Good day, and thank you for standing by. Welcome to the Acadia Realty Trust Second Quarter 2024 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 note that today's conference may be recorded. I will now hand the conference over to speaker host, Ethan Gomez. Please go ahead.

Good morning, and thank you for joining us for the second quarter 2024 Acadia Realty Trust earnings conference call. My name is Ethan Gomez, and I'm an intern in our acquisitions 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, July 31, 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 Chief Executive Officer, who will begin today's management remarks.

Great job, Ethan. Thank you to you and the rest of the summer interns for bringing some great energy here this summer. Welcome, everyone. I'm here with John Gottfried and A.J. Levine. I'll give a few comments before handing the remarks over to A.J. Then, John will discuss our earnings guidance, our balance sheet metrics, and after that, we'll take some questions. As you can see from our earnings release, our strong second quarter performance is reflective of both the operational tailwinds that our sector is experiencing, as well as the successful execution by our team of several important initiatives. In light of this strong performance, we've increased our full year earnings guidance and increased our quarterly dividend. More importantly, we see this momentum continuing. While there are always multiple drivers of our growth, there are effectively three critical areas of focus for our business. The first is driving strong internal growth, most significantly coming from our street retail portfolio. The second is maintaining a solid balance sheet. And then third is the incremental earnings growth beginning to impact the bottom line from our highly differentiated investment activity. So first, with respect to internal growth, our same-store NOI growth has averaged over 6% for the last two years, and we see this multiyear growth trajectory continuing. A.J. will walk through the details of this progress, but all this activity supports our goal of generating superior top-line growth and then having that growth hit the bottom line. Our second key area of focus comes from maintaining a strong and flexible balance sheet. John will elaborate on our balance sheet metrics further, but in short, we are now positioned with a well-hedged balance sheet, strong liquidity to fuel growth, limited maturity exposure, and solid access to attractive debt. Our third and increasingly important driver comes from contributions from external growth. This includes both our on-balance-sheet acquisitions for our core portfolio, as well as growth through our investment management platform. Our focus for on-balance-sheet investment activity is to grow the street retail segment of our core portfolio. We believe this segment will produce the highest risk-adjusted returns in the open-air sector. We are concentrating our street retail acquisition efforts on properties in key corridors that are accretive to earnings, accretive to NAV, and accretive to our long-term internal growth trajectory. We believe that there is still a capital market dislocation with respect to the pricing of street retail investment opportunities, and this dislocation is providing going-in yields that do not account for the superior growth rates when compared to other open-air formats. As the capital markets begin to normalize, sellers are beginning to emerge, and opportunities are beginning to materialize. Along these lines, last quarter we made progress on several transactions. We are finalizing our due diligence for high-quality street retail assets in key shopping corridors, both in Manhattan and Brooklyn, for approximately $75 million. Additionally, we have funded a position that allows us to add an additional 11% interest in the Georgetown Renaissance collection, a portfolio in M Street Georgetown, where we already own a 20% stake and where we hope to add even further to this position. For those of you less familiar with the recovery we're experiencing in Georgetown, over the last several years, this iconic corridor has seen a meaningful improvement in merchandising, tenant demand, and tenant performance. The addition of new tenants, including Aritzia, Alo Yoga, Faherty, Veronica Beard, and SKIMS, just to name a few, has triggered strong growth on a street that had previously suffered from outdated merchandising and underperforming tenants. We have seen many of our retailers post sales growth of over 40% since 2019, and tenant sales growth is a great indicator of future rent growth. Behind these acquisitions I just mentioned, we have a growing pipeline of properties that also meet our acquisition criteria for our core portfolio. Now, deals are not done until they're done, and we will remain disciplined, but it feels as though the stars are beginning to align. Complementing our on-balance-sheet investments, we're continuing to see opportunities to grow our investment management platform where we are generally focused on open-air suburban shopping centers, where we will leverage our institutional capital relationships. There are a few initiatives in progress here. First, as we had previously announced, we formed a strategic partnership for our property, the Shops at Grand, with JPMorgan, where we retained a 5% interest in the investment, plus retained the management as well as potential upside. This transaction is an example of our intention to migrate some of our stable but lower-growth assets out of our core portfolio and into the investment management platform. Last quarter, we also completed a new acquisition in Tampa, Florida, of an open-air community center for $31 million designated for our investment management platform. Given the strong demographics of The Walk at Highwoods Preserve and the value-add upside, we have strong institutional interest from investors in this asset. Most importantly, as it relates to external growth, keep in mind that for a company of our size, it doesn't take much volume to move the needle. While every transaction will differ in terms of long-term accretion, we are currently targeting about 1% earnings accretion for every $200 million of gross investment. Historically, we are used to doing multiples of that in volume. So, looking ahead, we remain very bullish about our ability to continue to add value by driving internal growth, maintaining a strong and flexible balance sheet, and adding additional growth through our strategic new investments. With that, I'd like to thank the team for their hard work last quarter, and I'll turn the call over to A.J.

Great. Thank you, Ken. Good morning, everyone. So, another highly productive quarter is in the books, and the trends that we've been seeing play out over the last several years appear to be sticking. We're seeing no signs of a slowdown. Our leasing pipeline is the largest it's ever been, and the team continues to post double-digit spreads throughout our high-growth streets. To help understand why we're still seeing this high level of productivity, let's touch on two of the critical factors that drive market rents: supply/demand and rent-to-sales. As it relates to supply/demand, as you can see from our results, tenant demand continues unabated, and there has been no new supply added to our streets. Driving that demand, among other factors including strong performance, is a continued focus on DTC and the tenant's desire to better control the interaction with the consumer. All this has resulted in a historically favorable supply/demand dynamic for landlords. In terms of rent to sales, along with strong and consistent sales growth in markets like M Street, Madison Avenue, and Soho among others, tenants remain disciplined, and rent-to-sales ratios sit well within a healthy acceptable range. Much of that sales growth comes from strong consumer demand, but let's not forget about the impact of inflation on sales and rents. Inflation alone has driven sales over 20% since the start of 2020, and strong retailer performance is driving it even further. As Ken mentioned in relation to M Street, as well as other areas, where we see strong sales growth, strong rent growth inevitably follows. In the background of these trends, the team continues to work hard to increase occupancy and drive NOI across the portfolio. In the second quarter, we saw a significant pickup in leasing velocity, signing approximately $2.8 million of new core ABR at Acadia's share, which is nearly a 150% increase over the activity from Q1. So, no slowdown here. Year-to-date, within just our core portfolio, we have signed approximately $4.3 million of ABR, again at Acadia's share, and as I mentioned, the pipeline remains robust. In addition to the $8 million of executed leases in our signed but not yet open pipeline as of June 30, we are also in advanced negotiations for an additional $10 million of ABR of core leases, with substantially all of it coming from our street and urban markets, including Soho, Armitage Avenue, the Gold Coast in Chicago, and Henderson Avenue in Dallas, each of which are markets where we will see the highest annual contractual growth at 3% per annum, along with more frequent opportunities to mark to market through FMV resets. Additionally, we are incredibly excited about the momentum we've seen in Chicago as recently as the last 24 hours, not just on the Gold Coast but also the surrounding areas, and we expect to share some very positive news in the coming weeks, if not sooner. So, stay tuned. Circling back to Armitage Avenue, last quarter I told you about the market dynamics that make a street like Armitage ripe for outsized growth: strong tenant performance, healthy rent-to-sales, barriers to entry, high tenant demand, and very low levels of supply, along with the prevalence of FMV resets that provide leverage to pry loose space and mark to market more frequently. Since the end of the first quarter, we've signed two new leases in the market and have another two in active negotiation at very strong double-digit spreads. Again, those rents will all grow at the contractual 3% per annum, which is the historical contractual standard for street retail and are all subject to FMV reset at the end of their initial term. I also mentioned that these dynamics were not unique to Armitage; over the last year, we’ve seen the same dynamic play out in Soho, Williamsburg, and Melrose Place, and we expect to see this story play out across most of our high-growth streets. Some of the activity will come from organic lease-up of vacancies and expiring leases, but we also continue to accelerate positive mark-to-market spreads through our pry-loose strategy. Let’s touch on the pry-loose strategy for a second. In addition to driving NOI, the frequency of FMV resets and the impact that has on our ability to pry loose space allows us to better curate our streets and create the best ecosystem to promote strong sales growth and long-term market performance; striking that balance is just one of the areas where we truly excel. Now, all of these factors, all this momentum applies to City Point as well, where the wind is firmly at our backs. In terms of that curation, Sephora is now open and exceeding projections, adding a noticeable increase in traffic to Prince Street. In the first quarter, we saw the same effect on the opposite end of Prince Street when Fogo opened its doors. The park is open as well and is packed with young families eager to shop at Prince Street and Primark and Trader Joe's and dine at our food hall, which continues to post record sales each month. Alamo Drafthouse, which was recently acquired by Sony, has completed their expansion into five additional theaters. This is all being reflected in strong quarter-over-quarter and year-over-year sales growth, which we anticipate will only accelerate as Sephora and these other factors drive additional traffic and the market continues to mature around us. In the meantime, the leasing team at City Point is taking advantage of this momentum and unlocking those spaces on Prince Street and fronting the park that we've been strategically waiting to bring to market. Tenant interest at City Point has never been stronger. So, in summation, landlord-friendly supply/demand dynamic, healthy tenants posting consistent sales growth, and significant room to run on rents. With that, I will turn things over to John.

Thank you, A.J., and good morning. We are excited to announce another strong quarter, with our operating results and key metrics exceeding our expectations, alongside an active and productive few months in the capital markets. Through our refinancings and interest rate management, we have established a core balance sheet with nearly no debt maturities or exposure to base rates for the next several years. This positions us to maintain the internal growth rate of over 5% that we are projecting, which will continue to positively impact our bottom line. Additionally, during the quarter, we brought our core debt to EBITDA ratio back into the 5s on a nondilutive basis, surpassing our own target. We also doubled our liquidity by expanding our credit facility and executing our first $100 million unsecured private placement bond. As a result, our balance sheet is now well-positioned with both the liquidity and flexibility to pursue the accretive external growth opportunities we are identifying. Now, regarding our second quarter results, we reported funds from operations of $0.31 a share, which is $0.01 above the first quarter after adjusting for one-time items. Moving into the second half of the year, we expect to add approximately $0.01 per quarter as our signed but not yet open deals begin to take effect, projecting ranges of $0.31 to $0.33 for Q3 and $0.32 to $0.34 for Q4. In terms of core leasing metrics, we increased both our physical and leased occupancy rates this quarter. I want to note that our sequential occupancy statistics were impacted by the sale of Shops at Grand, a fully occupied asset of 100,000 square feet. Adjusting for this sale, our total core occupancy increased by 20 basis points this quarter, while our street and urban occupancy increased by 40 basis points. It’s important to recognize that not all occupancy is equal; although our overall core occupancy is close to 95%, there is potential for improvement since our street and urban occupancy rates are at 86.9% occupied and 89.7% leased as of June 30. Given the higher rents and lower capital expenditure load as a percentage of net operating income, this provides additional growth opportunities, especially considering the trends observed by A.J. and his team. Furthermore, we have increased our signed but not-yet-open pipeline to $8.1 million, representing about 6% of our annual base rents at our pro rata share. Approximately one-third of this signed portfolio is expected to commence operations during the third and fourth quarters of 2024, with the remainder anticipated in 2025. It’s worth noting that the $8.1 million represents our pro rata share and only includes core same-store figures, excluding any leases signed in our core redevelopment pipeline or within our investment management platform. This entire amount is incremental annual base rent, meaning it consists solely of new leases without including existing occupied spaces. As for our guidance, as mentioned in our release, we have raised our full-year earnings projections. We typically do not include benefits from external growth in our guidance until the associated transactions are completed. Thus, our guidance currently does not take into account potential accretion from investments under agreement. However, we aim for about 1% FFO accretion for each $200 million invested. Regarding same-store net operating income, we reported a growth of 5.5% for the quarter, fueled by a 12% increase in our street portfolio. This growth is consistent across all major street markets, driven by a combination of lease-up activity, fair value resets, market adjustments on new leases, and a 3% contractual growth rate included in our street leases. Looking forward to 2025 and beyond, we anticipate similar trends, with our street portfolio outperforming our suburban assets by 300 to 400 basis points. We have also increased our dividend by 5.6%, reflecting our sustained growth and projections for taxable income. Post-increase, we expect to maintain our conservative adjusted funds from operations payout ratio in the 65% to 70% range. Regarding our balance sheet, we currently have no significant core debt maturities and a fully hedged balance sheet for the upcoming years, ensuring that our internal growth continues to enhance our bottom line. We have been highly active recently, focusing on reducing our overall leverage on a non-dilutive basis, returning our debt metrics—particularly debt to gross asset value and debt to EBITDA—to targeted levels, and expanding our liquidity and capital availability. We have successfully reduced our leverage by approximately $150 million, accounting for about 10% of our pro rata debt during 2024. This lower leverage, combined with increased EBITDA, has allowed us to lower our net debt to EBITDA by nearly a full turn, placing our core portfolio back within the 5s. This progress aligns our leverage metrics with our goals, and we expect further improvements as internal growth becomes evident in our results. While debt to EBITDA remains a key metric, we are equally focused on overall leverage levels, with core debt as a percentage of gross asset value currently in the mid-30% range. It’s important to remember that a lower cap rate portfolio like ours can afford to operate at a higher debt-to-EBITDA ratio compared to higher cap rate portfolios. Additionally, we have financed or extended nearly 80% of our outstanding debt, totaling nearly $1 billion over recent quarters, without increasing our borrowing costs or diluting our earnings. Finally, our expansion of the corporate revolver, capital recycling, and strategic sourcing of new capital avenues have contributed to our goal of increasing liquidity and access to capital. We’re pleased with the execution and pricing of our inaugural $100 million unsecured private placement bond, which was arranged with a top-tier investor and is scheduled to close in mid-August. The proceeds will be non-dilutive, if not slightly accretive, and the private placement market offers an additional source of liquidity and the ability to extend debt duration beyond existing bank market options, thereby improving our overall cost of capital. Our balance sheet is a fundamental driver of our business, and it’s prepared for the accretive external growth opportunities Ken mentioned. We plan to fund this growth in a leverage-neutral manner, whether through equity issuance or capital recycling within our core and investment management platforms. Before we open the floor for questions, I want to mention a quick housekeeping item regarding our upcoming third quarter earnings call. Due to a scheduling conflict, we are planning to release our earnings in the morning and hold the call later that same day. This is an exception, and we expect to return to our standard schedule of releasing earnings the night before our call. I wanted to keep everyone informed about this change. Now, let’s open the call for questions.

Thank you. Our first question comes from Jeffrey Spector with Bank of America. Your line is open.

Hi, this is Andrew Reale on for Jeff. Thanks for taking our questions. We've spoken previously about the fact that Soho rents are, call it, a half to two-thirds of their peak levels in 2015 or so, whereas sales are well above where they were at the time. Just given where sales are today, is it realistic to believe that Soho rents can return to these prior peaks? And if not, where do you think Soho rents top out relative to the previous highs?

A.J., why don't you take that one?

Yeah, look, I think this somewhat goes back to the idea of the FMV resets, which we talked about, right? And the ability to unlock a lot of those rents that are sub-peak and mark to market based on sales performance, right? If we didn't have the ability to do that, then we couldn't take advantage of the strong sales. I do think there is a lot of room to run to continue to approach prior peak, again, just based on the performance that we continue to see.

Yes. The tenant sales suggest that when considering healthy rent-to-sales ratios, there are various retailers ready to reach previous highs as that space becomes available. We are also encouraged by our retailers' careful and disciplined approach, which means that rent increases do not seem to exceed what retailers can afford.

Okay, thanks. Can you quantify how rent to sales compares today versus where it was at prior peaks in Soho?

Yeah, I mean, like rents in Soho, it's a very nuanced market, and it's a relatively large market, and you're going to see some variation there. I think prior-peak rents were, or I'd say occupancy costs were pushing well north of 20%. When you look at our portfolio specifically, as well as anecdotally from talking with our tenants, those occupancy costs are living in the mid-teens range at this point. But again, given the sales growth that we've seen, even if those occupancy costs continue to creep up, we still have a lot of room to run in terms of rents.

Okay, thank you. And then just any more color on your expectations for the volume of external opportunities heading into the back half? I heard some chatter that potential sellers might be sitting idle in anticipation of rate cuts, but the $75 million you have in advanced negotiation maybe suggests otherwise.

Well, I think that what you saw over the last several months until relatively recently was sellers sitting on the sidelines with some amount of FOMO, fear of missing out, because they thought, 'Geez, I've waited this long, maybe I should wait a little bit longer.' I think there's much more clarity, perhaps not for bond traders, but clarity over the next 12 to 24 months of what the landing looks like and when cuts might occur. So we're starting to see sellers say, 'Okay, I do need liquidity. It is time to transact.' And we're very encouraged by that cadence. How that translates through into specific volume, stay tuned.

Great. Thanks for the time.

Thank you. And our next question coming from the line of Linda Tsai with Jefferies. Your line is open.

Yes. Hi. Question for A.J. Just in regards to Ken's comments about post-pandemic retailer sales growth of over 40%, are these mostly digitally native, or are there any traits that you would highlight that these retailers possess collectively?

Yeah, I mean, frankly, I think we're seeing fewer and fewer digitally native in general as we see the continuing shift away from digital exclusive or digitally native more towards DTC, but no, it's not unique to digitally native. We're seeing it across the board, from some of our more traditional retailers to emerging brands that are exclusively focused on brick-and-mortar DTC.

Just to add to that, Linda, first of all, almost across the board, wherever price inflation has been since 2019, most retailers have been able to pass that through to the consumer. Obviously, at the lower end, that's been a little bit tougher for some of our retailers, but the majority of our assets are attracting a more affluent shopper, and there, the ability to pass inflation through has been pretty straightforward. On top of that, though, and what A.J. was pointing to, whether it's athleisure, advanced contemporary, some luxury, and then retailers across the board, they've been able to do better than just passing inflation through. They've been able to capture sales in their stores as you've seen a migration out of wholesale, out of the department stores, and into the individual stores, as you've seen the consumer come back to these key corridors. That's true for the vast majority of our portfolio; we're seeing a broad variety of retailers achieving very strong sales growth. Our goal, and A.J. touched on this, is to make sure as those sales grow, we capture it in our rental growth sooner rather than later.

Thanks. And then just on external growth, in terms of the $75 million of Manhattan and Brooklyn portfolios, is this an opportunity you've been working on for a while, or did it come up more out of the blue? Just wondering if this is indicative of some of the capitulation you had spoken of earlier.

Yeah. And let me be clear, I wouldn't define this as capitulation by sellers. Some of these deals we've been working on for a while, and some are coming up more quickly. What you have is an environment three, four, five months ago where buyers wanted sellers to believe that the 10-year treasury was going to 5%, that there was a hard landing in front of us, and pricing accordingly. Sellers were like, 'Geez, there was a sub 4% 10-year treasury not too long ago. We want you to price that way.' There was a pretty significant standoff. Sellers of cash-flowing assets were those who didn't have an immediate reason to liquidate; those sellers went to the sidelines. Right now there's much more clarity as to what borrowing spreads are like, as John indicated. For high-quality borrowers, spreads are back, liquidity is back, and fundamentals remain strong. This isn't seller capitulation as much as buyers and sellers reaching a better understanding of what the next five years should look like. We think that the street retail in which we are focused looks very attractive, and sellers are agreeing with us.

Thanks. And then just the last one, if I could sneak this in for John, just from where you're sitting today, and without giving guidance, how are you thinking about the level of gains and promotes in '25 versus '24?

Yeah. Again, and I'll repeat your caveat without giving guidance, but I would say, Linda, we are seeing a consistent level of activity in '25 as we're seeing in '24. We reaffirm that with a balance sheet that's fully hedged. The 5%-plus of internal growth, we see that continuing for our bottom line into '25.

Thanks.

Thank you. And our next question coming from the line of Todd Thomas with KeyBanc. Your line is open.

Hi. Thanks. Good morning. First question, John, just as it pertains to the guidance, can you just talk about the guidance increase a little bit more at the low end? Sounds like there's no pending or future investments embedded in the guidance that have not closed. So, just curious if you could shed a little bit more light on what drove the increase.

For the short term, any further adjustments to guidance will depend on the completion of external growth that Ken mentioned. The increase in our guidance this quarter was driven by higher-than-expected rents and quicker lease commencements. We have a significant number of signed leases that have not yet opened, and tenant contributions are part of the equation. We continue to see strength from our retailers, which aligns with A.J.'s comments. Additionally, the reserves we had anticipated needing are no longer necessary, reflecting improvements in getting our stores opened and positive activity overall. We also had a few acquisitions that were completed, contributing to this increase. All these factors combined raised our guidance by $0.01 at the midpoint.

Okay. That's helpful. How much more reserves are embedded in the guidance for the balance of the year?

In our full year guidance, we initially projected about $0.03. Since then, we expect an additional $0.01 or so in reserves for the remainder of the year, but we are seeing very positive trends with our tenants.

Okay, that's helpful. And then just shifting over to investments and the investment management platform. Sounds like you're certainly seeing an increase in transaction activity. With regard to the strategic relationship with JPMorgan and their real estate income trust, it sounds like there are additional asset contributions being contemplated from the Acadia core portfolio. Can you just talk about how much volume you're eyeing for contributions, whether assets have been identified already from the core portfolio, and the potential timeline to complete additional contribution transactions? Are you also looking at third-party deals as well?

In fact, I would emphasize the third-party deals more so. We may migrate some of our suburban assets over from the core portfolio, but we don't feel the urgency. We like that portfolio fine. Some of this was a move towards non-dilutive deleveraging. As John walked through from a balance sheet perspective, we're getting where we want to from that perspective. If we think we can migrate core assets accretively, we'll do it, but we're also very confident in our ability to identify, as we have done for a billion and a half of transactions in Fund V, a variety of third-party transactions as we did recently down in Tampa. It’s a good core competency of ours. It’s a good way to add incremental accretion. The final point of all this is expect the majority of our external growth to come from the additions of street retail. That’s the area that we're most excited about, and we believe we have the most differentiation and the ability to move the needle in ways different than perhaps the more traditional open-air retail.

Okay. Got it. And with JPMorgan, though, any future deals, whether contributions from your portfolio or third-party deals? Are they all likely to be structured in a similar format, 95-5, and with similar terms, or will each deal be different within that structure?

They might be different, but, and I guess I would say I'll let JPMorgan speak for JPMorgan, for the non-traded REIT that we transacted with, they’ll probably look very similar, but they would point out that they have multiple different buckets of capital. Neither of us are on any form of exclusive relationship, but it's a good relationship, and we're constantly comparing notes about different opportunities. I would say both sides are relatively agnostic as to whether it’s a new transaction or an existing asset. Glad we got the relationship kicked off with an existing asset, but look forward to doing many more with them, irrespective based on the investment opportunities we see. We’re encouraged by the deal flow we’re seeing, so hopefully that works out great.

Okay, great. Thank you.

Thank you. And our next question coming from the line of Craig Mailman with Citi. Your line is open.

Good morning. Ken, I wanted to revisit the pricing for street retail. We've observed a few more transactions, and it seems you are becoming more active. We noticed one of your public competitors has also increased their activity in Williamsburg. Can you provide a range for street retail pricing in Manhattan compared to Brooklyn, and if possible, some insights on what you are considering for M Street? This would help us understand your expected returns across different markets.

I apologize for being broad and vague, but yield is just one part of the total growth picture. We're still not back to the prior peaks, and there are leases from that time that are above market, which will trade at different cap rates compared to those signed during COVID that might be at half the market rate. To simplify, leases signed recently typically have a 3% contractual growth. If they involve fair market value resets, they seem quite appealing, potentially in the 5% to 7% range for going-in yields. We're optimistic about starting in the 6% range and potentially reaching upper sixes or unleveraged sevens relatively quickly, which looks promising considering long-term trends. In open-air retail, the top supermarket-anchored shopping centers are trading around this range, with a growth rate of about 2%. The street retail we’re discussing could achieve growth rates double that. We aim for 3% contractual growth with additional upside. This is encouraging, especially since our going-in yields are competitive. I understand that supermarket-anchored retail is more defensive and demonstrated strong performance during COVID. Given the sales growth and tenant demand, as well as the shift from wholesale to these corridors, we are very optimistic about these opportunities. While there is some competition, it is less intense in this sector compared to other open-air spaces, which is exciting for us. I realize this response is somewhat vague; we see trades occasionally in the low 5% range, and sometimes in the high 6% range, with everything else falling in between.

So, from an un-levered AR perspective, I think you said, what, around a 7%-plus is kind of the target? Is that a good way to think about that cap rate?

I think it'll be higher than that. That's just the yield that it grows to. So, if you buy a yield at a 6% and over the five years through contractual growth and fair market value resets, the un-levered yield grows to 7%, that probably equates to more like an 8% or 9% un-levered and then obviously higher on a levered IRR.

Got you. That's helpful. And I guess the other kind of question I have just kind of long term as you're underwriting rents, right? For street, you've clearly seen the ability to raise rents. Part of that is the 20% cumulative inflation. If that kind of normalizes here, what do you think is a better long-term market rent growth figure beyond the 3% annual bumps? Like, what do you think is a blended kind of market rent growth over a couple of year period for street and a normalized period of time versus the post-COVID environment?

Let's make a distinction between market rent growth and our internal growth because as hard as A.J. and his team will try, they're not going to successfully mark all our assets to market in 12 to 24 months. Retailers enjoy below-market leases for a long time. Albeit in street retail, for a much shorter time period, we have more fair market value resets and more mark-to-market opportunities than we do in our suburban. There's a distinction between fair market value rents and existing portfolio. With that caveat, if we approach what we define as normalized rents and normalized rent to sales, and that could happen in the next few years, then I guess I would tell you that our expectation within a range is that market rents should only grow consistent with tenant sales growth. Tenants want, if we were to pick the advanced contemporary, and they want to be at less than 20% rent to sales, then market rents should, at that point going forward, grow only consistent with sales. Take a step back for a second and don't lose sight of the 2010 to 2020 period, which I defined as a decade of deflation. It was probably more disinflation, but for that time period, a variety of our retailers were in price wars, were migrating to e-commerce, and sales declined. During that period, the 2015 to 2020 period, it was hard to see rents go up at all. We are now at a point where it feels like inflation will be a tailwind for us, tenant performance will be a tailwind for us, and the ability to see retailer sales grow not every quarter but over time makes us bullish that it will be 3%-plus for the foreseeable future. Stay tuned if we change that tune. Thank you.

Great. Thank you.

Thank you. And our next question coming from the line of Michael Mueller with JPMorgan. Your line is open.

Yeah, hi. Two questions. First, for the Manhattan Brooklyn portfolio acquisition, just curious if you can share what's prompting the seller to sell today. For the second question, you talked about the upside in the street urban portfolio. So, if you look at the SNO NOI coming online by year-end, where would that push your street occupancy to by year-end, which I think is 84.7%, if I'm not mistaken?

John, why don't you take the SNO piece of this first?

Sure. In terms of revenue, let's focus on that since it's likely the most significant aspect of our signed but not yet opened properties. Approximately $5.5 million of the total $8 million comes from the street segment, which represents a substantial share of our yet-to-open projects. While we’re more focused on dollars than percentages, we expect to reach around 90% occupancy by the end of the year. However, there's still potential for growth. We believe our street properties could achieve occupancy levels of 95% or more based on the activity that A.J. and his team are observing. By year-end, targeting around 90% occupancy for our projected openings seems reasonable.

In terms of seller motivation, realize there's a lot of finite life funds, a lot of debt coming due, and a lot of CapEx needed to restabilize assets. Every seller has different motivations. But compared to two, three, or four months ago, sellers are saying, 'You know what, I've waited this long. I need to do some transacting.' We're starting to see that and be encouraged by it.

Okay. Thank you.

Thank you. And our next question coming from the line of Ki Bin Kim with Truist. Your line is open.

Thank you. Just a couple of follow-ups here. On the New York City pending acquisition, can you just talk about some of the longer-term upside? Is this something that you have to kind of re-merchandise over time to get to those higher yields?

It's going to be a combination. I don't want to get to the point where when we close these deals, we're all bored by what we're talking about. A.J. and his team look forward to re-tenanting wherever there's a tenant that's either underperforming or has a chance to bring in that roster of tenants that you see us work with, whether it's on Armitage Avenue or Melrose Place or elsewhere. It will be a combination of attractive going-in yields, in some cases, lease-up, and others. We'll try to find that right blend.

Going back to your comments about street retail sales being up 40%, I was uncertain whether that referred to your entire portfolio or just the M Street portfolio. In regard to the M Street portfolio, when I examine 2019 or 2020, the ABR hasn't really changed over that period. Your tenants have certainly changed, so I'm trying to better understand where the mark-to-market opportunity lies. Since rents haven't shifted much, could you clarify how much more dynamic that market may be today compared to four or five years ago?

Yes. The answer is much more dynamic. I wish that every time a retailer called me and said, 'Wow, my sales are up 40%,' I was able to say, 'Great, pay us 40% more!' But leases are leases. The sales growth you’re referencing was related to M Street, although we don’t get great sales data across the board. We’re seeing that in many of our dynamic markets. It can take somewhere between two and five years for us to catch up, even with aggressive pry-loose and fair market value resets.

Okay. Thank you.

Thank you. And our next question coming from the line of Paulina Rojas-Schmidt with Green Street. Your line is open.

Good morning. And I see Walgreens is an important tenant for you. I know they are evaluating potential store closures. Have you talked to them at all about how they are thinking about the stores in your portfolio?

Paulina, what was the retailer again for store closures? Was it...

We have no indication at this point that Walgreens is closing any of their stores in our portfolio. Several of them have recently extended leases. The simple answer to the question is they seem to be well-performing locations, and there's no indication that they'll be closing any of them.

Thank you. And then, if I remember well, you're mostly on variable CAM, right? I think that's the case, but correct me if I'm wrong. And my question is, I have seen other REITs benefit in this cycle from fixed CAM. So, my question, if that were the case you were mostly variable, do you think differently about the mix because of your strictly retail exposure, perhaps?

Yeah. The vast majority of our leases are variable. We pass through the actual expenses to the tenant. I think there's pros and cons of each. Operationally, that reduces disputes if it’s a fixed CAM, but I think our preference is to stay variable. We evaluate that all the time. Tenants have different views of it, but at this point, our preference is to stay with a variable; in times of inflation, that's something we would like to keep as variable.

Okay. And the last one, can you remind me how frequent are percentage rents in your portfolio?

A relatively small amount. Not a big piece of what we did; I think during COVID, we saw a slight tick-up in it, but it's well under 1%.

It's much more common, of course, in the street portfolio than in shopping centers. Just to be clear, that's in addition to a market base rent. It's upside; it's not sort of in exchange for a market rent.

Thank you very much.

Thank you. I see we have no further questions in the queue at this time. I will now turn the call back over to Mr. Bernstein for any closing remarks.

Great. Thank you all for joining us. We look forward to speaking to you next quarter. Enjoy the rest of the summer.

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