Acadia Realty Trust Q4 FY2021 Earnings Call

Thank you for standing by. And welcome to the Fourth Quarter 2021 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I would now like to hand the conference over to your host, Joe Rizzoli. Please go ahead.

Good afternoon. And thank you for joining us for the fourth quarter 2021 Acadia Realty Trust earnings conference call. My name is Joe Rizzoli, and I am a Property Accountant in our Accounting Department. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934, and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risks and uncertainties, including those disclosed in the company’s most recent Form 10-K and other periodic filings with the SEC. Forward-looking statements speak only as of the date of this call, February 16, 2022, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia’s earnings press release posted on its website for reconciliations of those non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue, and we will answer as time permits. Now, it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today’s management remarks.

Thanks, Joe. Good job. Welcome, everyone. Good afternoon. We had a strong quarter and we will delve into the details in a minute, but first, a few observations. While not ignoring the impact of Omicron on our healthcare system and the lives of many, from the perspective of our portfolio performance and our business plan, we remain very much on track as evidenced by our fourth quarter results and our forecast for this year. We did not see an impact on our collections, tenant interest, leasing progress, or investment efforts. If anything, from a transactional perspective, it may have helped nudge certain sellers off the sidelines, and we are seeing that reflected in our increasing investment volume. In terms of leasing and tenant performance, last quarter we continued to see a meaningful improvement in fundamentals after a very challenging 2020 and, frankly, a few years of headwinds for many of our retailers even prior to that. The reopening that began in early 2021 gained steam throughout the year. As a result, our second half NOI last year increased over 5%, and it looks like this above-average growth has several more years in front of us. These longer-term tailwinds have several important drivers. On a macro level, our retailers’ performance, their balance sheets, and their business models are, with few exceptions, stronger today than pre-COVID. The recognition by our retailers of the critical importance of brick-and-mortar real estate in an omnichannel world is certainly clearer today than it has been for many years. This re-embracing of physical stores is happening faster than we expected, and we are seeing this from a wider range of our retailers and formats. For instance, as it relates to Acadia and our street retail portfolio, we are seeing it from luxury retailers who are doubling down in our corridors ranging from Melrose Place in Los Angeles to the Gold Coast in Chicago, as well as here in Soho. Last year, we expanded YSL in Chicago, had solid renewal spreads in Melrose Place, and are busy signing leases in Soho. We are also seeing it with our digitally native retailers, the Warby Parkers and Allbirds of the world, as well as those brands that thrive around them. These direct-to-consumer retailers are now showing up in force on many of our corridors. For instance, on M Street and Georgetown, last quarter we added Glossier, Sur La Table, and Gloss Lab, and in Soho we added FILA. We continue to see that at our Armitage Avenue assemblage in Chicago, which continues to benefit from our curating a critical mass of the right retailers, where last quarter we profitably added Jenny Kane and Feherty. And especially as it relates to those markets that were hit hard during the pandemic, we are seeing a significant rebound in tenant activity, and given this increase in tenant demand, it’s beginning to look like the rental growth trajectory will be stronger than we had previously anticipated, and this obviously bodes well for our forecast of multiyear NOI growth. For instance, in Soho, after several years of rental headwinds that started around 2017, tenant performance and rents are now, in many instances, exceeding pre-COVID levels, and the reopening and acceleration of demand is still in its early stages. So, as it relates to our Soho assets, given our current in-place rents and available occupancy, even before any further market rent growth, we have nice embedded NOI growth that we have begun harvesting, and then assuming increased tenant demand continues, that growth will likely be even stronger than we anticipated. Keep in mind that given the headwinds of the last several years, market rents in Soho could increase by an additional 50% from where they are today and still not be at prior peaks. But tenant sales performance for many of our retailers is already well on its way to prior peaks. Now, some folks will say that rents will never get back to prior peaks. Well, given the recovery we are seeing, I doubt that. But if one defines never as being five years from now, then if you do the math, that still looks pretty encouraging to us. Drilling further into our portfolio, we see tailwinds and above average growth from multiple drivers. This will first come from the lease-up of valuable vacancy in our portfolio over the next year or so, as well as the profitable re-tenanting of other spaces. An example of both of these last quarter includes Lincoln Park, Chicago, on North Avenue. Last quarter, we signed a lease with that country to replace a former Pier 1 and adjacent tenant. Then, in the suburban side of our portfolio last quarter, we signed BJ’s Wholesale Club at our Westchester, New York Crossroads shopping center. That will replace our Kmart at that center at triple-digit spreads. Now, while the short-term impact of Omicron is passing quickly, we certainly will be focused on supply chain and longer-term inflationary pressures on both our retailers and our portfolios. As we think about which segments of our retailers and our portfolios are likely to be the most resilient in an inflationary environment, ultimately, it’s going to come down to where consumer spending will remain strong, which retailers have pricing power to hold onto their margins, and which real estate portfolios can capture that growth. From that perspective, while I think most segments of our portfolio should be in good shape, our street portion of our portfolio seems to be particularly well positioned. First of all, from a structural perspective, our street leases generally have stronger contractual growth and more fair market value resets than in our suburban assets. Thus, we will have the ability to capture inflation-related growth sooner. Additionally, operating expenses are a much lower percentage of occupancy cost for our street-based retailers. So, the inevitable rise in operating expenses should be less impactful at our streets. Now, since inflation will likely result in increased topline sales, the rent-to-sales metrics, which have been a headwind during the deflationary period of the last decade, should reverse. This means the discussion with tenants will be less about topline sales growth and more about their bottom line. And here again, street and flagship stores have an advantage in an omnichannel world where national retailers, whether they are luxury or advanced contemporary, operate at higher margins and seem to be able to absorb this impact. But while we will ponder the pros and cons of inflation, keep this in mind: deflation is worse. It is becoming increasingly clear that we are past the highly promotional and deflationary pricing environment that existed in the past decade, where the consumer was trained to believe that if they waited, almost everything would be less expensive. This decade-long trend contributed significantly to the retail Armageddon, and most retailers seem to understand that this race to the bottom diluted their brands, reduced their connection with their customers, and was just not sustainable. Going forward, in conversations with our retailers, they seem to understand the importance of curation and the risks of ubiquity. Most importantly, they understand the critical nature of their physical stores in terms of customer acquisition and retention, as well as profitability. As we look out over the next few years from an internal growth perspective, whether from lease-up, re-tenanting, or contractual growth, we are increasingly encouraged by the rebound and rental growth trajectory we are seeing. Turning to the new investment side, after a very quiet 2020 when lenders were highly accommodative and owners were fairly frozen, in the last quarter and now looking forward, we are seeing nice growth in investment opportunities at attractive prices, both for our fund platform and for our core portfolio investments. On the fund side and as Amy will discuss, last quarter, we added a $72 million investment and have an additional $120 million under contract where we have completed our diligence, but the closing is still subject to the typical closing conditions. These deals continue to be consistent with our Fund V Higher Yielding Investment strategy that we have been successfully executing over the past several years. With respect to core acquisitions, we closed on $66 million and have a meaningful pipeline under agreement, but here our pipeline is still subject to our completing our review. The deal is closed in end markets we are very familiar with. In Soho, we added one of the best corners on Green Street, and in Washington D.C., we added to our portfolio there with our acquisition of a portfolio of buildings on 14th Street. In short, we are pleased with the external growth activity we are seeing, and as John highlights in our guidance, we are still seeing accretion levels of about 1% per $100 million of investment activity, whether it be core or fund. This activity can really move the needle for us. Finally, I want to thank our entire team for their hard work last year during a year of recovery, but also a year of whiplash. We are now clearly seeing the fruits of your labor and I’d like to congratulate those of you who received much-deserved promotions. Last but not least, I’d like to thank Chris Conlon for his over a decade of contribution to Acadia’s performance. Chris, as COO, oversaw our leasing and development areas and so much more. He will be missed, but of all of his great contributions, none was more important than the pipeline of talent he built, talent that is ready, willing, and able to step up and continue the efforts that Chris started. With that, I will turn the call over to John.

Thanks, Ken, and good afternoon. Let me first start by addressing the 8-K that we filed last evening. As outlined in the filing, during the course of our year-end audit, actually within the past few days, we identified two fund investments, acquired about a decade ago, that were incorrectly recorded as consolidated investments rather than as equity method investments within our GAAP financial statements. In plain English, this means we need to amend our prior year GAAP financial statements to show these two fund investments on a net basis rather than gross. In terms of its impact, while we need to fix this, the netting down of these two investments does not change any of our previously reported pro-rata financial information or any individual line items within our pro-rata financial statements or any of our prior operating metrics. Furthermore, this does not change any of our pro-rata share of core, our fund net operating income, our net income, our FFO per share, or our net worth. Rather, they simply reflect reclassifications between individual line items within our GAAP financial statements, and our team is actively working through the process of updating all of our filings. We fully expect to meet the SEC reporting deadlines, which will enable us to access the capital markets in the ordinary course. Now, moving on to our results, we have had an incredibly active few months with our fourth quarter full-year 2021 along with our 2022 guidance exceeding our expectations on all fronts. As Ken mentioned, we are continuing to see elevated demand for our space with over $13 million of executed leases to date, representing approximately 10% of our core ABR, along with meaningful amounts of external growth in both our core and fund businesses. Starting with the quarter, our fourth quarter earnings of $0.29 a share came in ahead of our expectations, driven by recommencement on new leases and an improved credit environment, with core cash collections exceeding 98%, along with the accretive impact from the approximately $250 million of external investments that we closed during the year, including $100 million in the fourth quarter. For the full year 2021, we generated a $1.10 of FFO, which came in 10% above the high end of our initial range after adjusting for the fund promotes that were included in our guidance. This meaningful beat in our earnings was playing out throughout the year and it was driven by a combination of our core portfolio rebounding at a pace and velocity well beyond our expectations, along with meaningful accretion from our external investments. As Ken mentioned, our core portfolio began its rebound in the second half of the year, with our six-month same-store NOI growing approximately 5% and over 3% in the fourth quarter. I want to focus on a few points within our same-store results for the fourth quarter. As highlighted in our release, our same-store growth this quarter was driven by a street and urban portfolio outperforming our suburban portfolio by over 300 basis points. It’s also worth noting that our percentage increase this quarter is fairly clean, meaning that it was not materially impacted by current or historical cash recoveries, as the amount of recoveries in the fourth quarter of 2021 roughly approximated what was recognized in the comparable fourth quarter of the prior year. More importantly, we are seeing the strength continue into 2021 and, in fact, for the next several years, with growth expectations ranging from 5% to 10%. Now transitioning to our 2022 guidance, at $1.23 midpoint, we are projecting overall FFO growth of approximately 12% in 2022 or 10% growth in our FFO run rate when adjusting for anticipated fund profits and the one-time benefits from cash recoveries. Our 2022 guidance reflects the continued strength that we are seeing across our key earnings drivers, meaning strong internal growth from both lease-up and profitable leasing spreads, meaningful accretion on our external investments, and the monetization of profits from our fund business. Starting with internal growth, our core NOI is anticipated to grow 5% at the midpoint in 2022. This is the number that we actually intend to report, meaning it incorporates the expected headwinds from cash recovery accounting that occurred in 2021. As highlighted in our supplemental, we anticipate that our core NOI, excluding cash recoveries, will grow approximately 10% when including the redevelopments and our new acquisitions. The projected internal growth in 2022, as well as we are expecting for at least the next several years, is poised to be above trend, and this growth is driven by a continuation lease-up, profitable spreads of new and renewed leases, along with contractual rental growth. In terms of growth from lease-up, our signed but not yet occupied spread within our core portfolio is at a historic high at 320 basis points, representing approximately $5 million of pro-rata ABR. This includes key street leases across all of our geographies that are anticipated to commence in the first half of this year, including many names that Ken mentioned, including Lincoln Park and Armitage Avenue in Chicago, Soho in New York City, and Washington, D.C. Keep in mind that in addition to the $5 million of signed but not yet occupied space, this excludes the incremental amounts from any locations that have been pre-leased in advance of an existing tenant vacating, such as the profitable re-tenanting of 565 Broadway in Soho. So, at a 93% leased occupancy, we still have several hundred basis points of growth with high-quality space remaining, and our leasing team is off to a great start to the year, with an additional $6 million or roughly 5% of our core ABR in advanced stages of lease negotiation. Again, on some of our key street locations in Soho, Lincoln Park, Chicago, along with several deals at our suburban shopping center in Westchester, New York, following the profitable recapture of Kmart and our re-tenanting to BJ’s. I also want to highlight the 30 basis points decline in our core built occupancy this quarter. This is actually an instance of addition by subtraction. This decline was driven by the recapture of Kmart at Crossroads in December, representing approximately 100 basis points of built physical occupancy. We replaced this roughly $6 rent at multiples of that with a new BJ’s lease that is expected to commence in the fourth quarter of 2022. From the fund perspective, we are seeing similar strength in our leasing efforts, with a signed but not yet occupied spread of approximately 200 basis points, representing approximately $2 million of ABR as our share. Secondly, we are seeing strong spreads in both new and renewed leases, with cash spreads on our new leases exceeding 200% this quarter. As outlined in our release, in addition to the triple-digit spread we recognized on the re-tenanting of Kmart at Crossroads, we also reported high double-digit spreads in our street portfolio, primarily within our New York Metro portfolio. Lastly, our portfolio benefits from strong contractual growth. As a reminder, our in-place street leases typically provide for a 3% contractual growth, which, when blended with our suburban assets, results in a blended annual contractual growth of approximately 2%. Lastly, I want to spend a moment on the profit expectations from our fund business. As outlined in our 2022 guidance, we anticipate $0.06 to $0.10 of profits, with an expectation that roughly half of this will come from fund investments other than from our ownership interest in Albertsons. We should be able to operate at a similar run rate for the next several years, as our team works to harvest the embedded promotes across our various fund platforms. When we put the pieces together, core NOI is expected to be strong in 2022 and well poised to strengthen even further in 2023 and beyond. We have a strong and growing external investment pipeline, with over $135 million of deals completed since our last call. As Ken mentioned, we capture about a $0.01 for FFO for every $100 million that we invest, whether it’s a core fund deal, which means that we don’t have to buy large portfolios to generate meaningful levels of accretion from our external investments. So, between our strong internal growth and our growing external pipeline, we are well poised to deliver above-trend growth for the next several years. Lastly, I want to touch on our balance sheet. As outlined in our release, we issued approximately $150 million of equity under our ATM since our last call at a gross issuance price of approximately $22.50 to fund our external growth, including those investments we have closed to date, as well as to pre-fund our core pipeline on a leverage-neutral basis. Our balance sheet is in great shape, with no meaningful core debt maturities or capital funding needs, ample liquidity on our corporate facilities, along with various avenues to access capital. This puts us in a position of strength as we continue to see actionable and accretive investment opportunities. Lastly, as outlined in our release, we have increased our quarterly dividend by 20%. At this payout level, I expect our AFFO payout ratio to be in the mid-60s, enabling us to retain a meaningful amount of operating cash flow to accretively fund our internal and external growth. Assuming our business continues to achieve the growth goals that I have outlined, we are well-positioned to have similar growth in our dividend over the next few years in order to meet our tax requirements. In summary, we had a strong quarter with an optimistic outlook on our 2022 earnings, with increased optimism on our expectation of multiyear internal and external growth. I will now turn the call over to Amy to discuss our fund business.

Thanks, John. Today, I’d like to provide a brief update on our fund platform, beginning with Fund V. First, deal flow remained strong. During the fourth quarter and as detailed in our press release, we completed a $70 million acquisition located in a suburb of New York City. We acquired the property at a cost of approximately $180 per square foot, which represents a substantial discount to replacement cost. The 385,000 square foot open-air shopping center is anchored by a high-performing ShopRite supermarket in addition to PetSmart and Best Buy. Not only was the property acquired at an attractive going-in yield, but also we have an opportunity to add value to the returning of two junior anchors totaling 60,000 square feet. Looking ahead, we have $120 million of fund acquisitions in our near-term pipeline. The thesis here is consistent with the properties in our existing high-yield portfolio. Overall in Fund V, we have been acquiring properties in the 7% and 8% cap rate range on an unlevered basis and have been able to generate a mid-teens current return on our invested equity using two-thirds leverage. As a result of our typical five-year hold, we can generate most of our total return from operating cash flow. Since 2016, we have been assembling a $1 billion portfolio of handpicked high-yielding suburban shopping centers in Fund V. As previously discussed, we see a tangible opportunity for outsized performance in this fund due to cap rate compression. In fact, based on our current projections, an eventual sale of the Fund V portfolio at a blended 7% cap rate would bring our projected IRR into the low 20s and our projected multiple to a 2x on equity. While it’s still too early to declare victory, our cost basis in these assets is attractive and we are well-positioned to execute on a variety of opportunistic transactions at the right time. Including this pipeline, we have now allocated approximately 85% of our $520 million of Fund V capital commitments. This is now the appropriate time for us to be engaging with our existing investors on Fund VI, and it comes at a good time given the strong recovery and operating fundamentals for retail real estate and the strengthening appetite for this product type in the capital markets. In the meantime, we still have approximately $200 million of gross buying power in Fund V, which we expect to deploy before the end of the Fund’s investment period in August of this year. On the disposition front, we have also been quite active. For example, in February, we completed the $66 million sale of Fund III Cortlandt Crossing, a 130,000 square foot ShopRite supermarket-anchored property in Westchester County, New York. There are still embedded profits in a couple of remaining investments in this fund. Additionally, in January, we completed the $24 million sale of Fund IV’s Mayfair Shopping Center, a 115,000 square foot supermarket-anchored property in Philadelphia. This was one of two remaining shopping centers in our original eight-property Northeast grocery portfolio, and the last center is also under contract for $22 million. Turning to the balance sheet, as of year-end 2021, the fund’s platform had $860 million of debt maturing in 2022, of which $590 million has no extension options. Excluding mortgages on property sold in 2022 or currently under contract, as well as the outstanding balances on two subscription facilities, which are used to short-term bridge for debt and equity, we have $420 million of expiring debt to address this year. Of this amount, approximately 40% or $160 million is spread over six months and is expected to be refinanced or extended in the normal course of business. The balance, or $260 million, pertains to City Point, our mixed-use property in Downtown Brooklyn. The City Point debt matures during the third quarter. Although we are still several months away from the maturity, we are currently in the market to refinance the property and are pleased with our progress so far. At the property level, we continue to see strong momentum. On the sales front, those tenants who report sales had a very strong December. For example, Han Dynasty, Lululemon, and McNally Jackson all registered all-time sales highs. As it relates to new leasing, construction is well underway on our new Primark, who is expected to open in the second half of this year, replacing Century 21. Additionally, in February, we executed a 4,000-square-foot lease with Sixpoint Brewery, adjacent to DeKalb Market Hall on the concourse level. In addition to new tenants, Downtown Brooklyn is welcoming new residents, with 22,000 new residential units completed or actively under construction, a new skyline with the tallest tower in Brooklyn topped off as of last fall and located adjacent to our Fulton Street entrance, a new green space with a 1-acre park currently under construction adjacent to our Gold Street entrance, and even New York Fashion Week, with City Point hosting its first runway show last weekend. If you haven’t been to Downtown Brooklyn in a while, come visit us. So, in conclusion, heading into 2022, our fund platform remains well-positioned, with a successful capital allocation strategy and a portfolio of existing investments that continue to march towards stabilization. Now, we will open the call to your questions.

Thank you. The first question comes from Floris Van Dijkum with Compass Point. Please go ahead with your question.

Great. Hey, everyone. Thanks for taking my question. Ken, could you address how many of your competitors have mentioned the compression of cap rates as growth expectations are increasing? How does this relate to the streets and urban portfolio? Are you noticing any signs of this, and how will you alter your operations or investment philosophy in response to potentially higher growth or lower cap rates?

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

Could you discuss the billion in higher yielding suburban assets in your Fund V? As you consider monetizing that, Amy mentioned that a cap rate of 7% would effectively double your equity. However, based on what we're hearing in the markets and the cap rate evidence available, a 7% yield seems fairly conservative. Are there any near-term factors that might lead you to pursue a portfolio trade, or is it more likely that this will be sold off in parcels over time?

So I am not going to predict what avenue we choose over the next year or two. But your numbers are correct, and I agree with Amy’s analysis as well. Let’s start with what was our thesis around this, and keep in mind, it’s somewhat of a barbell approach. On one hand, we like very much the growth potential that we see in the street and urban markets. We prefer not to have gone through a global pandemic, but we already are seeing rents that are at pre-pandemic levels, and we see strong growth rates there. The other end of the spectrum is what we have been doing in Fund V over the last several years where we were able to buy out-of-favor retail, not counting on much, if any NOI growth, and it has lived up to our expectations. By that, I mean, not much growth, but that’s just fine when you are buying in the 7s and 8s, when you are leveraging 2 to 1, and clipping mid-teens returns. What do we do with that portfolio as there is recognized cap rate compression? Does it get recapitalized? Does it get sold one-off? As Amy pointed out, we still have a couple of hundred million dollars, a few hundred million more of acquisitions that we have to get done before we really have that fund fully invested. But I do feel like that thesis has been well validated, the team has done a great job executing it, and we will have a lot of different choices to ponder as to the best way to maximize the value for all of our stakeholders there.

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

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

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

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

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

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

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

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

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

Now, we have been seeing solid momentum at the asset, like I mentioned with 6 Point coming, as well as other tenants in our pipeline. So we look forward to continuing to share updates there.

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

Thanks. I am actually going to follow up on that last question. Can you just provide some more details or color in terms of what you are seeing in your forward leasing pipeline? Not necessarily for City Point, but I am asking more about the street and urban segment of your portfolio.

Sure. What has been a pleasant surprise, if you dial back to pre-COVID, there was a lot of concern, and we felt like after three years or four years of rental declines, that retailers were ready to step up. But then, COVID happened, and now let’s see where we are. As a result of a combination of the cleansing process that occurred during the Retail Armageddon and the confirmation process that occurred as a result of omnichannel actually working, we are now in a position where luxury retailers are stepping up, and meaningfully so, and they are stepping up in ways that are different than what you saw five years, 10 years ago. The luxury retailers are not simply counting on their mall-based tenancy. They are not simply counting on their department store sales. They are recognizing they need to get in front of their important customers in these key areas. The sales are supporting this. These are not just showrooms. Expect to see, in many of the corridors we are active in and other corridors that we are not yet active in, luxury continuing to show up. That’s trend number one and our leasing team is excited by that. Trend number two is that because omnichannel has worked for so many of the digitally native companies, what you are seeing today compared to two years, three years ago where some of those online retailers said that they never need to open stores, as they have been going public, as they have been growing, they are all acknowledging that the store is the most profitable channel for them. Expect to see the Warby Parker and Allbirds of the world open stores in these corridors. That combination, plus everything in between, is leading to a much stronger leasing environment than we certainly expected a few years ago or feared during COVID, and we are in a position because we have enough vacancy to lease up, and we have enough of the right spaces to capture that.

Got it. So how does that all translate into dollars and cents? Meaning your street and urban retail portfolio is at 90% leased today at 4Q. I am not going to get as specific as what exactly is embedded in your guidance for 2022, but I am just trying to figure out when does that get back to 94%, 95%?

I would model that we should be at that level that we view as full occupancy, 94%, 95%, in the late 2023, 2024 timeframe.

Yeah. Hi. I guess following up on Ki Bin’s, you don’t have a lot of street expirations in 2022, but in 2023 it looks like about 20% or so rolls. Can you give us like a rough sense of bracket as to where you think that group would roll to and does anything in particular stand out during that year?

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

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

We usually find that there are new investors that come to join in. The world evolves. The core fund investors that have been with us over the decade are the endowments and foundations, but then there are always new folks and we welcome that. The first few is we had to find profitable investments to put the money to work, because until Fund V was well on its way, it was hard to talk about VI. We are now at that point, and Amy and I are looking forward to starting those conversations.

Thank you. And I am not showing any further questions in queue.

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

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