Good day, ladies and gentlemen. Thank you for standing by. Welcome to the First Quarter 2023 Acadia Realty Trust Earnings Conference Call. Please note that today's conference is being recorded.

Good morning, and thank you for joining us for the First Quarter 2023 Acadia Realty Trust Earnings Conference Call. My name is Jay Martin, and I am an analyst in our Asset Management 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, May 3, 2023, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.

Thank you. Great job, Jay. Welcome, everyone. I'm going to give a few comments, then I'll turn the call over to Stuart Seeley and then John Gottfried. As you can see in our earnings release, our first quarter results represented another strong quarter. Same-property NOI growth was ahead of our expectations at 7% and our earnings were ahead of forecast as well. It's worth noting that this is not just one good quarter in isolation. In fact, following the painful drop during the pandemic, same-property NOI growth has now been above 5% for 6 of the last 8 quarters and during that 8-quarter period, the quarterly average growth rate has been over 7%. This multi-quarter trend reflects the strong recovery we're seeing at our properties and bodes well for our prospects not just this year, but more importantly, for our multiyear goal of 5% to 10% annual internal growth. And to be clear, this long-term growth should also show up in earnings growth. Notwithstanding this continued progress, we're certainly keeping an eye on the headwinds in the broader economy and the potential impact on our portfolio performance. Thankfully, when looking at our current leasing pipeline, activity remains on track with our prior forecast, and we haven't seen any fallout in tenant demand. Furthermore, we believe our reserves for our tenant watch list and our credit reserves currently in place are adequately conservative to address any potential short-term disruption. Most importantly, even after taking into account the implications of a potential recession this year, we expect our leasing progress to more than compensate for any economic slowdown. Thus, we anticipate 8 steps forward, even if there might be 2 steps backward. On our last earnings call, I walked through in detail the likely reasons why our operating results are holding up despite near-term economic pressures, but let me emphasize 3 factors. First, the secular headwinds over the last several years from the rise of e-commerce have passed, fears by both retailers and investors that online shopping and the so-called retail Armageddon will devastate the physical store. Well, that fear has abated and this multiyear headwind is now a tailwind as retailers recognized that stores are their most profitable channel in an omnichannel world. Second, there is a scarcity of high-quality space and vacancies are quickly being absorbed, especially in our key corridors. Third, as Stuart will discuss, we still have high-quality space in our leasing pipeline to drive meaningful growth over the next few years. And while there's solid growth throughout our portfolio, both urban and suburban, the rebound we are seeing is most significant in our key streets. Remember, our Street portfolio comprises about half of our overall portfolio value. And given a tough couple of years during COVID, many folks questioned whether a sustainable recovery would ever occur. Given the significant distinction between the type of street retail that dominates our portfolio compared to Street retail more dependent on return to office, it's clear to us the recovery in our street retail portfolio is still not fully understood. So it's worth highlighting a couple of points. First, the vast majority of our street retail portfolio is not an amenity to office workers. Residential statistics are proving much more relevant, where you have seen a residential rebound, our retail has rebounded as well. And for those corridors, retail fundamentals are now stronger today than before COVID. That means tenant demand, tenant performance and market rents are now stronger today than in 2019. Second, this is not just a rebound. The growth appears to be longer in duration and stronger than just a reopening. In fact, over the past year as vacancies have been taken, market rent growth is continuing to accelerate. For over 70% of our street portfolio, specifically, Soho, Williamsburg, M Street, Rush & Walton, Armitage, Melrose Place, Henderson Avenue, Greenwich and Westport, these corridors are not only performing better than pre-COVID, but notwithstanding macro headwinds, rental growth is accelerating. We have seen net effective market rents over the past year grow by over 15% on average in these corridors and for Melrose Place, Soho and Williamsburg, market rents have grown over 20% over the past year. We're seeing this growth driven in our markets either where luxury is expanding or in other markets where foot traffic and tourism is returning. And while the rebound doesn't mean every retailer was right nor has every corridor recovered, the positives in our portfolio are far outweighing the negatives. Corridors like North Michigan Avenue are still in early stages of recovery. But even there, we're seeing positive signs. And while we should always be prepared for vacancies created by bankruptcies, like Bed Bath & Beyond, since they're an inevitable part of our business, tenant demand seems to be outstripping supply coming from these tenants. John will discuss the economic details of Bed Bath & Beyond's bankruptcy. But as it relates to our 2 locations in our core portfolio, I'll briefly touch on it here first. At Brandywine Town Center in Wilmington, Delaware, we have leased the entirety of the Bed Bath & Beyond space there. It is being taken by the adjacent tenant Dick's Sporting Goods, which plans to expand into the combined space as a flagship house of sport, its newest comprehensive format. And as part of this profitable expansion, the Sporting Goods executed a new 15-year lease covering the combined space. Our second location is 5559 in San Francisco. The property is a well-located, 2-level urban shopping center that is undergoing an important transformation. The Street level includes a thriving Trader Joe's and an oversized 2-level Bed Bath & Beyond that has rents that are well below market. We are turning the second level of this property into its own self-contained center with dedicated parking. We have signed a lease with the container store to anchor the second floor space adjacent to the Bed Bath & Beyond. And upon the recapture of the Bed Bath space, we can now activate the balance of the second level. This repositioning has been planned for several years and has always hinged on getting at least one of the levels of the Bed Bath space back. Finally, as it relates to City Point, the opening of Primark in December, anchoring our presence on Fulton Street continues to meaningfully increase the energy for the whole project. Primark opened much stronger than anticipated and the foot traffic continues to be strong. This strength, as well as the impact coming from significantly expanded residential footprint from all of the developments surrounding this project, is translating into increasing levels of tenant interest at rents that are above our expectations. During the past quarter and to date, we have executed leases in excess of $1 million of annual base rent, including a recent 8,000 square foot restaurant lease for our Prince Street passage. We have an equivalent amount of leases in advanced stages of lease negotiation right now with several exciting retailers that will further energize this irreplaceable asset. So as it relates to our internal growth, looking at our leasing activity and in our conversations with our retailers, they indicate that they're looking past the near-term cyclical headwinds and executing leases on their preferred locations based on their medium- and longer-term expectations. All of this simply reinforces our view that our internal growth forecast for this year and beyond remains on track. Turning now to external growth and the transaction markets. Given the volatility in the capital markets, transactional activity remained muted last quarter as most sellers are on the sidelines. Nevertheless, our team remains very active underwriting and executing a variety of opportunities since it doesn't take much volume to move the needle for us. First, as it relates to on-balance sheet acquisitions, our cost of capital kept us on the sidelines last quarter. And given the public market dislocation, we are exploring areas where we can sell assets opportunistically or reduce our concentration in certain markets and do so on an earnings-neutral basis. In terms of Fund V acquisitions, while that market is relatively quiet as well, the team remains active with several deals under review. And the pipeline is robust enough that we will be successful in deploying the remaining capital even in this quiet market. More importantly, to the extent that larger opportunities arise, we are confident that we'll be in a position to successfully leverage our institutional relationships. This quarter, we added one transaction to Fund V - Mohawk Commons, which we discussed in detail last quarter. So to conclude, we recognize that macro news headlines continue to create uncertainty and concern for commercial real estate in general. But even in this challenging environment, our leasing fundamentals remain strong and internal growth is intact. And once we get past this period of Fed tightening and potential consumer slowdown, we're in a very good position to continue to drive internal growth and then capitalize on the external growth opportunities that should arise. With that, I'd like to thank the team for their hard work this last quarter, and I will turn the call over to Stuart.

Thank you, Ken. I am really delighted to be part of the team here at Acadia. The group of new colleagues with whom I work every day are exceptional and highly professional. The vast majority of whom the investment community doesn't have any exposure to and their expertise and dedication is not always transparent externally. They have also been very patient with me as I dig into a lot of details on how things work, and I ask a lot of questions. I suppose it's fair to say that when looking towards the inside from the outside, which is what I've been doing for the past 2 decades, it is hard to fully appreciate the variances and subtleties that companies say are important, particularly when you are looking at over 100 companies. But when you're highly focused on one company, the important differences resonate quite a bit more. In that regard, I'll make a few observations and provide a few anecdotes and then turn the call over to John. Our diverse core portfolio is very well balanced and includes our Street assets, our urban shopping centers, and our suburban portfolio. The suburban properties can sometimes get overlooked but represent about 30% of the value in our core portfolio. The suburban portfolio is a very stable 94.5% occupied collection of retail assets with varied open-air formats. The overall average rent in the suburban portfolio is about $1,750 a square foot, including anchors, but the shop space has in-place rents of about $29 a square foot. The top tenants from the suburban portfolio include TJX, Lowe's, and Dick's. The suburban portfolio provides balance and it is very complementary to our urban and street assets and has an overlapping tenant base with retailers having exposure to 2 and sometimes all 3 of these portfolios. Now, it does get a lot of attention and deservedly so is our focus on high growth, high barrier to entry markets, which has led to a very concentrated portfolio of street retail assets. These assets do have and will have higher growth for the next several years due to a few identifiable specific items. First is occupancy gains. All occupancy gains are not created equal, while the entire core portfolio is about 93% occupied, within that, our much higher dollar rent street portfolio is only about 85% occupied, and we believe the street portfolio can get back to 95%. Furthermore, our Street assets have an average in-place rent of over $80 per square foot, and the incoming rents from the portion of our signed but open pipeline that is from our street assets are at an average rent of over $150. Second is lease structure. Street leases typically have higher annual contractual bumps than other retail formats. Our street leases have average bumps of 3%, which is about 100 to 200 basis points higher than what is typical for other open-air lease formats. This structure resulted in internal growth over 5 years of about 13%, which is about double the 6% for typical suburban leases. Third, as we expect above-average rent growth on the market rent growth on the streets, particularly if inflation runs hotter. And we expect to be able to more frequently capture the growth as lease terms are typically shorter. Currently, the greatest market rent rebound is now occurring in our street and urban corridors, and John will give some examples. I want to turn to our progress on 2 recent acquisitions. First, our Henderson portfolio acquired in early 2022. This was a project that envisioned both minor short-term and major medium-term repositioning. The team is executing as planned, but escalating market rents have been a tailwind to our expectations. The team is signing rents about 20% to 30% higher than underwriting. As planned, we recaptured a large space, physically reconfigured and redemised that space and are signing leases over 50% higher than the prior rents. Note that these leases will be non-comparable so they won't be reported in our spread. These results are being achieved at Henderson even before the most significant planned asset upgrades have been commenced. Second, at Melrose Place, which was an asset acquired in 2019, no near-term repositioning was either planned or necessary. The investment thesis was to get the benefit of the growth from both below-market rents and market rent increases driven by our expectation that luxury tenants would come into the market, and they did. A.J. and his team just renewed several tenants in April, and John will walk through some of those details. It's worth noting that Melrose was a pre-pandemic acquisition with the full year impact of these recent rent resets. The 2024 NOI will represent a 6% compound annual growth rate over the 2019 pre-pandemic NOI level or a 33% increase. One final observation is that street retail is not a widely held institutional asset class. Ownership is highly fragmented, and we are one of the few institutional owners with expertise that is recognized by both retailers and capital markets players. Also, basis matters and the importance of micro submarkets and concentrated ownership in the correct micro submarkets cannot be overstated. And now that I have a chance to walk more of these assets and markets and meet with our leasing and asset management teams, I have a much better appreciation for our Street portfolio and just how distinctive it is. These assets represent a unique growth driver for us and our capabilities in this fragmented asset class position us to pursue opportunities in the future. With that, I will turn the call over to John.

Thanks, Stuart, and good morning. We had another strong quarter, surpassing our expectations across all of our key operating metrics, achieving FFO of $0.40 a share, along with a 7% increase in same-store NOI, both of which came in stronger than what we had anticipated. Additionally, and consistent with our expectation of multiyear NOI growth, we are signing new leases at rent spreads in excess of what we had budgeted - including those that we publicly report but likely even more impactful those that we don't report due to their nonconforming nature but have the equivalent impact on our earnings and same-store NOI growth. And even with the economic headwinds that are likely still in front of us, we remain confident in our multiyear internal NOI growth. And even more importantly, the translation of this growth into above-trend FFO and increased dividends for our shareholders. And I'll provide some further color on each of these. Starting with our first quarter FFO. Driven by the strength of our core portfolio, we reported FFO per share of $0.40 for the quarter, inclusive of $0.11 from the previously announced special dividend from our shares in Allerton. In light of these results, along with the positive trends that we are seeing across our portfolio, we conservatively increased our full-year guidance to $1.19 to $1.26 from $1.17 to $1.20. I struggled with increasing our guidance after just a few months, particularly in light of the economic uncertainty that may still be in front of us. But the strength and resiliency of what we are seeing from our business and from our tenants dictated otherwise. And contrary to what you might expect from the macro headlines, we are continuing to see record levels of tenant sales, along with continued demand for space, particularly in our street and urban markets and at rents in excess of what we had budgeted. Furthermore, we have yet to see any meaningful signs of tenant distress beyond what we had anticipated. Our cash collections remain strong, with our credit loss for the quarter coming in better than what we had projected. As a reminder, we incorporated approximately 270 basis points of annual credit loss into our FFO guidance. And when using this annual 270 basis points against our Q1 rents, we only needed about half of it for the quarter. In terms of the Bed Bath bankruptcy filing last week and the anticipated projection of our 2 core leases, I want to provide an update. First, as we had outlined on our last call, we would not have any downward revisions to our guidance as a result of Bed Bath. And in fact, we raised our guidance. Secondly, as we have been discussing for a while, the 5559 Street lease in San Francisco is significantly below market. And assuming it gets rejected, we preliminarily estimate a one-time incremental noncash gain of about $0.05. Please note that this potential gain was not factored into our initial or was it included in our updated guidance for the quarter. And while we need to wait for the court system to work out in order to finalize our analysis, our preliminary goal would be to exclude this incremental gain from our guidance, such that there'll be no need to revise your models. But presumably, it would be included in our headline Nareit FFO. But stay tuned, and I will provide updates as they become available. And as it relates to our second Bed Bath location, as Ken discussed, we have already profitably retended the space, and I will provide further economics on that deal shortly. Turning now to same-store NOI. We exceeded our expectations for the quarter with growth of 7%, and we are currently trending above the 5% to 6% full-year same-store NOI range that was outlined in our initial guidance. It's also worth highlighting that we achieved a 7% quarterly same-store NOI growth despite over 200 basis points of headwinds from prior period cash collections. And if we were to exclude these headwinds, our same-store growth for the quarter would have been in excess of 9%. As you may recall from our prior call, we anticipated that our street assets, which comprise about half the value of our portfolio, were projected to increase 6% to 7% in 2023. And we outperformed this expectation with same-store growth in excess of 8% coming from our street during the quarter. While the entirety of our street portfolio achieved 8% growth this past quarter, I want to drill down a bit further into our high-growth markets, which, as a reminder, comprise about 70% of our street assets. And we are projecting about 10% annual NOI growth from these key 3 corridors between 2023 to 2025, which equates to aggregate incremental NOI over the next couple of years in excess of $7 million or $0.07 a share, with Soho alone contributing nearly half of this growth. So what about the other 30% of our portfolio that we are not categorizing as high growth? To be clear, we are continuing to hold very conservative assumptions in our current models and guidance, but we are starting to see evidence of similar trends in the streets including State Street in Chicago, which, as we've said on prior calls, has been slower to recover coming out of the pandemic. But for example, one of our significant apparel tenants on State Street reported monthly sales that were 25% higher than any previous month on record. Moreover, this momentum continued throughout the quarter, with reported sales figures that were 30% higher than those reported in the corresponding period in 2022. Now turning to our total core NOI. In addition to the 7% growth from our same-store pool, we also achieved total NOI growth of about 6.5%, inclusive of our assets in redevelopment and recent acquisitions, growing to approximately $36.2 million in Q1 2023 as compared to the $34 million that we reported in Q1 2022. In terms of redevelopment, as we've discussed over the past year, we placed our core North Michigan Avenue assets into redevelopment during the quarter as our team embarks and plans to reposition these iconic assets. And as Ken mentioned, we are starting to see some encouraging signs of tenant activity in North Michigan Avenue, and we are in the early stages of some really exciting concepts so stay tuned. Moving on to spreads. As highlighted in our release, we reported solid leasing spreads of about 10% cash and 22% GAAP on new and renewed leases. And consistent with Stuart's remarks and our expectations of 10% annual NOI growth from a high-growth street, we have increasing visibility that we should be able to achieve sustainable and meaningful mark-to-market increases over the next several years. In fact, I want to spend a moment to highlight a few interesting trends that we are seeing in our portfolio. During the quarter, we were able to increase our cash rents by about 20% from a significant lease in Williamsburg, Brooklyn, an investment that we acquired a little over a year ago. It's worth highlighting that this 20% mark-to-market was not included in our reported rent spreads this quarter. As was neither a new lease nor a renewal as the length of lease was unchanged following a fair value reset of rents. The increase in rent exceeded our underwriting as we view this lease to be at market when we initially acquired the asset. In addition, during the second quarter, we will be reporting a cash renewal spread of nearly 50% for one of our tenants at Melrose Place, L.A. that arose from a fair market value reset upon renewal. And to further highlight that not all spreads are created equal, this lease generated the 50% spread even after being subject to 4% annual bumps over its initial term, which is above the 3% growth that we typically receive from our street assets. Lastly, I want to touch on some of the details involving the profitable re-tenanting of Bed Bath & Beyond at Wilmington, Delaware that we signed during the quarter. As Ken mentioned, the former Bed Bath space was leased to Dick's, which when combined with the adjacent space, will be converted to a new 15-year lease for a 100,000 square foot house of sport. As this was an expansion, it wasn't reflected in our reported spreads, but when looking at the deal across both spaces, it resulted in a 15% cash spread on the combined 100,000 square feet when comparing the new rents on the house of sport to the prior rents received from Bed Bath and Dick's at a cost of about $100 a foot. And we anticipate rent commencement in the first half of 2025. Moving on to occupancy. In terms of occupancy, we retained our physical lease occupancy at 92.8% and 94.6%, respectively, with ABR of approximately $1.3 million commencing during the quarter. As we have discussed in the past, given the range of rents between our street and suburban assets, movements in occupancy percentage are not often the most relevant metric for us. But we are on track to increase our physical occupancy by another 100 basis points or so by year-end. In terms of our core signed but not yet opened pipeline, we sequentially increased it to $6.8 million of ABR at March 31st, at our pro-rata share compared to the $5.6 million that we reported last quarter. And of the $6.8 million pipeline, we expect that approximately 25% of it will commence in the second quarter, followed by another 30% in the second half of this year and the remaining 45% in the first half of 2024. Please note that given the timing of commencements, we won't get the full benefit in our reported results until the subsequent full annual or quarterly period. I also want to highlight that the $6.8 million of signed but not yet open pipeline is entirely incremental, meaning it excludes leases signed in advance of an expiration such as the executed Dick's lease at our Bed Bath & Beyond location in Wilmington, Delaware and also excludes any leases executed on our assets in redevelopment. Lastly, I want to touch on a few items on our balance sheet. The good news, particularly in light of the current capital market environment, is that our update this quarter is pretty boring. We have no meaningful core maturities over the next several years, nor do we need to rely upon the capital markets to fund our internal growth as we are able to fund this growth using the cash flow generated from our business. In terms of core interest rate exposure, over 97% of our debt is fixed at an all-in rate of about 4.25%. And through the use of interest rate swaps, we have limited exposure to base rates until 2027. And on the fund side, given the strength of our lending relationships, even with the challenging capital markets environment, we are continuing to source new debt, whether it be for a refinancing of an existing asset or securing financing for new opportunities. In fact, over the last several weeks, we have successfully secured 2 five-year nonrecourse loans at spreads of about 200 basis points over the base rate. In summary, we started the year incredibly strong. And even in light of the economic uncertainty, we have cautious optimism as we look forward to the balance of the year. Our multiyear internal growth strategy remains on track, and we have increasing visibility that this growth is poised to drive bottom line FFO and cash flow growth. We will now open up the call for questions.

Our first question is from Floris Van Dijkum with Compass Point.

Looks pretty good and encouraging. One of the particularly appealing aspects is the occupancy and the potential upside in your Street portfolio. Stuart mentioned it was 85% occupied at the end of the quarter, and you hope to reach 95%. What will be the impact of that on your earnings? You have some of that in your signed but not open pipeline, but how much more incremental rent could you generate from that part of your portfolio?

Yes, Floris, this is John. So I think what I would point to is if we look over the next several years, we have about 5% to 10% growth in that street lease-up, both the lease-up of that, that call it the incremental 10% as well as the fair market value that we get to mark-to-market is going to be a big chunk of that 5% to 10%, which we think is north of $30 million in total for our entire portfolio. So a good chunk of that growth is coming from that portion of our portfolio.

Great. So it's over half, right? If I think about it, it's almost more than two-thirds. Is that the right way to think about it?

No, I think that makes sense. You all have to get a little more granular in order to do that, Floris, but I think it's a good chunk of it for sure.

Great. Ken, could you elaborate on the larger opportunities you mentioned? Are you referring to the core or the fund? I'm assuming some of your limited partners might be involved in co-investments. It would be helpful if you could share your thoughts on potential interesting opportunities, especially considering there seems to be a lot of New York street retail facing challenges outside of your markets.

So let's separate capital structure, which is highly dependent on a variety of factors ranging from availability of debt, cost of capital for us within the REIT, separate capital structure from where we see opportunities. And what we have always done over the years is not be overly beholden to the public markets, if the public markets were not available. But also recognize that there are going to be a variety of opportunities for assets, right structure, right time, that belong in our core portfolio. So, I see opportunities falling into 3 categories. One is it is likely given what's going on with the regional banks, it is likely for a variety of other reasons that we're reading in the headlines, that there could be complicated, but highly profitable, debt restructuring, debt purchases, things that are more consistent with what you've seen Acadia do in its fund or joint ventures over time, whether it was our purchase of Mervin and Albertsons or some of the more complicated restructurings that we get involved with. That's certainly a possibility, and I would expect us to utilize our institutional relationships for something like that. While some assets might be at the property level consistent with our core portfolio, we need to be open-minded and opportunistic on that side. And then for the street retail, as you mentioned, Floris, I do think there's going to be opportunities. The number of previously institutional owners who now are focused elsewhere could create opportunities. In both instances, I think we're talking many months before this all plays through. But in a couple of quarters, we could see opportunities there. And again, whether we do these on a balance sheet or in some form of structure, time will tell. The good news is retail and retail expertise and retail platforms are finally once again getting the attention from institutional investors. So the inbound increase in ways to partner with us are very encouraging.

Our next question is coming from the line of Ki Bin Kim with Truist.

First question, the North Michigan Avenue mortgage is maturing in 2025. Any early thoughts you can share in terms of if you plan to cover debt service when the occupancy falls off or how you want to handle that maturity?

Yes, we have a lot of time left on the mortgage, which has a solid rate. We maintain a very good relationship with the lender, Ki Bin. Stay tuned, as we've observed some interesting developments on North Michigan.

Okay. Since the last earnings call, there have been a few developments. In Chicago, a new Mayor was elected who seems to have a lenient stance on crime. What is your outlook regarding your urban street retail portfolio in Chicago, considering that about one-third of your street and urban income comes from there? I’d like to hear any general insights on how this situation might affect your business or tenant demand.

Sure. So without delving too much into politics, big picture, we have more than enough exposure to Chicago. So almost irrespective of how bullish I might be, what I would guide you to expect is that we will decrease our percentage of revenue in Chicago relative to other areas just in terms of prudent balancing. That being said, Chicago has a lot going for it. It has challenges and the elected officials, I think, across the board understand this. Let's see over the next several years how this all plays out, but it wouldn't be productive for us to say that a new incoming administration is not going to be effective before they have even started.

And our next question coming from the line of Thomas with KeyBanc.

Ken, first, just wanted to follow up there, I guess, on the street and urban portfolio, the Chicago Metro specifically, which does look like there's a fair bit of upside there. Stuart outlined some of that and some of the progress, John, too. And you signed a lease at Rush and Walton in the quarter. But can you talk a little bit more about some of the momentum and sort of discuss leasing activity in the metro around assets like Sullivan Center and Roosevelt Galleria and Clark and Diversey, which are some of the assets that have lagged in the recovery, whether you're seeing an improvement in those submarkets? And can you talk about the timeline to sign additional leases?

Sure. Let me provide an overview. John, you may want to add to what you've said about State Street. Each market is recovering at different rates. Some markets, like Armitage Avenue and Rush & Walton, are performing as well as our other street retail markets and are not impacted by the concerns affecting North Michigan Avenue or State Street. We're already seeing a nice increase in retailer sales at State Street, which is encouraging as I still view it as being in the early stages. Similarly, Clark and Diversey are finally seeing lease signings and gaining traction. We will be closely monitoring the recovery of North Michigan Avenue. Based on discussions with various retailers planning to open, I believe we will be pleasantly surprised in the next year or two regarding the return of North Michigan Avenue.

Yes. I want to highlight that we recently signed a new lease in Rush & Walton. This lease was for a former bank space that we took back several years ago, which had been difficult to lease for various reasons due to its somewhat off-location. However, it has now been leased at a strong rate to exciting retailers. This indicates new tenants are entering the market and recognizing the potential there. Additionally, our leasing pipeline includes properties like Clark and Diversey, where we are in the final stages of lease negotiations or letters of intent.

One final point on that, Todd. I want to clarify that our thesis is not dependent on a recovery in that 30%. We are taking a very conservative approach. We will manage through this and sell some of those assets as soon as we enhance them. Our focus is not on relying on a rebound there but on recognizing the substantial outperformance and growth in the 70% and the stability we are observing elsewhere in the portfolio.

Okay. And then also in Chicago, the addition of 840 and 664 North Michigan adds to the redevelopment pipeline there, that's over $250 million value, I guess, at your basis. Can you talk a little bit about the potential timeline for those projects and how we should think about the value creation opportunity relative to your basis in those assets? And maybe John, can you also provide a little bit of insight around the NOI impact that we might anticipate, the drag associated with repositioning those assets, whether that going to materialize in '23 or '24, what we should be anticipating?

Assuming downtime is included in our projections for 2023 and 2024, we do not expect a rapid rebound or quick retenanting. It takes time to get tenants in the highest demand spaces up and running, generating rent. This expectation is reflected in our numbers; when I refer to moving 8 steps forward and 2 steps back, I consider that to be part of the 2 steps back while still anticipating 5% to 10% growth. John, do you have anything to add on this? The key takeaway is that this is accounted for in our projections, and we maintain a cautious perspective, even as we begin to see some new tenant interest, which is quite promising.

Yes. And Todd, I don't want to go lease by lease and exact RCD dates for a variety of reasons because there's, as you expect, with 1,500 leases in our portfolio, there's lots of puts and takes. But in terms of NOI impact, given when the leases mature, some of them third quarter of this year, some first half of next year, the rollover impact year-to-year is going to be split between the years and just reiterating what Ken said, in our growth expectations, this has been very conservatively factored in.

Looking back at last quarter's supplement, there is nearly $12 million of ABR from the two properties. It seems that between later this year and throughout 2024, that ABR will diminish, followed by some downtime before you can re-tenant or reposition those assets. Should we consider this approach in our model?

Yes, that's how we thought about it in ours as well in terms of when those leases come out. And again, I don't want to get too granular, but think of real estate taxes as part of that. And once we get those spaces back, you should assume that we'll be aggressively challenging real estate taxes, which are a good portion of where that NOI is. So just stay tuned, Todd. I think like I said, it's been in our numbers and has always been in our numbers. This is not a surprise for us.

And our next question coming from the line of Linda Tsai with Jefferies.

Maybe sticking to street retail. When you consider the street retail portfolio and some of the submarkets that have been slower to recover like North Michigan, San Francisco versus Street and Soho. Taking into account your basis, how would you rank them in terms of the most potential upside over the next several years?

The category is somewhat different. For our core portfolio in San Francisco, we have two shopping centers that include parking and are more necessity-focused, which distinguishes them from the high street retail found in Soho. On North Michigan Avenue, the larger format is more driven by tourists. There’s a clear difference among these areas. The shopping centers in San Francisco are seeing a good amount of NOI growth, which is quite straightforward and doesn't rely on a return to tourism. However, the street retail in San Francisco that we had in our fund may take longer to fully recover as tourism returns and residents come back to the city. So it's case by case as to when do we get Whole Foods open, when do we and how do we deal with the thriving Trader Joe's and assuming we get the space back adjacent to our container store in 5559, very different, more traditional shopping center leasing there. Soho, by far the most upside in terms of percentage of rent growth, rent per foot. John, you could give by order of magnitude where we see Soho growth versus some of these others. But Soho, overall is going to have probably be the largest contributor to growth within our Street portfolio because of a combination of contractual growth. Remember, we tend to get 3% contractual growth in all of those stores. Then fair market value resets something we only see in our street retail portfolio, and we have some nice ones teeing up in Soho. And then as you pointed out, we have a vacancy on Mercer Street, and thankfully, we're getting good activity there. The way lease-ups work in these markets, and we've seen this through several cycles in markets like Soho. Retailers like the cluster; you first see the movement based on whoever is making the most significant push this cycle, it's been luxury. Luxury has doubled down in our Street corridors. So it's those streets in the case of Soho, that means Green Street first and foremost, Princeton Spring, all where we own and are active, that has seen the first lift and then the other corridors follow. And so it feels to me like Mercer is next up at that for that.

Thanks for that context. John, regarding the unchanged 270 basis points of credit loss, you mentioned that you only needed half of it for the quarter. Could you clarify how much bad debt you experienced in Q1 as a percentage of Q1 base rent? It seems that around 135 would be a little less than half of the $270 million, translating to about 130 to 140 basis points against Q1 rents.

Pro rata per quarter. Just take whatever quarterly rent we build multiplied by 1.35%. We used about half of what we thought the annualized 270 was, right? Does that make sense, Linda?

Yes.

And our next question coming from the line of Elizabeth Yang Doykan with Bank of America.

I just wanted to clarify, out-of-period collections once more, and I apologize if I missed it, but I think you said the headline same-store NOI number would have been close to 9%. Had it not been for the impact from this. Can you confirm that once more? And then the impact expected for the full year, if that's meaningful?

Yes. Liz, regarding the 200 basis points, if you compare it to last year during the same period, you'll find that we reported about $600,000 in prior period cash collections, which accounts for that 200 basis points. This year, we haven't had any of that. You can refer to our disclosures on cash collections for each quarter last year. As indicated in our guidance, this is mostly behind us now.

Okay. I understand you mentioned there are no signs of further tenant distress. I'm curious about your recent discussions with the small shop retailers in your portfolio. Are there any concerns regarding their credit or any changes in lease negotiations?

Still early. Remember, our small shop tenants show up primarily in the suburban portion of our portfolio. They tend to hang on until they can't. It's what we refer to in the industry as midnight moves in that they'll do their best to hang in there. So far they are, so far we're not seeing any problems. But certainly, when we think about where we might have vulnerability in the event of a hard landing, it's usually in that segment that we see a quick movement haven't seen it yet. Hopefully, we don't see it. It's a very small portion of our portfolio.

And our next question coming from the line of Michael Mueller with JPMorgan.

A few, hopefully quick ones here for you. First of all, I guess, on the comment about, I think it was 85% occupancy on the street portfolio. Where could that go to, say, by the end of '24 on that trajectory up to $95 million?

Yes, thinking through space by space, Mike. But I think it's fair to assume we think we get back to, call it, 93% to 95% in the next 18 months, 18 to 24 months, right? So because some of that's in Dallas, which we outlined in both Stuart and myself and our talking points where we're doing some pretty exciting things there, that will be a big boost to it. So I think 18, 24 months, we get back to low mid-90s.

Got it. Low to mid-90s. More than halfway there. High period. Got it. Okay. And then can you comment about Chicago exposure and kind of maybe balancing that or reducing it relative to the overall pie. Do you see that being more of a function of deploying capital elsewhere and shrinking it while not really swapping out the assets or maybe accelerating some asset sales to sell down your exposure in the market?

Either, but I'm not waiting for us to deploy more capital to do it just in light of the last couple of years. So I think you should expect us periodically to fix and sell assets because they still trade pretty well there.

And our next question is from Craig Mellman with Citi.

Just, John, quickly, I know you said there was about a 50 basis point difference in core NOI growth in same store. I mean, is that what the drag would have been just for putting the North Mish assets into redevelopment and maybe how much of a drag would have been also 5559 the same-store pool?

Yes, I think that covers everything, Craig. I wouldn't categorize it as solely North Mish or anything like that. It's simply our overall portfolio. For example, Braxton and Anders, along with the growth in Henderson, present various factors, but the bottom line is that our total core grew by 6.5%.

It's strong growth either way, whether it's same-store or total.

Yes. Okay. And then just separately, Ken, maybe just with the news about Whole Foods pulling out in San Francisco, Nordstrom's now pulling out of San Francisco. Just kind of curious if the conversations have all have changed for the backfill 5559 or just in general with tenants being a little bit more hesitant to take more exposure in the city at this point?

So what I'll point out is our 2 shopping centers are not in the downtown and in conversations specifically with our retailers, including Whole Foods, full speed ahead from their perspective. This is a Downtown phenomenon that doesn't apply to our shopping centers, but it's one that the city is going to have to focus on. And they will, and San Francisco will come back. It may take a while. So thankfully, we're not part of that. But it is certainly a challenge that business leaders, political leaders are focused on.

And then, I know the question about San Fran, I just asked people asked about Chicago on the call. Just as you guys look about deploying capital, assuming normalization of the transaction market, where would you put incremental capital on the street retail? Would it be in existing markets only or are there a couple of new markets you guys will look to enter?

Yes. And there are certainly new markets. I think the way we do this, the way we have done it historically is we sit with our retailers and understand what markets they are focused on. And 5, 10 years ago, it was clear to us that Soho was one of those markets and there were a handful of key markets. And as we discussed with Melrose Place, Soho, we're seeing that kind of validation we would be happy to own more. But when you see us stepping into Henderson Avenue in Dallas, there are a bunch of other markets we won't spend today's call on it, where our retailers are saying, yes, these are now likely to be forever markets, and if it can meet our criteria, right barriers to entry, right supply constraints, right value, we are more than happy to add additional markets. And I think I've been abundantly clear, there are a handful of markets that we currently own that we are going to subtract, not add.

I'm showing no further questions at this time. I will turn the call back over to Mr. Kenneth Bernstein for any closing remarks.

Great. Thank you all for taking the time, and we look forward to speaking to you again next quarter.

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