Acadia Realty Trust Q3 FY2024 Earnings Call

Hello, and welcome to Acadia Realty Trust's Earnings Conference Call for the Third Quarter of 2024. I would now like to turn the call over to Alec Aaronson, Development Analyst. Please proceed.

Good morning, and thank you for joining us for the third quarter 2024 Acadia Realty Trust earnings conference call. My name is Alec Aaronson, and I'm an analyst in our development 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, October 28, 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 operation 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.

Thank you, Alec. Well done. Good morning, everyone. We had a very active and productive third quarter with a lot to discuss, so let's jump in. As we've discussed on prior calls, there are three critical drivers of our business. The first is delivering continued strong internal growth, most significantly coming from our Street retail portfolio. A.J. Levine will provide more details on our continued success on this front. But as you can see from our earnings release, we had another strong quarter and have averaged over 6% same-store NOI growth for the past three years. Most importantly, we see this growth continuing. The second driver is maintaining a strong balance sheet, which provides us the liquidity and the capacity to thoughtfully grow our portfolio. John Gottfried will discuss these important steps that we've taken this year to get our key metrics and our liquidity where we want them. And then the third driver is to provide external growth through accretive acquisitions, both with respect to our on-balance sheet investments as well as through our investment management platform. This third driver is kicking into gear. So let me spend a few minutes discussing our progress on our external growth initiatives. First, with respect to our on-balance sheet activity for our core portfolio. Our goal here is to add assets that are consistent with our highly differentiated portfolio dominated by high-growth street retail properties in critical shopping corridors. As we've discussed, we are focused on acquisitions that are accretive to earnings, accretive to net asset value, and that enable us to continue to deliver peer-leading growth long after full stabilization of our existing portfolio. After several years of the REIT industry in general and Acadia specifically facing a challenging capital market backdrop for on-balance sheet acquisitions, conditions have finally begun to shift. This has enabled us to move to offense and allowed us to amplify our focus on street retail properties in key must-have high-growth markets. Starting last quarter and to date, we have closed or are under contract for a total of $270 million of acquisitions for our core portfolio. We have closed approximately $120 million of them with the balance closing over the next couple of quarters. I'll let A.J. give more color on the leasing trends we're seeing in these corridors, but here's a quick overview of the transactions. As previously announced, we closed on a four-property retail portfolio along the Bleecker Street retail corridor in the West Village of Manhattan. Over the last several years, Bleecker Street has begun to emerge as a coveted landing spot for many of our younger advanced contemporary brands and reflects the same curation, same fundamentals that we've seen in our other high-growth streets. We have an attractive going-in yield and the ability to significantly grow rents over time. We have also expanded our Williamsburg assets by adding four buildings on North 6th Street in Williamsburg, Brooklyn. What we have seen in Williamsburg over the last several years since our Bedford Avenue acquisition, is tenant demand and tenant performance continues to grow. And with that growth, North 6th Street has emerged as a must-have corridor for leading retailers in Williamsburg. Our investment there is a combination of lease-up and redevelopment opportunities combined with below-market leases that provide us with long-term growth and attractive returns. We have also acquired a three-tenant building that will further enhance our presence on Green Street in SoHo with leases substantially below market in arguably the highest demand corridor in SoHo. This building is adjacent to the building we own on the corner of Princeton Green, currently occupied by Bang & Olufsen. This edition now gives us two contiguous clusters on Green Street. Lastly, we have approximately $150 million in assets under contract, primarily in Georgetown and D.C. and in SoHo. We anticipate closing the balance of these transactions early next year and will discuss them in more detail as we close. In terms of pricing, while we're not going to discuss individual pricing of deals, these day-one accretive acquisitions have an initial GAAP yield in the mid-6% with a cash yield in the mid-5%, with compounded annual growth rates north of 7% and growing to a cash yield also north of 7% in the next few years. In terms of earnings accretion, as we said in the past, given our size, relatively small amounts of external growth can really move the needle. And that's certainly the case here. As we previously discussed, we have been targeting transactions that on a leverage-neutral basis provide approximately $0.01 of earnings growth for every $200 million of acquisitions, with further growth then upon stabilization. These $270 million of acquisitions are slated to meet or exceed that goal and should contribute over 1% earnings accretion upon closing and close to 3% upon stabilization in 2027 and 2028. Along with these on-balance sheet acquisitions, we expect significant long-term growth through some of our recently announced expansion plans for our core portfolio assets on Henderson Avenue in Dallas. I'll let A.J. discuss this further in his comments. But we have patiently watched the demand for this corridor grow over the last few years, and now is the right time to begin this expansion, which is penciling out to stabilize to north of an 8% yield on cost. While we are doing this expansion in stages, assuming we do the full expansion as contemplated with an incremental cost of approximately $100 million, this could contribute in excess of 2% incremental long-term earnings upon stabilization. So this accretion plus the estimated 3% accretion upon stabilization of the on-balance sheet investments I discussed sets us up very nicely over the next few years. Then complementing these on-balance sheet investments, we're continuing to see opportunities in our investment management platform, where we can leverage our institutional capital relationships for a broader variety of investments. First, as we had previously announced in July, we completed a new acquisition in Tampa, Florida of an open-air community center for approximately $31 million. Recently, we formed a partnership with Cohen & Steers where we retained an interest in the investment plus retained the management as well as upside potential. Beyond this, we and a global alternative asset manager are very close to finalizing a potential investment for approximately $275 million that would fall into the opportunistic bucket. We will give more color on that as it progresses. As for the accretion of the investment management platform investments, the metrics remain about the same as our on-balance sheet investments, meaning we expect roughly $0.01 per $200 million of gross acquisition volume. But for now, we think it's probably more prudent to think about this buy-fix-sell platform as a capital recycling vehicle where our current goal is to maintain approximately $2 billion in AUM and maintain a stable and profitable revenue stream equal to what we have today. We may see opportunities to grow this platform, but for now, we just pencil in stability. So looking ahead, we remain very bullish on our ability to continue to add value by driving internal growth, by maintaining a strong and flexible balance sheet, and by adding additional growth through strategic new investments. New investments, including on-balance sheet acquisitions that are consistent with our high-growth portfolio that we own today, accretion from redevelopment and expansions of existing assets such as what we have begun on Henderson Avenue, and then also opportunistically adding assets to our investment management platform. Before I turn the call over to A.J. for his remarks, I'd like to thank the Acadia team for their incredibly hard work as we have been waiting not so patiently for the stars to align. And this quarter, they finally did with strong internal growth and solid balance sheet metrics, and now impactful external growth, we are hitting on all cylinders. With that, I'll turn the call over to A.J.

Great. Thanks, Ken. Good morning, everyone. So we have a lot to go over this morning. I'll start with an update on internal growth and we'll finish things off with an exciting update on our Henderson portfolio down in Dallas. Jumping right into leasing and internal growth, in the third quarter, we signed a record $7 million in core leases, and we've already exceeded the total volume of leases signed in 2023 with another quarter of leasing ahead of us. We've increased the signed-not-yet-open pipeline to $10 million, and with no signs of a slowdown, we have several more leases in advanced stages of negotiation. In terms of fundamentals, our tenant sales continue to grow and remain well above where they were in 2019. When we speak with our tenants, they're telling us that positive performance in relation to 2019 continues to outweigh any concern around short-term choppiness, and they remain focused on long-term growth. Our direct-to-consumer or DTC brick-and-mortar strategy is priority number one for our retailers. That includes categories that may have historically relied more on wholesale and department stores, like luxury, advanced contemporary, and aspirational. That sentiment is reflected clearly on our high-growth streets, including SoHo, Williamsburg, M Street in Georgetown, and at our newly acquired Bleecker Street portfolio. DTC allows our tenants to better control the brand narrative and how they interact with the consumer. It allows them to better control pricing and have better control over which other retailers to cluster with to create the most productive ecosystem to drive sales. More than any time in the past, tenants know very clearly where their customers are and where they can operate a profitable store. A healthy tenant, along with a very favorable supply-demand dynamic allows our leasing team to continue to improve the merchandising on our streets with more dynamic higher volume tenants, which will in turn drive sales and over time increase rents. We've continued to watch this dynamic play out on streets like Armitage Avenue, where rents have increased 20% over the last year and 50% since 2019. In the third quarter on Armitage, we signed new leases with Levain Bakery and the contemporary fashion tenant Rails, both at healthy double-digit spreads. In terms of merchandising, Rails is just one of the many contemporary tenants that have shown up in our markets like SoHo and M Street as they shift away from wholesale towards a direct-to-consumer strategy. Levain, who has been a long-term tenant of ours in Williamsburg and has a presence on a number of our streets, will add a new F&B component to Armitage and drive a new layer of traffic that will benefit the entire street. We've already seen it happen firsthand in Williamsburg, M Street in Georgetown, Newbury Street in Boston, and elsewhere, and it's that depth of experience and insight that tells us who we can add to our streets to drive overall market performance. In other words, curation. On Michigan Avenue, we are increasingly encouraged by the interest and activity we're seeing on the street. In this past quarter at 664 North Michigan, we successfully signed a lease with the fashion brand Mango for the entire building, which includes approximately 8,000 square feet of ground floor space. Just a few blocks north, on the Gold Coast, we completed a new lease for the entire building, including approximately 4,500 feet at grade with an exciting New York-based fashion and lifestyle brand. We are actively negotiating a lease with another leading fashion retailer for our final vacancy on Walton Street, which we expect to have signed in the coming days. Elsewhere in the portfolio, we're seeing continued growth in both sales and rents. We are especially encouraged by the recent additions to our existing high-growth streets, doubling down in markets like SoHo, Williamsburg, and M Street, and expanding into new markets like Bleecker Street will continue to provide fuel for future internal growth. In SoHo, for example, rents are up double digits year-over-year and 30% to 40% since 2019. Over the last year in our portfolio alone, we've added great luxury and advanced contemporary brands like Zimmermann, STAUD, and Madewell, and the market continues to see a steady influx of today's most relevant brands like Kate, Valentino, Jacquemus, and Toteme. Now with the recent acquisition of two more storefronts on Green Street between Prince and Spring, along with the Bang & Olufsen we already owned on the block, we can control a meaningful portion of the most coveted luxury block in SoHo with neighbors including Louis Vuitton, Dior, Stella McCartney, and Cartier. This will give us 17 storefronts in SoHo, which is an essential market for our retailers. The team is excited to get to work, prying loose those undermarket leases and taking advantage of the incredible growth we've seen over the last several years. Williamsburg is another market that has seen rents grow 40% to 50% since 2019 and 10% to 15% over the last year alone. Williamsburg has firmly established itself as a must-have location for brands like Lululemon, Alo Yoga, Sephora, On Running, Kith, and now Hermes. By purchasing older vintage leases with short-term expirations, we can get to work extracting that embedded rent growth. Again, because of our history in the market, we can see firsthand how demand continues to outpace supply and drive rents. Turning to Bleecker Street, as Ken mentioned, over the last several years, Bleecker Street has emerged as a highly coveted landing spot for many of the same advanced contemporary and luxury brands that we've seen in markets like Madison Avenue, M Street, Melrose Place, and the Gold Coast. While we're entering Bleecker Street in the relatively early innings, it already shares many of the same attributes as our other high-growth markets: high demand and extremely tight supply, a noticeable improvement in sales performance, resulting in healthy tenants, and has recently emerged as one of New York's premier shopping destinations. With where we see sales and rents today on Bleecker, it's clear that we're entering the market at the opportune time to capture significant rent growth moving forward. And to M Street, we're in the third quarter, we successfully signed two new leases, including a new 5,000 square foot Tesla flagship. The story in Georgetown continues to be a pivot away from older mall brands and towards more dynamic higher-volume retailers. We know from our portfolio that year-over-year sales growth is north of 10%, and several of our tenants have experienced over 40% sales growth since 2019. Demand on M Street has never been stronger, and with the addition of several great brands like Alo Yoga, Vuori, SKIMS, Sezane, and Veronica Beard, we expect demand to only accelerate as we continue to curate the street. Last but certainly not least, we are excited to announce that in partnership with Mark Masinter, Tristan Simon, and their team at Ignite-Rebees, we have kicked off the next phase of our Henderson portfolio in Dallas. We first entered Dallas in 2022 by purchasing 15 retail buildings on Henderson Avenue with younger tenants in place like Tecovas, Warby Parker, Sprouts Market, as well as a fully entitled land parcel. At the time, it was clear that the center of gravity in Dallas had for years been shifting towards the Knox/Henderson corridor. Additionally, there was a noticeable void in the market for a walkable, open-air shopping district where today's most relevant and contemporary tenants could cluster and thrive. Henderson Avenue was clearly a diamond in the rough. Since that time, we've seen firsthand rents grow between 40% and 50%. Sales today on Henderson are on par with markets like Armitage Avenue, but rents are half as high. After years of patience and planning, we are adding the next phase of retail on Henderson. The project will consist of 10 architecturally distinct buildings and will be completed in several phases with an incremental project cost of approximately $100 million. This highly curated retail is designed to appeal to the same tenants you'll find on our other high-growth streets like SoHo, M Street, and Armitage. Those tenants have been eagerly awaiting the next phase on Henderson, and just two weeks after breaking ground, we are already in negotiations with over a dozen retail brands. Upon completion in 2027, Henderson will emerge as one of the most vibrant stretches of walkable street retail in the country, and we expect rents on the street to stabilize at levels on par with our other more established high-growth streets. In the meantime, we will continue to keep you updated as we make progress towards stabilization. So all in all, another exciting, eventful quarter. I will now turn things over to John.

Thanks, A.J., and good morning. We have had another busy and productive quarter. As Ken mentioned, three key things are becoming increasingly clear to us. First, our balance sheet is right where we want it. As the capital markets opened up, we moved quickly securing over $1 billion of debt and equity capital. Not only did this allow us to achieve our targeted ratios and liquidity, but we were able to do it on a non-dilutive basis. Secondly, our multiyear core internal growth remains intact, as our team continues to beat our leasing goals, both in terms of deal volume, along with the rents we are achieving. We have increased confidence and visibility on not only meeting but exceeding our multiyear internal growth goal in excess of 5%. Just to highlight, this 5% plus growth is even before we layer-in the accretive impact of the external growth that Ken just discussed. And finally, external growth. As Ken mentioned, as the bid-ask spread narrowed, our team moved quickly to lock-up over $0.5 billion of accretive investments that were in our pipeline. When we put these three pieces together, our business is poised to achieve a powerful combination of internal and external growth, fueled by a strong balance sheet that has both the liquidity and flexibility to fund it. I'm not going to spend the next few minutes highlighting some of these key highlights, starting with our balance sheet. In a short period of time and on a non-dilutive basis, we completed approximately $1.5 billion of debt and equity transactions, resulting in a reduction of our debt to GAV to about 30%, along with reducing our debt-to-EBITDA ratio in excess of a full turn to 5.6 times. To be clear, the 5.6 times is our total debt to EBITDA ratio, inclusive of our share of debt from the investment management business, which means that on a standalone basis, our core debt-to-EBITDA is about 0.5 turn lower. Additionally, with the strong support of our banking partners, we increased our revolver capacity again during the quarter, doubling it over the course of the year to $525 million with virtually no amounts currently drawn on the facility. We have no meaningful core debt maturities until 2028, along with a fully hedged balance sheet for the next several years, which means that our internal growth of 5% plus will drop to our bottom line. A final point on the balance sheet, we have secured the capital that we need to close our pipeline, thus our balance sheet has the flexibility and liquidity to continue to transact on the accretive external growth opportunities that we are seeing. As evidenced by the equity issuance that we completed a few weeks ago, we will continue to match fund our external growth on a leverage-neutral basis to ensure that not only do we retain our balance sheet strength and liquidity, but that we proactively lock in our cost of capital to achieve the day-one earnings and NAV accretion that we target on each transaction. Moving to our quarter results, along with an update on internal growth, consistent with the quarterly run rate that we laid out a few calls ago, we reported FFO of $0.32 a share, which reflects sequential growth of $0.01, along with year-over-year earnings growth of $0.05 a share or 20% when excluding the realized gains on our Albertson shares. We have also successfully maintained our full-year guidance, and this is even in after taking into account the $320 million of equity representing over 10% of our market cap that we issued over the past few months to prefund our acquisition pipeline. Thus, we continue to reaffirm our projected range of $0.32 to $0.34 for the fourth quarter. Moving to same-store NOI, we reported core same-store NOI growth of 5.9% for the quarter and 5.7% for the year, which has us trending towards the upper end of our 5% to 6% annual same-store guidance. During the quarter, our Street portfolio outperformed our suburban assets by approximately 250 basis points. Moving on to leasing, we increased our signed-not-yet-open pipeline by over 20%, bringing it to approximately $10 million at September 30. The $10 million is at our pro-rata share and represents core same-store only, meaning it excludes any leases that were signed in our core redevelopment pipeline as well as within our investment management platform, including City Point. Additionally, the entire $10 million of signed-not-yet-open pipeline represents incremental ABR, as it excludes any leases that we have not executed on space that is currently occupied. As A.J. discussed and is outlined in our release, we had a strong leasing quarter, signing $7 million of new core leases, representing about 5% of our ABR. The $7 million is comprised of $3 million on vacant space and $4 million on space that is currently occupied. In regards to the $4 million of occupied space, our team was able to successfully pry loose several below-market spaces across our portfolio, and we were able to recapture these spaces at a nominal cost of under $500,000. Further, as outlined in our release, the capture of these spaces will result in incremental ABR of $1.6 million upon commencement of the new leases. When we combine the $10 million in our signed-not-yet-open pipeline with this $1.6 million, we have approximately $11.6 million of incremental core ABR, representing core growth of approximately 8%. For those modeling, given the magnitude of growth, I thought it would be helpful to walk through a bit of granularity on the timing of this incremental $11.6 million. We anticipate approximately 25% of the ABR will commence in the fourth quarter of 2024 and will contribute an incremental $200,000 to $400,000 during the quarter, with the remaining 70% expected to commence in 2025, contributing an incremental $3 million to $5 million throughout the year skewed towards the second half. Keep in mind that these incremental amounts in 2024 and '25 are net of the downtime associated with the profitable recapture of $2.4 million of occupied ABR that we highlighted in our release, thus, the full impact of the incremental $11.6 million will show up in our 2026 results. In summary, our core portfolio continues to exceed our expectations. Given our highly differentiated street retail portfolio, we continue to see this playing out over the next several years, driven by a powerful combination of 3% contractual growth, double-digit spreads on expiring leases and fair market value resets, and ongoing lease-up. Ken has already laid out the earnings accretion that we expect from our recent acquisitions, so I won't repeat his remarks, but when we layer in that accretion along with our internal growth, we are well poised for several years of strong bottom-line earnings growth. And with that, we will now open up the call for questions.

Our first question comes from Linda Tsai with Jefferies. Your line is open.

Hi, good morning. Exciting quarter. I know the acquisitions you've announced didn't happen overnight, but just given what you've accomplished year-to-date, is this indicative of the pace and level of opportunities you see going forward near-term?

Short answer is yes. Obviously, the stars have to align and have to check the boxes that I've outlined frankly over the last year, Linda. You're right, it may feel like it's overnight, but our team has been working all year to tee up these kinds of deals. Provided we can find deals that are accretive to earnings, accretive to net asset value, and that extend the strong growth that has come primarily from internal growth for the last few years. As long as we can extend that, we feel pretty good that we're in a position to establish Acadia as the highly differentiated street retail owners in the public markets. So that's the longer answer of yes, we can do this.

And then if street retail is back, how do you deal effectively with competition?

Yes, in a perfect world, there wouldn't be any, but it's never a perfect world. Frankly, when there's no competition, sellers tend to go into hiding. So what's different this time than perhaps other cycles for street retail, we are seeing competition. But it's highly professional competition that are thoughtful and good landlords. So if they're opening across the street from us, we like that. It's the less professional landlords that are more problematic. Given our cost of capital, we have a high-level of confidence that we can move faster, identify the transactions. Even with competition, we certainly got our fair share this past quarter, and we look forward to quarters in the future.

Thanks. And then a question for John. What percentage of NOI is NYC currently? Do you have an internal view of how high New York could become or any other urban MSA? Or is it all just a byproduct of individual opportunities?

Yes. So Linda, I think it's right now, not I think it is about a third of our NOI, core NOI comes from New York with the concentration in SoHo and in Williamsburg. I'll let Ken expand on how we see that growing, but I would say to the extent it checks those boxes for day one earnings accretion, long-term growth, and NAV accretion, we're seeing those trends across all of our key markets, whether it's in Georgetown, and certainly in Dallas. We're going to continue to do that and diversify. There's not a set target, but just where we can knowing where our cost of capital is and what we need to do to achieve our long-term strategy.

Yes, I totally agree with what John said. Diversification benefits our shareholders. More importantly, from A.J. and the leasing team's perspective, being geographically diverse enables us to remain highly relevant for a broad group of our retailers. A lot of the decisions of where we're seeing outperformance comes from conversations with retailers about where they are doing best and where they want to be next. By adding assets, as we've referenced in today's call, in Georgetown and DC or our expansions in Henderson and Dallas, all of those bode well from a perspective of capturing the right growth.

Sorry, sneaking one last one in for A.J. Just when you look at the pipeline of deals being signed, is it more domestic brands or international?

Yes. It's a nice mix. Certainly, a market like SoHo has always been a preferred landing spot for international brands. Not just luxury, but even a lot of the younger brands. I think Zimmerman is a great example of that. That's a brand that started in Australia and decided to go international, and their first landing spot was in SoHo. What's more encouraging is when you see these brands notice and show up in markets like M Street. Tenants like Sezane and Zadig & Voltaire, Lugano Diamonds, are traditionally SoHo tenants starting to focus on some of those next entry markets. That means you're really turning the corner.

Please standby for our next question. Our next question comes from the line of Floris van Dijkum with Compass Point. Your line is open.

Hi, thanks for taking my question. Good set of results, encouraging. Question I have is, I guess maybe for A.J. or Ken, but I'm curious how you look at OCR and how does OCR compare across the various markets? In particular, SoHo versus Bleecker versus Williamsburg? And maybe touch upon Chicago. You talked about the upside potential in Henderson, how does Henderson compare to those other markets?

Let me set the table. I assume you are referring to the rent-to-sales ratio, tenant occupancy cost relative to various markets. The very encouraging news across the board is as opposed to prior cycles, two important areas of distinction. First, top-line sales growth has improved over the last several years. A.J. touched on it relative to 2019, and has improved well in excess of rental growth so far. This means tenants have room to run, meaning rent-to-sales ratios are substantially healthier than at prior peaks. This room gives us comfort going forward. The other encouraging piece is we are now in an omnichannel environment; tenants now know for certain there is benefit from having a great store, driving online sales. A.J., why don't you touch on the different markets and distinctions we're seeing in Henderson versus SoHo, and Williamsburg?

Generally speaking, in more established markets like the Gold Coast, SoHo, and Madison Avenue, you're seeing mid-teens occupancy costs; these tenants could push comfortably up towards 20% into the low 20s. Markets like Bleecker and the younger markets see occupancy costs closer to that 10% range, which just gives us confidence to push those occupancy costs considerably higher. It really varies from market to market.

And is that the same in Williamsburg or how does Williamsburg compare to Bleecker versus SoHo? Is it in between or more like SoHo?

I'd say it's pretty comparable to SoHo.

Okay. And then is Dallas even below 10%?

Yes, several tenants in Dallas are sub 10% just because of the vintage of those leases.

Great. And thanks, A.J. My follow-up question, if I may. You've got $270 million of acquisition earmarks, $120 million closed, $150 million in for the core. How big of a pipeline do you have behind that? Some people questioned how deep the street retail market is and how much capital can be put to work in this segment.

We remain very bullish on what the pipeline could look like. You're right, the way we think about it is both in terms of our internal capacity to digest in the normal course of business and this $0.5 billion of acquisitions that John referred to. We are proving that rate. The question is the opportunity set. To the extent we have competitive cost of capital and sellers emerging, we think we can continue at this growth rate for several years, as long as the stars align. There are enough deals in the markets we are currently active in and additional markets that we might enter based on what our retailers are saying.

Yes, there are several billion dollars of potential scalable assets for us. The team's ability to digest them is proven now, and it is just a matter of the negotiations and pricing since we have strong internal growth ahead of us.

Thanks, Ken.

Thank you. Please standby for our next question. Our next question comes from the line of Jeffrey Spector with Bank of America Securities. Your line is open.

Great. Good morning and congratulations on the quarter. Maybe, Ken, the first question, I don't know if it's for you or A.J. On the strengthened leasing and demand for space, would you say it's the result of strong luxury fashion retail sales the last couple of years? Is it these retailers continue to move away from wholesale? Is it a combination? What are your thoughts?

Yes, it is a combination. First, let's acknowledge the headwinds we experienced for several years. Fears around retail Armageddon, COVID, and concerns around consumer activity. Now, those headwinds are tailwinds, meaning retailers recognize the critical nature of the store. The concern about e-commerce has become a halo. Retailers are shifting into direct-to-consumer strategies, and regardless of the economic noise, the job market and economy remain quite strong, all support top-line sales and the ability to continue to drive rents.

Yes. The only thing I would add is, don't discount the data; they know exactly where their consumers want to be and they want to be open air.

Thanks, A.J. and Ken, for the insights. I’m here to discuss some financial details if needed.

Please standby for the next question.

Hi, thanks guys for taking my question. Good set of results, encouraging. Question I have is, I guess maybe for A.J. or Ken, you might have planned on this as well. But I'm curious as to how you look at OCR and how does OCR compare across the various markets? And in particular, SoHo versus Bleecker versus Williamsburg? And maybe touch upon Chicago. And then you talked about the upside potential in Henderson and how does Henderson compare to all of those other markets as well. If you can give us some more details, that'd be great.

Let me clarify that you are asking about the rent-to-sales ratio and tenant occupancy costs. The positive news is fairly widespread. Unlike previous cycles, two key points stand out. First, top-line sales growth has significantly improved over the last few years, outpacing rental growth compared to 2019. This indicates that tenants have more flexibility and the rent-to-sales ratios are much healthier than in previous peaks, which gives us confidence moving forward. Second, we are now firmly in an omnichannel environment. In the past, tenants were uncertain about the benefits of having a physical store alongside online sales. Now, they know that a strong store presence positively impacts online sales. They are also using technology and AI more effectively for site selection, which has made this process more precise rather than based on guesswork. In an omnichannel context, the sales performance of an individual store remains crucial, but for mission-critical locations, tenants are considering overall sales generated by the store, not just its direct sales. A.J., could you explain the differences we see in various markets such as Henderson compared to SoHo and Williamsburg?

Yes. Look, I think generally speaking in the more established markets like the Gold Coast, like SoHo, Madison Avenue, you're seeing mid-teens occupancy cost, which is, as Ken mentioned, gives you a good amount of room to run. These tenants could push comfortably up towards 20% into the low 20%. Markets like Bleecker and perhaps some of the younger markets, we're seeing occupancy costs that are closer to that 10% range, which just gives us confidence along with seeing market rent growth; right, deals getting signed at higher rents than what we're purchasing – room to run in terms of pushing those occupancy costs pretty considerably higher. So it really varies from market to market.

And is that the same in Williamsburg or how does Williamsburg compare to Bleecker versus SoHo? Is it in between or is it more like SoHo in terms of the mid-teens occupancy costs?

I'd say it's pretty comparable to SoHo.

Okay. And then is Dallas even below 10?

Yes, there are several tenants in Dallas due to the nature of their leases and the improvements we've observed, and many of those tenants are below 10%.

Thank you, AJ. I have a follow-up question. You have $270 million earmarked for acquisitions, with $120 million already closed and $150 million in the final stages. What does your pipeline look like behind that? This question arises partly because you have been inactive in the past few years due to market conditions affecting your cost of capital. Some people are also wondering about the depth of the street retail market and the amount of capital that can be applied in this area. Could you elaborate on the overall market size? From what I understand, it seems substantial, and I would appreciate your insights on the potential for investment, as I suspect several billion dollars could be invested without difficulty.

Yes. So for a bunch of different reasons we remain very bullish on what the pipeline could look like. The way we think about it is both in terms of what is our internal capacity to digest in the normal course of business and this $0.5 billion of acquisitions that John referred to because whether it's the investment management platform or core portfolio, the team needs to be able to digest a certain amount. And I think we are proving that that is a rate we can live with. So then the question is the opportunity set. To the extent we have a competitive cost of capital and to the extent that sellers are beginning to emerge and they are only beginning just now, we think we can continue at this growth rate for several years for as long as the stars aligned. There are enough deals both in the markets that we are currently active in and I'd say most importantly in those markets because I think that's where you will see the majority of our growth. But there are also additional markets, a handful of them that either we've been active in the past or our retailers are saying these are now established must-have markets that you can also see us get involved with. So I don't doubt that there are several billions of dollars of potential scalable assets for us. I don't doubt the team's ability to digest them. And so then it's just a matter of the negotiations, the pricing, it has to be attractive because here's the final good news for us. On one hand, it was quiet for a couple of years for all the obvious reasons. But our growth was pretty darn good. We had very strong internal growth for many years in front of us. So if the deals are not accretive, if they're not additive, if they don't make sense, we will have really powerful top line and bottom line growth just based on what we have right now.

Thanks, Ken.

Thank you. Please standby for our next question. Our next question comes from the line of Jeffrey Spector with Bank of America Securities. Your line is open.

Great. Good morning and congratulations on the quarter. Maybe Ken, the first question, I don't know if it's for you or A.J. On the strengthened leasing and demand for space, would you say it's the result of strong luxury fashion retail sales the last couple of years? Is it these retailers continue to move away from wholesale? Is it a combination? What are your thoughts?

Yes, it is a combination and AJ, feel free to chime in as well. First of all, let's acknowledge the headwinds that we experienced for several years. First were fears around confusion around this so-called retail Armageddon. Then there was certainly COVID and lockdown and all the issues around and concerns around where would people settle, would they ever come back to places like SoHo, and now going forward, those headwinds are tailwinds. Tailwinds mean as follows: one, asked and answered, retailers recognize the critical nature of the store. Second was the so-called concern about e-commerce has become a halo. In fact, where you can have stores that benefit from omnichannel, it's a net benefit. Then as you pointed out, there has been a notable shift into what we refer to as direct-to-consumer (DTC), a shift out of wholesale and retailers saying they need to connect directly with their customers, and the store, especially these key stores is critical to that. Despite a lot of noise around the economy, the job market is still strong and the economy remains strong. Inflation, as long as it's not out of control, continues to drive top-line sales, all bode well for our portfolio and the ability to continue to drive rents. A.J. I said a lot, but anything you want to add to that?

Yes. The only thing I would say is, again, don't discount the data. Tenants know very clearly where their consumers want to be, and they want to be open air and that's where they're choosing to plant their flare.

Thanks.

Please standby for our next question. Our next question comes from the line of Seth Bergey with Citi. Your line is open.

Hi, it's Craig Nolan here. Just a question for you, Ken. It sounds like you think it's replicable to maybe do $300 million, maybe $400 million of acquisitions a year in the near term, assuming stars align. You guys were able to issue a lot of equity this quarter and the market seems to be giving you the green light. But as you move forward, if you want to continue to deploy this level of capital annually, maybe for the next year or two and keep leverage kind of in check, what should we think about the right mix or how to think about kind of debt, equity, and maybe asset sales to fund the growth on the accretive earnings and NAV basis?

John, you want to touch on that?

Absolutely. So I think, Craig, as I put in my remarks that our balance sheet is right where we want it, and we're going to keep it there. So I think let's just start at that starting point. Anything we do is going to be leverage neutral, and whatever we do, we're going to be very well aware of what our cost of capital is where we know what it needs to be FFO accretive day one. We know our growth; we're really focused on ensuring we maintain leverage-neutral positions.

Just to add, Craig, in terms of asset sales, keep in mind, as we monetize assets in our investment management platform, we get a fair amount of capital coming back from that as well, whether that's redeployed into future investment management deals or otherwise, cash is relatively agnostic. We do have several arrows in our quiver without having to lever up, and that's what you should expect to see.

And then on Henderson, as you guys move forward, it sounds like the yields there are pretty attractive. But from a risk mitigation standpoint, is there a targeted level of pre-leasing or at least deals in maybe an LOI stage that aren't signed yet, but give you the confidence to move forward with additional build-out there to hit those returns without a higher level of risk to the extent they're not pre-leased?

Yes. Thankfully, the situation there allows us to proceed in phases. We expect to have a high level of leasing as we do each phase of this, providing some level of mitigation. We feel strongly about tenant demand.

Okay. Then maybe just one last one. It sounds like North Michigan is picking up a bit. Any update on potentially selling part of the building next to Waterside. I know you guys have talked about maybe monetizing a piece of that as an option to the developer next door or is it getting to a point where you can re-lease to existing retail?

Leasing demand is improving, and that's positive. We remain open-minded and have various conversations around monetization opportunities there. I don't think anyone should expect any significant earnings dilution if we were to go that route. We think what we have on North Mich thankfully is rebounding and should be accretive. John, anything?

No, I think that sums it up. Nothing to add there.

Great. Thanks.

Thank you. Please standby for our next question. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.

Hi, thanks. Good morning. Ken, I wanted to go back to the investment management platform. While you’re acquiring assets with partners, you did sell a Fund V asset in the quarter and you mentioned you have potential to raise capital there. Should we assume fund dispositions accelerate as off-balance-sheet acquisition activity picks up? Is it more of a capital recycling exercise within the investment management platform or should we think about growth in the size of that platform? What’s the impact to the model that we should be thinking about from transaction activity in the investment management platform?

Let me start, but John, I want you to chime in. What's prudent for now is to assume stability. Yes, it could ramp up and grow, Todd. But we also want to continue to monetize. This last deal we sold in Fund V was north of a 2 times equity multiple, north of a 20 IRR. If we can achieve those for Fund V, there's a lot of economic benefit to our shareholders and to our investors. That's what the buy, fix, sell platform does. It could ramp up. Now for modeling purposes, please assume stability.

Yes, just to expand on that, Todd. Assume stability and for now capital recycling. We really like about this model is that we are putting deals in separate vehicles with no cross-promotes. This will enable us to get to promotes earlier and more visibility into those. For a model, I would assume it remains stable.

Okay, John, I have a question about the 1% accretion associated with every $200 million in acquisitions. You've mentioned that level of accretion for a while, but the company's cost of capital has significantly improved over the past year. I'm curious why the formula hasn't changed in light of the spread you're able to invest at, or are you just being cautious when considering accretion from external growth along with other variables?

I'll let John think about that for a second, but yes, he's being conservative. Also, Todd, going-in accretion is just one of the boxes to check. The growth rate of what we teed up here is higher than we theoretically thought about.

And we're allowed to beat our 1% on every $200 million. Acknowledge all your points, but yes, we're allowed to be done.

7% growth feels pretty darn good.

Please standby for our next question. Our next question comes from the line of Ki Bin Kim with Truist. Your line is open.

Thank you. Good morning. Just wanted to go back to the topic about occupancy costs. Your more established markets being in the mid-teens, can you remind us where that was for the prior healthy peak for that occupancy cost ratio? Ultimately, do you think you can get there through renewals or do you need a different slate of retailers to get to the higher occupancy cost ratio?

Yes, during the last go around occupancy costs were probably closer to that 20% range. One of the quivers we have is fair market value resets; tenants that can afford to stay at market will. We will pry that space loose and mark-to-market at a pretty positive spread.

And how prevalent are the fair market value resets in your street retail portfolio?

More often than not, we have a fair market value reset. I can't think of a recent example of a deal we've done in our streets over the last several years that doesn't have some form of a reset.

Okay, great. And in terms of watchlist, as we look forward, any particular reason to think of it up or down from what we've seen from the past couple of years?

Yes. As an industry, we've been fortunate in terms of watchlist and retailers. We should be prepared for that there will be retailers that will struggle. Fortunately, we have a lot of confidence where we're at as we sit today. So long-winded way of saying, I think we should be very aware and we are of retailers and AJ and his team are proactively pulling that space back.

Okay. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Paulina Rojas Schmidt with Green Street. Your line is open.

Good morning. Do you think it's fair to say that today going-in yields for street retail are inside those you can find for grocery anchored neighborhood centers? Having IRRs in mind, can you comment on how you think market rent growth for these two subtypes looks like over the next five years? What do you think are the drivers behind that growth differential from a fundamental perspective?

Yes. It’s to some degree comparing apples to oranges in terms of going-in cap rates. The best I can tell is supermarket-anchored where most of the initial activity was, is probably the most crowded. In comparing yields for high demand, best in class supermarket-anchored centers versus high demand, best in class street retail, I'd say yields are pretty similar. Historically, street retail had lower yields due to growth but as it sets up today, going-in yields are about the same, and then the growth rate is about twice for street retail. We own both and we like both. The growth for street being higher is often stronger contractual growth, a blue in market resets that we don't tend to see in supermarket side. Long-term growth defined as the next five-plus years, for the street portfolio, should be materially higher than supermarket anchored assets, which perhaps might seem more defensive and thus deserve lower yields.

Regarding Henderson, I think you mentioned it, but I didn't really understand the details. What's behind the wide range for the total development cost there? It seems wide to me. The original plan was to include some office space; is it still the case, or is it entirely retail space you are thinking about?

The reason for the wide range is we can do this in phases, depending on demand. It will have a mixed-use component, but it pencils out just fine even if we were not to add, build, and lease the office piece of this. We also own a lot of Henderson right now. This expansion, if it happens in full phase, I’m confident it will lift the whole Henderson Avenue.

Thank you very much.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.