I guess, how do you guys prepare the Street or potentially communicate that from a long-term kind of growth, either earnings or NAV accretion, if maybe you’re using some proceeds from potentially some higher cap rate asset sales just to kind of circle the square on the long-term attributes versus maybe the short-term dilution? And kind of how do you — kind of you view the importance of that in your decision-making?
Ken Bernstein: Yeah. So let me be clear. I don’t want to spook anyone to think that what I’m about to say in any way means brace yourself for short-term dilution because I think we can avoid that. But, when rents are moving as quickly as we’ve seen in some of these corridors, especially at a time where institutional capital seems to be ignoring that. The opportunity, just think about the 45% spread we saw over 24 months on Prince and Broadway, the opportunity to acquire assets at 2021 rents, when AJ has conviction about what he can deliver for 2024 rents, that arbitrage is pretty compelling, especially given that as opposed to a decade ago, there’s just less competition there. And considering, again, our expertise, our access to a variety of capital sources.
I am hopeful that this quiet period in terms of acquisitions ends and that we can find value-add opportunities where we can turn that tenancy around. But again, to be clear, we are not viewing this as the right time to add diluted transactions, and we would look forward to that accretion even if we have to wait 24, 36 months to go from 2021 leases to 2024.
Craig Mailman: And then just one last one. As we look in ’24 and maybe ‘25, how many fair market value adjustment opportunities guys have?
Ken Bernstein: John?
John Gottfried: Yeah. So, Craig, I would say the vast, vast majority of our streets have that provision. So I think we do have several of those coming up. So I think that’s an opportunity for those. But I would say, over the next couple of years, constantly having role, and we’re going to see that opportunity. And AJ sort of mentioned, we’re working through some of that as we speak. So stay tuned.
Ken Bernstein: Let me point out, but I don’t want to continue this conversation too much. Just so everyone understands how fair market value resets work. The tenant has the option to renew at the greater of a contractual bump, which looks like most of our standard leases, the greater of that and fair market value. So the good news is it’s not as though this appraises rents downward. However, we weren’t talking about fair market value resets from 2017 until 2022 for all of the obvious reasons is that tenants weren’t exercising. We were using that opportunity to cleanse streets like M Street in Georgetown. But now we are at that period where tenants are exercising those options. And the good news is in conversations with our retailers, their sales are strong enough that they’re more than happy to exercise those options and continuing to see their business growth. So let’s move on to the next question.
Operator: One moment. Our next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is open.
