Acadia Realty Trust Q4 FY2023 Earnings Call

Thank you for your patience, and welcome to Acadia Realty Trust's Fourth Quarter 2023 Earnings Conference Call. I will now pass the call to Jeff Winston. Please proceed.

Good morning. And thank you for joining us for the fourth quarter 2023 Acadia Realty Trust earnings conference call. My name is Jeff Winston, and I am a senior associate 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, February 14, 2024, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue, and we will answer as time permits. Now it is my pleasure to turn the call over to Ken Bernstein, President and CEO, who will begin today's management remarks.

Great job, Jeff. Thank you. Welcome, everyone. Happy Valentine's Day. I'm here with John Gottfried, Stuart Seeley, and A.J. Levine. I'll give a few comments, then hand the call over to A.J. Then John will discuss our earnings, our balance sheet metrics, and our guidance. As you can see in our earnings release, our 2023 performance was very strong. Same property NOI growth was nearly 6% and new lease spreads were over 40%. This same property NOI growth is comping off prior year's growth of over 6% as well. Fourth quarter results also showed continued strength, driven by the Street retail portion of our portfolio, delivering 10% same store NOI growth and strong leasing spreads. I'll let John discuss the moving pieces of our earnings in detail. But in short, our goal of creating superior top-line growth at the property level and having that growth translate into bottom line earnings growth remains on track. As we look to 2024 and beyond, the leasing momentum we saw last year is continuing. This is evidenced by both our significant signed not open activity and the leasing pipeline behind it. And while in some respects, last quarter might be viewed as just another solid quarter from an internal growth perspective, I think there is a more meaningful shift going on. We are now past retail simply experiencing a COVID list or a COVID recovery. The shift in retailer sentiment and retailer activity feels more secular than cyclical and thus more long-lasting than just a rebound. While we first saw this as a lift in the suburban and necessity portions of our portfolio, we are still seeing strong solid performance there. The longer-term growth is now having its most material impact within the Street retail component of our portfolio, and it is looking more likely that this growth rate in Street retail has real staying power. A.J. Levine will discuss the drivers of this trend in further detail. But as it relates to internal growth, these secular tailwinds should add further support to the multiyear growth goals that we have been discussing and delivering on for the last couple of years. Then along with continued momentum on internal growth after several relatively quiet years, actionable external growth opportunities are starting to emerge. We are seeing a narrowing of the bid-ask spread and increased likelihood that accretive growth will start to pencil out. And since retail has not been an area of focus by institutional investors over the last several years, there are just fewer well-positioned capable buyers. Now granted, the inverted yield curve and elevated interest rates are still a headwind for improving deal flow, but this is beginning to shift. Increased optimism about improving borrower cost, coupled with resilient tenant demand is helping underwriting. And more significantly, whether due to more realistic appraised values or other factors, sellers seem to be more realistic and more willing to transact. A couple of quarters ago, I thought the majority of our activity would be distressed-focused, either discounted debt or forced sales, and it's still likely that there will be a fair amount of what we refer to as special situations, certainly for office, but other products like retail as well. Given the nonperforming nature of much of this type of investing, we’ll likely participate in distressed special situations in conjunction with one of our strategic capital relationships. But more importantly, we are now seeing sellers begin to emerge that are not highly distressed, just motivated. They may have some staying power, but not unlimited patience. And this shift means our pipeline for a broader variety of opportunities is coming together nicely. You will hopefully see this reflected later this year and for years to come. So here's how we're thinking about external growth. In terms of product types within open air, we consider ourselves to be highly confident in all areas of open retail and try to position ourselves to be open-minded as to which growth opportunities, which capital structure, and which risk-adjusted returns are most compelling at any given time. Here's how that landscape looks today. In terms of power or junior anchor-dominated regional centers, these will have the highest going-in yields. But in order to have net effective growth, special attention will have to be paid to tenant turnover and the cost of retenanting, which heavily impacts net effective growth. We still think this area can provide attractive risk-adjusted returns. But as was the case with our Fund V investing, we'll continue to focus on this investing in the fund or strategic venture format. Then in terms of supermarket or neighborhood anchored centers, investor demand remains strong because of their resilience during COVID, the defensive profile, and the ease of underwriting. This segment is probably the most covered or most crowded in terms of competition for bidding. So unless there's a value-add component, it will be hard for us to be constructive. We could add the right supermarket-anchored assets, both on balance sheet or in a joint venture structure. But in either case, growth opportunities will have to be compelling. In terms of Street retail, after several bumpy years, we believe this segment will have the highest long-term net effective growth. For a variety of reasons, notwithstanding the ongoing rebound in fundamentals, Street retail seems to be trading at an elevated floor on cap rates with going-in yields that don't appear to take into account the growth potential. And this is creating an opportunity for asymmetrical upside. Now granted, Street retail requires the highest level of expertise to underwrite, as it lacks some of the uniformity of other open-air assets. And while not all streets, not all markets are recovering equally, the initial fear that Street retail was too idiosyncratic or a zero-sum game with the Sunbelt winning and other key markets losing is turning out not to be the case. For most retailers, there is more synergy than cannibalization, meaning retailers can thrive in SoHo and nationally. And since there are more markets that are thriving from a scale and opportunity set perspective, we think there should be plenty of deals of size out there. We think we are entering a period where our shareholders will benefit from the expansion of our highly differentiated Street retail portfolio in our core portfolio, provided we can do it on a leverage-neutral earnings and NAV accretive basis. Given our expertise and our extensive experience in this space, Acadia is well positioned to be a consolidator in Street retail assets in this phase of the cycle. While a key focus will be to the extent practical to grow the Street retail component on balance sheet, adding to the 70% of our current portfolio that is Street or urban, we suspect that there could also be several larger opportunities that will also include the leveraging of our strategic capital relationships. We are in a period where having access to multiple sources of equity and debt should inure to our shareholders' benefit. Finally, from a capital allocation and deployment perspective, a few thoughts. Capital recycling will be part of our growth strategy. It can come from multiple areas. First, from portions of our core portfolio that might not be as high growth or not consistent with our long-term growth strategy. And then second, from portions of our over $2 billion of assets currently in our fund or investment management platform. Investor interest is growing, and we should be able to capitalize on this increased interest. This means we should be able to bring in new capital on a non-dilutive basis and then redeploy it accretively. Given our recent equity issuance, our balance sheet metrics are getting to where we want them, so we can also afford to be strategic with our capital recycling initiatives. Finally, since it doesn't take much volume to move the needle for us, even a few acquisitions can add meaningfully to our external growth. So to conclude, the stars are beginning to align this year. We will be keenly focused on the three key drivers of our growth: first, driving solid internal growth; second, maintaining a solid and flexible balance sheet; and third, executing on our accretive external growth strategy. The combination of improving fundamentals, improving debt markets, improving bid-ask spread, and investors inching their way back to retail are all positive trends. And we're in a great position, having access to both public and private capital to use our platform to execute a highly accretive growth strategy. And with that, I'd like to thank the team for their hard work last year, and I will turn the call over to A.J. Levine.

Thank you, Ken. Good morning, everyone. Each week, I am asked the same two questions. The first is whether there are any signs of a slowdown, and for over two years, my answer has been a strong no. Despite some fluctuations in retailer sales this year, the fundamentals remain solid, and it appears that this trend will persist into 2024 and beyond. This doesn’t mean we are unaware of the impacts of inflation or the sales growth normalization we experienced in 2023, especially after a record year in 2022. However, when I talk to our tenants, they have not indicated any expected decline in new store growth. While there are exceptions, the majority of our tenants are seeing a remarkably strong consumer base. They continue to show significantly positive sales compared to 2019 and recognize that physical stores are their greatest profit drivers. For instance, one of our luxury tenants on the Gold Coast shared that, despite slower activity in 2023, they are still outperforming 2019 sales by 50%, which no longer surprises me. This general sentiment is consistent across the board. This leads to the second question: Do you have space available? This applies to both suburban and urban areas, but especially our high-growth streets. The demand for new stores far exceeds the availability of desirable locations. One of the main issues for retailers today is the shortage of well-located, high-quality space. As Ken noted, this scarcity is rooted in trends we observed from late 2020 to early 2021, which seem to be more long-term in nature. Thoughtful and disciplined retail expansion is evident in both new and existing markets; this is particularly true for luxury markets such as SoHo and the Gold Coast, but also applies to places like M Street where luxury brands are just starting to appear, as demonstrated by dynamic retailers like Alo Yoga, Skims, and Glossier establishing their presence. The transition from department stores to standalone open-air shops along our streets and the natural clustering of similar brands in these markets is notable. In cities like New York, Los Angeles, and Chicago, rising customer demand and a diverse demographic have prompted many retailers, including luxury brands, to open multiple locations within the broader market. They can cater to tourists in one area and to local shoppers in another, effectively capitalizing on various market dynamics. Regarding rents, the significant decrease we witnessed in street rents at the onset of the pandemic, followed by a remarkable recovery in recent years, will likely facilitate continued strong net effective rent growth compared to our suburban areas. In existing high-growth markets like SoHo, Melrose, and the Gold Coast, we anticipate that the double-digit rent growth seen recently will persist. Increased sales are driving higher demand, paired with low supply and natural barriers to entry, establishing a foundation for sustained growth. Even as rent growth moderates, many of our markets can still experience low double-digit increases, and the healthy occupancy cost we are witnessing keeps these markets affordable for our tenants. As in previous quarters, we continue to strategically price space and leverage positive mark-to-market opportunities. In the third quarter in SoHo, we achieved a 45% mark-to-market spread, followed by a 25% spread in the fourth quarter over one year, all without incurring additional costs for Acadia. This requires hard work, but the team has proven adept at identifying these opportunities and unlocking their potential value. For spaces we cannot recapture immediately, their street-centric nature will enable us to capture growth through future resets. This trend is not unique to our portfolio. For example, a space in SoHo that was listed at $3.5 million in annual base rent just a year ago recently leased for $4.5 million, reflecting a 30% increase in one year. Such growth occurs in markets characterized by low supply, high foot traffic, and the right brands, including luxury brands, which cluster together to create an attractive shopping environment. Moreover, the scarcity of space will likely accelerate the recovery in traditionally high-growth markets that have seen slower rebounds, like Madison Avenue in the 70s, North Michigan Avenue, and eventually San Francisco, along with newer markets like Nashville and Tampa. As Ken stated, this is not a zero-sum situation. Retail expansion and rent growth will continue in both established and emerging markets. In summary, we've had an excellent year for fundamentals and leasing volumes in both high-growth streets and suburbs, with no signs of a slowdown in sight. I will now hand the discussion over to John.

Thank you, and good morning. As outlined in our release, we had a strong finish to the year with our same-store NOI and earnings coming in above our initial expectations. As the recovery within our Street retail portfolio not only continued but as we had been anticipating, accelerated throughout the year with growth of 10% during the fourth quarter. As we kick off the new year, that momentum is continuing. Our multiyear core internal growth of 5% to 10% remains intact, along with a balance sheet that is now in a position to capitalize on an expanding pipeline of accretive opportunities, which sets us up for above-trend same-store NOI and FFO growth over the next several years. Now I'll provide some more color on the quarter, along with an update on our multiyear outlook, starting with our fourth quarter results. In line with our expectations, we reported FFO of $0.28 per share for the quarter. And in terms of same-store NOI, we came in at the upper end of our guidance range with growth of 5.8% for the year. Additionally, as I highlighted in our release, we reported same-store growth of 4.2% for the fourth quarter. We want to point out a couple of things related to the quarter. First, the fourth-quarter results were comping off our 2022 quarter, which had included approximately $400,000 of prior period cash recoveries which, if excluded, would have increased the 4.2% we reported to 5.7%. Secondly, as outlined in our release, our Street portfolio grew in excess of 10% on a same-store basis. Not only have we been anticipating this acceleration, but we are feeling increasingly confident that this double-digit growth will continue with our model projecting about 10% annual growth from our Street portfolio over the next several years. With roughly 45% of our pro-rata NOI coming from the Street, this 10% annual growth is expected to generate incremental NOI of approximately $18 million to $20 million in our share. We are already well on our way of capturing this with more than half of the $18 million to $20 million already accounted for. Approximately $6 million will come from the 3% escalations that are built into our Street leases, along with another $6 million from executed Street leases that have not yet commenced and are included in the $7 million of signed but not yet open pipeline that we reported at December 31st, which leaves us with another $6 million to $8 million of Street retail growth coming from two additional sources. First, about half or $3 million to $4 million is anticipated to come from projected cash rent spreads on expiring leases over the next few years, with the balance coming from lease-up of our current inventory of available space. And to be clear, this is just the growth coming from our same-store portfolio. Meaning the $18 million to $20 million of NOI or 10% annual growth is before any potential upsides from our redevelopments of North Michigan Avenue. So while we are starting to see some encouraging activity on North Michigan, neither our 2024 guidance nor our base-case multiyear projection assumes a recovery. It's also worth pointing out that, in addition to the extraordinary growth we are projecting from the Street, we are also seeing solid trends across our core and fund platforms. In fact, as we look into 2024, in addition to the 5% to 6% of projected 2024 same store NOI growth, we are projecting 6.5% of total NOI growth from our core and fund businesses, inclusive of redevelopments. The good news is that our leasing team has already signed the vast majority of leases necessary to achieve our 2024 goals. With $13 million of executed leases, representing 7.5% of in-place ABR at our share, and the signed but not yet open pipeline at December 31st. This $13 million of signed but not yet open pipeline is comprised of $7 million from our core operating portfolio that we highlighted in our release, which represents the assets in our same-store pool, with another $4 million of signed leases from assets in our core redevelopment and $2 million from our fund business, with all of these amounts being in our share. Let's now transition from how this NOI growth impacts our 2024. Consistent with what I introduced on our last call, we are projecting $1.28 of FFO at the midpoint. This equates to earnings growth of about 5% over 2023, before the $0.08 for the noncash gain on the Bed Bath lease, and over 7.5% when adjusting our FFO for the promotes earned from our fund business. As you may recall from our last quarter's call, our 2024 earnings growth is being driven by the underlying strength of our core business, with $3 million of ABR that commenced fairly late in the fourth quarter that we highlighted in our release, along with another $7 million that is included in our signed but not yet open pipeline, of which approximately 85% of those represent Street leases and will commence throughout 2024. Last point on earnings, with strong year-over-year earnings growth of about 5% or over 7.5% before promotes, we see the potential for upside in our numbers from a few areas. First, we are now past the painful and long-discussed rollover on North Michigan Avenue and the bankruptcy of Bed Bath & Beyond. In fact, as we look forward, these historical headwinds are now a source of upside as neither our 2024 guidance nor our base-case multiyear projections have assumed a near-term recovery. Secondly, we have made significant leasing progress, with $13 million of executed leases in our signed but not open pipeline, representing 7.5% of our core and fund NOI, coupled with a long and growing list of LOIs out for available space. We are in great shape to not only hit our 2024 leasing goals but, with a lot of calendar left in the year, a very realistic opportunity to beat them. And not to mention that the rental rates our team is achieving on new leases is routinely beating the rents we had assumed in our model. And finally, we have not factored in any earnings accretion from external growth. But as Ken discussed, we are starting to see some exciting and accretive opportunities. And as I will discuss now, our balance sheet is now at a point where we can and will aggressively pursue these. As it relates to the balance sheet, let me first start off with talking about how we thought about the equity raise that we completed in early January. As you would expect, we thought long and hard about the decision to issue our equity below NAV. But in this unique instance of being able to raise a moderate amount of equity on a non-dilutive basis, it enabled us to accelerate our balance sheet goals by at least a year, if not more, and put our balance sheet in a much better position to go on offense. To be clear, our goal is and will be to get our core debt to EBITDA back into the 5s. We are now in the low 6s post equity raise and projected to be in the high 5s on a non-earnings diluted basis by year-end, if not sooner. Thus, our acquisitions team now has both the balance sheet and liquidity it needs to aggressively pursue the external opportunities that we are seeing. We will fund this accretive external growth on a leverage-neutral basis, using all of the diverse and efficient sources of capital that are available to us, whether it's recycled capital from non-dilutive dispositions, repayments from our loan book, retained earnings for our business, or the issuance of common equity or private capital. Lastly, on the balance sheet, I want to highlight our exposure and potentially the opportunity related to interest rates. With a core balance sheet that is fully hedged and no meaningful maturities over the next few years, we are well positioned to have overall stability in our earnings related to interest costs. With the vast majority of our floating rate exposure in the funds already being mark-to-market in terms of both spread and base rates, we have some upside in our earnings if and when the interest rates begin the downward trend that the market is predicting. In summary, we are starting the year with a strong balance sheet, along with a near-term and non-dilutive path to get it back to best-in-class. We are excited about the internal growth that we are poised to generate in 2024 and for the next several years, along with the potential to be in our expectations, whether it's the continued acceleration in our Street portfolio, and/or the accretion from external growth. With that, we will now open up the call for questions.

Our first question comes from Linda Tsai of Jefferies.

In terms of the outsized 10% same-store growth in the Street portfolio this quarter, how sustainable is this run rate and why?

John, why don't I let you talk about the specific numbers as to our portfolio, and then maybe I'll touch on these tailwinds from a more macro perspective.

Linda, first, just back to what I spoke about in my prepared remarks, it's a little under half of our portfolio. When we look at our model, you factor in the 3% contractual escalations that we're getting. We have a good chunk of great space that A.J. and his team are actively leasing up and then the mark-to-market. I think you look at that; that's as I outlined, $18 million to $20 million that we think we capture over the next two and half, three years. When we model that out, that portion of our business, a little under half, is projected to grow annually 10%.

Let me transition from that to why we see what I referred to in our prepared remarks is a secular shift. While I neither expect nor hope that market rents continue to grow at the 10% to 20% and A.J. even mentioned 30% in one of our markets year-over-year, I do think that Street retail is poised for high single-digit market rent growth. Thus, our ability to capture it and others' ability to capture it in Street retail as follows as John touched on: 3% contractual growth is industry standard, fair market value resets, also fairly common. But what you need are three different components as I think about it. One, you need supply and demand, and A.J. talked about now having more tenants than space. And that's a good tailwind to have right now after several tough years. Second, you need to have strong tenant sales. Tenants can only continue to pay more rent if their sales are there, and A.J. mentioned that as well. Finally, you have to have the right deal structures. You have to have the ability to capture that rent growth in a strong supply-demand scenario with strong rent-to-sale ratios, and you need to have the right contracts, and we do. Final point is, why now? Well, if you think about the last 10 years, almost 10 years ago, we entered into what was an oversimplified so-called retail Armageddon, which was the notion that retailers were going to be able to migrate their sales profitably online. The migration online occurred, but the profitability didn't. By around 2019, it was becoming clear to a variety of our retailers that the ability to use online sales as the main driver of profit was going to be too elusive. But COVID hit, and thank goodness for online sales because it kept a variety of retailers alive. What retailers saw in 2019, they are now executing on today. That means they're recognizing the importance of the store, whether it's discount department stores, off-price, certainly luxury and aspirational, and everyone in between. That tailwind is what's driving this long-term growth.

And then you referred to this earlier, but what types of opportunities are most compelling for you as it relates to external growth?

Partially due to reduced competition and significantly because we are experiencing substantial growth, we are particularly enthusiastic about street retail. This doesn't underestimate the other sectors where I also see positive trends, especially in open-air retail. We believe there is now an opportunity to take advantage of this. We're noticing increased interest from sellers and their readiness to engage. I observe what I consider to be an artificial floor on cap rates, which I can elaborate on later. I believe we will find a favorable entry point at some stage in 2024. I am eager for the combination of strong internal growth and the chance to add small gains, which can accumulate significantly for a company of our size.

Just one last one. What kind of assumptions are baked into the high and low end of same-store growth for your whole portfolio, and what are the assumptions for bad debt at the high and low end?

Linda, I think first just on the rent side. I alluded to in my remarks, where we have a chance to hit the upper end if the leasing team can pull forward some of our expectations when we get space assigned. I think that's the key: can we beat our base case expectations on not only leases signed but also opened? We have a very deep team of professionals that try to accelerate the commencement. In terms of credit, every month, I wake up thinking we're going to have some sort of deterioration in credit. We're just not seeing it in terms of collections or disputes. We're not seeing any downward trends. Within our guidance, I've put in a conservative, particularly over where we saw last year, expectation of 1.5%. So that's 150 basis points of rent of credit reserve that I've built in, which is more than we needed last year.

Our next question comes from the line of Craig Mailman of Citi.

Just following back on the acquisition theme here, Ken. Can you just go through where you would see Acadia kind of put out its own capital, fully on balance sheet versus bringing potential partners and maybe what those partners look like relative to maybe the historical use of funds?

It will be very dependent on what our on-balance sheet cost of capital, both debt and equity versus utilizing outside sources. Every deal could look different. Our historic economics are probably a good starting point. The issue will be where and when the right pricing shows up. Here's what excites me in terms of on-balance sheet. To be clear, I think our shareholders will benefit from earnings accretive acquisitions on balance sheet of assets that are consistent with 50% of our portfolio that is Street retail. There is less competition for buyers today. There are sellers now who, after a couple of years of not being able to transact, are recognizing that now is probably as good a time as it might be for them to exit these assets. There’s a hesitancy by institutional investors to enter at yields lower than borrowing costs, specifically for retail. That creates an interesting opportunity. The stars have to align, they're not there yet, but it's feeling real close for on-balance sheet acquisitions that pencil out. In terms of utilizing funds, there was a time when institutions were what I refer to as retail curious. They were thrilled to take meetings and hear about retail after not having invested in it for many years. What we've seen in the last three to six months is a recognition that they want best-in-class partners, and we're now in a position to partner with a variety of different institutions. If we are unable to acquire accretively on balance sheet, for Street retail, we absolutely will utilize some of those relationships.

And I don't want to get to over your skis in terms of guiding on potential acquisitions. But from what you're seeing in the pipeline, what would be a base level that you'd be disappointed if you don't get to over the next 12 to 18 months given what's in the pipeline? Are there any new markets, especially on Street that you guys are closer to today than you were previously?

I want to be very respectful of your request not to get too far over our skis. So John said, there's zero in our earnings growth associated with acquisitions right now, and I would be very disappointed if that's the case. But don't forget what A.J. Levine discussed; we have really good internal growth. I don't feel a need to do something prematurely. We will remain opportunistic but disciplined. Keep in mind, every $100 million, $200 million of acquisitions, whether on balance sheet or through our investment management platform can add half a penny to a penny per $100 million historically and I think that could be the case going forward. In terms of new markets, there was once a fear of a zero-sum game, but it turns out retailers are recognizing that there are just more key markets they need to enter. It’s a dynamic, and we're seeing that happen.

Our next question comes from the line of Todd Thomas of KeyBanc Capital Markets.

First question, I just wanted to go back to the comments around capital recycling. I think you commented that some of that activity might be from both the core and from the funds. You haven't really sold much in the core over time. I'm curious how you think about the core portfolio and how much property you consider to be non-core? Is the thought process that investments and capital needs will drive the decision to sell over time?

The 50% that is Street and the 20% that we call urban, vast majority of those are core markets. There are a couple that we have mentioned over time that were probably overweighted and we would look to trim some. But in general, we see those as growth markets and are less likely to recycle there other than due to overexposure. Then for the 30% of our core portfolio that is traditional solid suburban, we've found there have been inbound inquiries or we've reached out in general to investors who want to participate in those types of assets. That would be best execution for us. We’re open to recapitalization. We haven’t shed in the last few years because it’s been a tough time to be a seller of assets. But in 2023, brace yourself, in 2024, increased investor interest, it is starting to feel like the bid-ask spread declines and maybe we can have transactions.

John, you mentioned that you're past the painful vacates and expirations on North Michigan Ave. Can you provide an update on the status of H&M and others?

So H&M is on a very short-term lease. They found a new space, and they will be moving later this year, but they're effectively on a month-to-month lease, which is baked into our numbers. Verizon is out very early this year. They have a little bit left in the quarter, and then they'll be fully out, but that's also baked into our numbers.

North Michigan Avenue still has a little ways to go. We're very encouraged by what we're seeing happening on the street. Alo Yoga is opening up, Aritzia not far behind with opening in 50,000 feet. The number of tours we've had at our assets and the LOIs we are aware of on the street has increased significantly over the last three to six months. Chicago is a market that many retailers believe they need to be in. So while it's not a sole level of recovery yet, we're on our way and encouraged by what we're seeing.

All of that optimism is not in our multiyear model, so whenever we talk about North Michigan from this point on, it’s going to be upside.

Is there any way to quantify how much ABR or NOI those assets are still generating, and how much might come offline during the course of the year?

On top of my head, I don't have the exact number, but it's de minimis. H&M's not covering their taxes. This would be an insignificant amount of rent throughout the year.

Our next question comes from the line of Floris van Dijkum of Compass Point LLC.

Can you remind us, I think your Street portfolio currently is only 91.5% leased? What is the actual percentage of paying or physical occupancy? Where do you see peak occupancy?

So let me start, while John looks at those numbers. We are getting pretty close to that different time. There's more demand for quality space than there is space. Right now, we can expect to fall that probably translates through into the mid-90s, but John, what are the numbers?

Currently, we are approximately 89% physically occupied. Historically, we've reached occupancy levels in the mid-90s, up to 96.4%, so there's still some work to be done. The $18 million to $20 million does not account for potential growth beyond that, so those figures represent our baseline assumptions.

Your average Street and urban rent is $71. If you do the math, some significant upside appears. You mentioned something about M Street having no luxury yet, but expect that to potentially happen. What do you see as the signs for that, and what kind of impact would that have on your holdings?

There is no confusion. We’re not currently predicting luxury shows up on M Street. A.J.'s point was simply, even without luxury, you can have thriving corridors. If luxury shows up, as we are now seeing in Williamsburg, great. If it didn't, Williamsburg would still be great.

Where do you think SoHo market rents are today? We've seen some massive growth. Could you tell us a little more color on where market rents are being signed out in that particular market?

It’s space by space. Some spaces are $700; some are $200. The movement in general is a trend happening across the board. A.J., what are your thoughts?

It’s a nuanced market. Hard to pinpoint a number; growth has been tremendous. There’s still a lot of value to capture.

If the space at the prior peak was $700 and dropped to $300 during the dark days of COVID, it is certainly more than halfway back with room to run. We’re starting to see leases getting done at prior peaks.

Our next question comes from the line of Ki Bin Kim of Truist.

Your G&A guidance is a bit lower than I thought. Any kind of commentary you can provide?

We're basically giving it a penny or two flat down to last year. Nothing dramatic, but we're constantly looking at ways to operate more efficiently.

Your V funds are not currently in the promote period. Are we getting closer to realizing promotes, and are you considering restructuring how you earn and promote?

We are getting very close to that promote as those assets ripen for disposition in Fund III. Fund V could be the next one due to the significant cash flow. For future structuring, we would likely come up with structures that enable more consistent promotes than the multiyear lumpiness in our traditional funds.

How much of the bad debt in your guidance of 150 basis points accounts for known move-outs versus a general reserve?

The vast majority is unknown in general.

Our next question comes from the line of Paulina Rojas of Green Street.

You have talked about attractive going-in yields for Street retail. Can you provide some numbers around this? Where do you see the going-in yields for Street retail assets relative to market rents?

There is hesitancy for retail investments to enter at yields lower than private marketplace borrowing costs, which is around 6%. That’s the going-in yield range we are seeing. There is a real artificial floor; thus it grows from here. A highly motivated seller may sell at a 7%, a more patient seller closer to 6%.

When you say more rent growth in Street retail, are you referring specifically to market rents or the different lease structures of the two segments?

It's a combination of both. Part of our bullishness comes from 3% contractual growth and fair market value resets in our Street retail compared to less in suburban. It's the current supply-demand balance and strong rent-to-sales that inform the ability to achieve growth.

Can you put the rent-to-sales comment into historical context? Where does it sit today?

What retailers are realizing is that they can open these stores and achieve those rent-to-sales ratios effectively and profitably.

Our next question comes from Michael Mueller of JP Morgan.

Can you talk about different parts of the Street portfolio? The overall Street portfolio is about 85% occupied. Can you discuss new lease signing levels and how to think about rents for additional lease-up?

A.J., why don’t you talk about the level of interest for the spaces we’re leasing up?

There is more demand for space than there is space to lease. So we shouldn’t expect to see a significant slowdown in leasing volume moving forward. Demand remains high on our streets, and there's a lot of great product out there.

Over the next two years, we could guess on leases that are well below market, and that doesn't really help us if we can't get to them. The $3 million to $4 million incremental dollars that we think we can capture over the next couple of years could get us back to 93% to 95% occupancy.

Our next question comes from the line of Jeffrey Spector of Bank of America Securities.

I wanted to confirm if we have more clarity on what to expect on the cadence of FFO throughout the year or if the $0.30 to $0.34 range in each quarter is all that you're willing to put out for now?

It's going to be the cadence of rental starts, as I mentioned in my remarks. Our core portfolio will drive the results as those rents kick in. I would suggest we'll be in the lower 30s first half of the year and then upper 30s back half.

Regarding A.J.'s comments at the beginning on City Point, does the current activity you’re seeing lead to any changes in expectations around timing of leasing or potential accretion?

We're trying to balance between signing leases quickly and maximizing long-term value. All the developments at City Point are encouraging, and there are good days ahead.

We do not have it slated to come in this year. Even if it does, because the growth will be extraordinary, we would make sure to break out that growth from our same-store numbers.

I would now like to turn the conference back to Ken Bernstein for closing remarks. Sir?

I'll close with how I started. Happy Valentine's, everybody, and we look forward to speaking with you again soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.