Earnings Call
Acadia Realty Trust (AKR)
Earnings Call Transcript - AKR Q3 2023
Operator, Operator
Good day and thank you for standing by. Welcome to the Q3 2023 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Demoulas. Please go ahead.
John Demoulas, Analyst
Good morning, and thank you for joining us for the third quarter 2023 Acadia Realty Trust earnings conference call. My name is John Demoulas and I am an analyst in our finance 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 31, 2023, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. 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.
Ken Bernstein, CEO
Thanks, John, great job. Welcome everyone, happy Halloween. I'll give a few comments, then I'll turn the call over to AJ Levine who heads up our Leasing and Development division, then to John, and after that, John, Stuart, AJ, and I will take questions. As you can see in our earnings release, we had another solid quarter driven by strong same-store growth of nearly 6%. And this growth is hitting our bottom-line earnings as well. I'll let AJ discuss the leasing environment and our achievements last quarter, but our goal of creating superior top-line growth and having that growth translate into bottom-line earnings growth remains on track. On previous calls, I've walked through in detail the drivers of improving tenant demand. So I'll try not to repeat myself today other than to say that even with current macroeconomic concerns, the consumer remains fairly resilient and more importantly, while retailers' quarterly results may vary, tenants are looking past this short-term uncertainty and are continuing to execute on their multi-year growth goals. And now that we are a couple years past the lockdowns of 2020, it's worth taking a moment to look at how the retail real estate recovery is playing out. Some of what we're seeing in our results is well understood and broadly discussed, but other components are only recently beginning to be appreciated. The suburban segment of our portfolio was the first to bounce back from the early days of COVID. The resilience in this segment is pretty well understood. Going forward, we expect market rent growth to continue at a similar rate to economic growth. The key issue here will be increasing capital expenditures and operating expenses, which is reducing net effective rent growth. Then in terms of street retail, first we saw our rebound in that portion focused on the local neighborhoods ranging from Greenwich Avenue in Connecticut to Armitage Avenue in Chicago. For this segment and for a variety of reasons, market rents recovered to pre-COVID levels pretty quickly and have grown in excess of 20% and in some cases as high as 30% since then. Also, since CapEx as a percentage of rent is significantly smaller, net effective rent growth has been strong as well. The supply-demand balance is again favorable to landlords, tenant rent-to-sales ratios are healthy and we should be able to see net effective growth here also at or above the contractual growth rate of 3%. The issue here is that tourism is generally not a driver of sales in the neighborhood segment, and increased return to office might be a bit of a headwind. Then what is probably most surprising and generally not yet appreciated is the recovery of major market street retail, whether Soho in New York or Melrose Place in LA or many of the other corridors in our portfolio. Given that over half of our street retail falls into this segment, it's a recovery we are watching carefully. A couple years ago, it was unclear how key streets were going to respond to hybrid work, subdued international tourism, and a shift by many families to the suburbs or Sun Belt cities. We have more clarity now... Hybrid work is not a headwind for these corridors. The recovery of international tourism is only beginning to show up. The pace of urban out-migration has slowed and in some cases reversed. And most importantly, retailers are more focused today than ever on controlling their customer experience in an omnichannel world by having their own physical stores. Retail rents for key corridors first recovered to 2019 levels between one and two years ago, and we thought they might level off from there. We were wrong. As evidenced by some of our recent leasing accomplishments in key streets, market rents are now 20% to 40% above 2019 rents. This means that on a net effective basis, market rents since 2019 have grown in these streets more than in any other component of our portfolio. Our recent Broadway, Prince Street lease in Soho is an example where the recent spread of 45% after only two years is a good approximation of market recovery there since 2019. But we're also seeing meaningful growth in Melrose Place, the Gold Coast of Chicago, and Street in Georgetown. And as opposed to other segments of our portfolio, these markets are in earlier stages of recovery and based on both tenant demand and tenant health, market rents for this segment seem to have more room to run beyond this current rebound. And along with strong contractual growth, we should be able to recognize this NOI growth sooner as well since we have more mark-to-market opportunities in this segment. Now, to be clear, not all markets in our portfolio have yet recovered. Markets that have lagged some are downtown San Francisco, North Michigan Avenue in Chicago, and Madison Avenue here in New York. But in recent months, Madison Avenue is quickly recovering, and I'd expect other markets to follow as well. Now I appreciate that it is still hard for some to reconcile this tenant demand and performance with the perceptions around return to office or urban flight. Additionally, we recognize that this growth may not be fully appreciated until we are past some of the macro concerns around a looming recession and elevated interest rates. But as we continue to post these gains, they become harder to ignore. Thus, as it relates to internal growth, we are on track for our multi-year growth goals, and while we expect a slowdown in the economy will eventually create a reduction in tenant demand, we're not seeing it yet. Turning now to the capital markets. Well, the good news as it relates to the consumer, the job market, and our leasing performance is the bad news or headwinds in the Fed's focus on reducing inflation. Furthermore, the inverted yield curve and elevated interest rates are not just impacting borrowing costs but also creating uncertainty as to real estate values. Thankfully, as it relates to Acadia and as John will discuss, we have nicely hedged our interest rate exposure for our core portfolio and our maturity schedule for the next couple of years is also in good shape. The real question is the impact on the value of high-quality cash-flowing real estate. And the markets are fairly divided on this issue. While no one believes we are quickly returning to the era of free money, sellers want buyers to assume that the 10-year treasury recovers to its recent 3.5% rate or lower and that the economy has a very soft landing. And buyers want to transact on the assumption that the 10-year treasury is at 5% forever and that the landing is hard. And thus we have a wide bid-ask spread and limited transaction activity. And while this debate continues, the inverted yield curve is also causing too many investors to remain focused on short-term investments and debt-like instruments rather than taking duration and equity risk. This pricing impasse will likely end over the next few quarters. We're beginning to see some distress and turnaround opportunities emerge, and we'll make sure we position ourselves to participate in them. We'll be respectful not to add unnecessary complexity, not to lever our balance sheet, and not to grow for the sake of growth. But given our institutional capital relationships and our ability to identify opportunities even when our stock price is not advantageous, such was the case in Lincoln Road in Miami after the GFC, or our participation in the privatization of Albertsons Supermarkets, or the dozen other transactions that we participated in. We will find ways to ensure our shareholders benefit as external growth opportunities arise. And since it doesn't take much volume to move the needle for us, even a few acquisitions, whether on balance sheet in conjunction with capital recycling or utilizing our institutional capital relationships, they can meaningfully add to our external growth. As it relates to Fund V investments, we have an asset under agreement which fits our target profile and investment returns and we will round out the balance of Fund V with that. For future investments of this style, we're going to continue to rely on our institutional relationships to add to that platform. Given our 20-year track record of raising and managing third-party capital for the benefit of both the institutional clients and public shareholders, the key is first and foremost finding the right opportunities. And as time marches on, we suspect those opportunities will show up. So to conclude, it was another quarter of validation of our thesis, solid top-line growth hitting our bottom-line. As you will hear from AJ, our leasing activity is robust and as you will hear from John, our multi-year above-trend NOI growth plan is intact. And with that, I'd like to thank the team for their hard work this last quarter, and I'll turn the call over to AJ Levine.
AJ Levine, Head of Leasing and Development
Good morning everyone. I lead Acadia's Leasing and Development team, which is responsible for driving organic NOI growth for our $5 billion open-air portfolio, including top-tier street assets and open-air shopping centers, both wholly owned and in our funds. Our diverse portfolio gives us insight into various asset classes and the retail landscape. My team has direct access to a wide range of retailers from high-end luxury to grocery, food and beverage, specialty stores, and discount retailers. Today, I will discuss our observations at the asset level, both on our streets and in our shopping centers, as well as feedback from our retailers. We are currently experiencing strong demand from retailers across the spectrum. Retailers have informed us that they are looking beyond short-term fluctuations and are focused on long-term growth, leveraging their physical stores to sustain profitability after a strong performance in recent months. We are also witnessing a landlord-friendly supply-demand dynamic that began in 2022, which is buoyed by robust retailer performance, a flight to quality, solid tenant balance sheets, and historically low supply levels. This is resulting in consistent rent growth in many of our key markets and is advancing our goal of increasing core NOI by $30 to $40 million over the coming years. Regarding leasing volumes, my team is focused on achieving the best execution across both core and fund leasing, but the figures I'll mention are exclusively for our core portfolio at our pro rata share. Last year was one of our most productive leasing years ever, with nearly $9 million in new core leases, which constituted about 6.5% of our in-place ABR. Looking ahead to 2023, we are off to an even stronger start with over $8 million in new leases signed during the first nine months, and we anticipate another $2 million to $3 million in deals during the fourth quarter. This would bring our total new deals in 2023 to between $10 million and $11 million of ABR, marking a 20% increase over an exceptional 2022. Altogether, this represents approximately $20 million of ABR or about $25 million of NOI from new leases. Aside from acknowledging my team’s hard work, this underscores the significant progress we've made in meeting our growth objectives. We are also consistently surpassing our budgeted rents, which holds true for both our suburban portfolio and our street properties. For example, in the third quarter in New York City, we signed three leases, including two new ones in Soho with cash spreads of 45% and 95%, and one lease in Williamsburg at a 55% spread. The payback period for the capital invested in these deals averaged about a year of rent, a significant advantage of street leasing compared to suburban options. Another advantage of street leasing is the opportunity for fair market value resets, allowing us to adjust rents. Over the last year, we have seen five fair market value resets in our high-growth streets at an approximate 25% markup, at no cost to us, and these spreads contribute just under a penny of FFO. For a company of our size operating in a vibrant urban leasing environment, we can effectively enhance FFO with a manageable number of lease transactions. My team is always on the lookout for opportunities to optimize our portfolio and reclaim spaces when the market conditions are favorable. Recently, we proactively recaptured two spaces before the prior tenants' leases expired, knowing that several tenants were interested in those locations at much higher market rents—approximately 45% and 55% increases. This exemplifies the double-digit growth we're witnessing across our streets, driven by strong sales that are well above 2019 levels amid very low supply. For instance, much of the prime space in Soho is already leased, and Melrose Place and Armitage Avenue are fully occupied with waiting lists, while Greenwich Avenue is also close to capacity. On M Street, demand for smaller to medium-sized spaces has surged, creating spillover onto Wisconsin Avenue as specialty and aspirational brands seek to secure market presence. Healthy competition is leading to multiple offers, enhancing our pricing power and enabling us to curate our streets with tenants that elevate the overall market. This trend is not limited to Soho and Williamsburg; it's consistent across most of our streets. Last quarter, we highlighted Melrose Place with 30% spreads; this quarter's focus is on Soho. Shifting to our suburban centers, we are seeing strong top-line growth and stability. We have healthy competition for our junior boxes, although these deals have higher relative costs and longer payback periods. Exciting news this quarter includes our House of Sport opening for DICK'S Sporting Goods in Brandywine, expected in late 2024. Moreover, in downtown Brooklyn, we are witnessing remarkable momentum. The area has seen the addition of 27,000 new residential units, including 1,200 units directly above our project. NYU's tech campus hosts 7,500 students, and the vicinity is home to the Barclays Center and Metro Tech Center, which has over 25,000 employees near City Point. As the market matures, our curation at City Point remains exceptional. In addition to major tenants like Target and Trader Joe's, we boast an Alamo Drafthouse, a top-ranking theater, and a 60,000 square foot Primark that draws substantial traffic. We are attracting over 600,000 visitors monthly, which reflects a year-over-year traffic increase of 16%. Our large food hall, featuring 40 unique vendors, is exceeding pre-pandemic sales volume on a per stall basis and is now 95% leased. Fogo de Chao, which we signed early this year, is set to open in December, anchoring the north side of our Prince Street passage. Court 16, a 20,000 square foot indoor tennis facility, celebrated its opening last quarter. Additionally, a one-plus-acre park across from our Goldstreet retail is on schedule to open in the first quarter of 2024, providing a key outdoor space that connects with the neighborhood. With the park's opening, we can activate valuable street space that we've held back strategically. A significant recent development for City Point is our new lease with Sephora, which will anchor our south entrance, joining a lineup that includes Lululemon and McNally Jackson. This lease significantly strengthens our positioning at City Point and validates our team's efforts. With entrances anchored by Fogo de Chao on the north end and Sephora and Primark on the south, we can continue to fill in remaining spaces with innovative and relevant tenants. We are achieving this while exceeding our budget in both top-line and net effective terms and remain on target to surpass our projections. Stay tuned for further updates on City Point and more exciting announcements in the near future. I'll now hand the discussion over to John.
John Gottfried, CFO
Thanks, AJ, and good morning. We had another strong quarter. As AJ walked us through, the volume of deals and the rates we are achieving are continuing to exceed our expectations. Notwithstanding the rapid rise in interest rates, we have substantially mitigated our earnings exposure for the next several years through our use of interest rate swaps and managed debt maturities. This gives us increased confidence to reaffirm our multi-year same-store NOI growth projections and more importantly that this top-line growth will continue to drop to our bottom-line earnings. Now I'll provide some further color on each of these, starting with our third quarter results. We reported FFO of $0.27 per share. It's worth reminding everyone that as we had anticipated, embedded in our third quarter results is the NOI impact from the tenant rollover at North Michigan Avenue and Bed Bath and Beyond that we have been discussing for the last several calls. With this known rollover, our third quarter core NOI is at its trough with meaningful growth in front of us as our signed but not yet open pipeline starts to kick in. In a few moments, I'm going to walk through a preliminary 2024 earnings bridge that highlights our current expectation of once again delivering strong same-store NOI growth as well as year-over-year earnings growth in 2024 and beyond. In terms of our 2023 full-year earnings expectations, for the third time this year, we have increased our FFO to $1.26 at the midpoint after adjusting for the $0.05 gain that we discussed last quarter. At $1.26, this results in year-over-year earnings growth of about 6%. Now moving to same-store NOI. Driven by the profitable lease-up within our street portfolio, we reported same-store NOI growth of 5.8% for the quarter, which once again exceeded our internal model. With growth of 5.9% for the nine months, we remain on track to come in at the upper end of our initial 5% to 6% full-year 2023 guidance. It's worth highlighting the correlation between our top-line growth, meaning same-store NOI, to our bottom-line earnings growth, both of which we anticipate being about 6% in 2023. We expect this trend should continue in 2024 and in the years following. Although it is a bit premature to release our 2024 guidance, I want to spend a few moments highlighting a few preliminary observations on our core portfolio, which comprises the vast majority of our NAV and earnings. First, we are on track to deliver over 5% same-store NOI growth in 2024. Secondly, in addition to projected same-store growth, we are also on track to achieve total NOI growth in 2024, inclusive of our redevelopment projects. This is even factoring in the meaningful rollover that we have been discussing for several years on North Michigan Avenue in addition to the bankruptcy of Bed Bath & Beyond. With that in mind, I'm now going to walk through the key drivers that bridge the $0.27 of FFO that we reported this quarter to our projected 2024 quarterly run rate, which we expect to land in the $0.30 to $0.34 range, which if you are so inclined to annualize a midpoint, mathematically gets you to $1.28 for the year. Now let me walk through the pieces. Starting with our first and most impactful driver, our core portfolio. We anticipate that the growth in our core portfolio will add an incremental $0.01 to $0.03 to our quarterly run rate. This growth will be driven by the $8.3 million of ABR or nearly $10 million of NOI coming from our signed but not yet opened pipeline, as adjusted for our current expectations of potential tenant rollover and reserves. With a potential upside in the $0.01 to $0.03 quarterly range, coming from our team continuing to beat our leasing goals. Secondly, notwithstanding the significant rise in interest rates, we anticipate reducing our 2024 quarterly interest expense by about $0.01 or $0.02, which we expect to achieve without earnings dilution, primarily through reducing leverage with retained cash flow, monetizing non- and low-EBITDA-contributing assets, along with other balance sheet initiatives. Third, through a combination of fully deploying Fund V, the continued realization of fund profits and promotes, NOI growth at City Point, along with G&A initiatives, we anticipate that this increases our quarterly run rate by another $0.01 or $0.02. Thus when putting together these pieces, we are on track to achieve strong year-over-year earnings growth in 2024, particularly after adjusting for the $0.08 of the non-cash gain that we recognized in the second quarter of 2023. This run rate is before layering in any accretion from 2024 external growth assumptions. I also want to quickly share how we are thinking about City Point from a 2024 earnings perspective. AJ has already talked about all the exciting progress we have made over the past few months at the asset level, so I won't repeat any of those updates. As a reminder, last quarter we estimated and are reaffirming net incremental earnings accretion of $0.04 to $0.06. This accretion factors in both the additional NOI growth that we are projecting upon stabilization, along with the potential to further increase our ownership. As we mentioned last call, if we were to increase our ownership in City Point prior to stabilization, this would likely create short-term earnings dilution. However, based on recent discussions with our partners, our expectation is that our ownership will remain unchanged and thus we are projecting that our partners' loans will remain outstanding throughout 2024. Should any of these assumptions change, we will certainly provide you with an update. Now transitioning to core leasing and occupancy. As AJ mentioned, we signed several new leases in New York City during the quarter at average spreads exceeding 50%. These leases represented over $4 million in annual base rents at our share. To put this in context, a 50% spread on these handful of leases created incremental and unbudgeted NOI of about $1.5 million, resulting in over 1% annual FFO growth compared to our prior in-place rents. Now moving to occupancy. During the quarter, we increased our core leased occupancy to 95.3% at September 30th, resulting in a 20% sequential increase in our signed but not yet open pipeline to $8.3 million of ABR at our share or about 6% of our in-place ABR. Timing-wise, we anticipate that approximately 15% of the $8.3 million will commence during the fourth quarter of this year, with an expectation of about 50% commencing in the first half of 2024 and the remaining 35% in the second half. To remind you, this $8.3 million relates solely to our core operating portfolio, meaning it excludes any signed but not yet open leases from core assets that are in redevelopment, or those residing in our fund business including City Point, which if we were to include our share of these leases, would nearly double our pipeline with an additional $7 million of ABR of executed leases that have not yet commenced or over $15 million at our share when aggregated with the $8.3 million. Lastly, I want to touch on a few items on our balance sheet. With nearly $900 million of interest rate hedges coupled with minimal upcoming core maturities, our balance sheet is well insulated from the turbulent interest rate and capital market environment. This is irrespective of where base rates may go for the next several years. We anticipate nominal impact, if any, on our core earnings through 2026 due to financing costs. Furthermore, our balance sheet goals are on track. With the actions that we have set out to accomplish, we aim to moderately reduce our core leverage and get metrics back to our target levels well underway. Our goal within the next six to nine months is to get our core debt to EBITDA in the mid to low 6s and then firmly into the 5s within the next 18 months. To level set the magnitude, given our relatively small size coupled with the core EBITDA growth in front of us, the dollar amount of deleveraging that we need to achieve in order to hit our metrics is manageable at about $100 million. As I shared earlier, we remain confident that we should be able to accomplish our balance sheet goals in an earnings-neutral manner. While we remain cognizant of the macro uncertainties, our progress this quarter has strengthened our conviction on achieving our multi-year internal NOI growth goals, along with the actions we are taking to ensure this NOI growth will show up in our bottom-line earnings. With that, we will now open up the call for questions.
Operator, Operator
Our first question comes from Floris van Dijkum with Compass Point. Your line is open.
Floris van Dijkum, Analyst
Good morning, everyone. Thank you for taking my question. Another quarter of solid NOI growth has been reported. It appears that much of this growth will translate into earnings growth, which I believe will distinguish you from some of your peers in the coming year. Could you discuss some of the balance sheet initiatives? Additionally, you mentioned potential asset recycling on a neutral basis. Are you considering reducing your exposure to a market like Chicago in that context?
Ken Bernstein, CEO
All right. So let's do that actually in reverse order, John. Let me start off in terms of exposure. Markets like Chicago would be logical for us on a disciplined basis for us to reduce our exposure. We don't have anything against Chicago in some of our markets; Rush/Walton, Armitage Avenue, as AJ mentioned, are leasing very well. However, we do need to recognize that in the public markets having too much exposure to any one city and some of the headwinds that Chicago faces would make sense to reduce that. So that would be a market that you should expect us to reduce our exposure on a disciplined basis at the right time. As it relates to the balance sheet and other initiatives, John, why don't you cover those?
John Gottfried, CFO
Yeah. Hi, Floris. I think as I mentioned in my remarks, our target is going to be to do this in an earnings-neutral fashion. So think of things such as like in Albertsons where there's no EBITDA coming from that as we monetize that, that will be used to deleverage as well as retain cash flow. With the earnings growth in front of us, that will be another source to deleverage along with a couple of other things that we have in the works that are getting us there.
Floris van Dijkum, Analyst
And then if I can have a follow-up on San Francisco maybe a little bit. Obviously, you've still got these two really neighborhood centers, one with the Whole Foods that still has not got its certificate of occupancy. Maybe if you can give an update on that and also maybe give an update on what the status is on the former Bed Bath space at 555 Ninth?
Ken Bernstein, CEO
Sure. So let me set the table, and then AJ, in terms of leasing progress and leasing demand. City Center, as we've talked about in the past, Whole Foods is working through their local approvals. Thankfully, with some of the changes that have been occurring, we have seen an increase in community support for their opening and an increase in support from the city. So, Whole Foods is pleased with how that is progressing, and it remains on schedule for an approval process next year. The leasing around that is relatively small shop space, but that will be a nice incremental boost as well. Regarding 555 Ninth, AJ, I'll let you give some color there. To remind everyone, we had an oversized Bed Bath & Beyond that we recaptured below-market lease, created some earnings noise this year that I apologize about, but we are going to split that in two since it was two-level space, two junior anchors, one on each level, and then shop space. Why don't you talk about that a little further, AJ?
AJ Levine, Head of Leasing and Development
Yeah, sure. So as Ken said, 555 Ninth it's a redevelopment. It always has been. Bed Bath was in 75,000 square feet on two levels, and the plan has always been to split that up into three spaces: two anchors Ken mentioned and then the small shop space where you can really drive rents. Even in the best of times, I think it takes a while for that to come together. We are off to a great start at the center and that we leased the box on the second open-air portion of the center to the Container Store, and we are getting good preliminary interest on filling portions of that Bed Bath box.
Floris van Dijkum, Analyst
Maybe if I…
Ken Bernstein, CEO
Happy Halloween, Floris.
Floris van Dijkum, Analyst
Thank you, and I apologize. For my final question, I’m curious about City Point, which seems poised to be a significant contributor that won't be included in your same-store metrics. What steps do you need to take for it to be considered part of your same-store pool? Is it about increasing your ownership or achieving more stabilization? Because having a $7 million pipeline at City Point alone seems considerable.
Ken Bernstein, CEO
Yes, Floris, here’s how we’re approaching it. This aligns with our same-store metrics. The key factor will be achieving stabilization, and it will be the following year after that before we consider it for same-store growth to avoid overstating our figures. So, the primary focus is on stabilizing the asset. Additionally, as you mentioned, it still falls within a fund, and the ultimate ownership situation is still being determined, which will be a secondary consideration. However, reaching stabilization is crucial. We want our same-store metric to reflect growth that positively impacts our bottom line, as those are the assets that will drive that growth.
Operator, Operator
One moment for the next question. Our next question comes from Ki Bin Kim with Truist. Your line is open.
Ki Bin Kim, Analyst
Thank you, and good morning. On the $0.30 to $0.34 of a recurring quarterly FFO run rate, how much of that $0.32 is transactional income or promote income?
Ken Bernstein, CEO
Sure, I'll start by saying this is preliminary. We are not providing detailed guidance at this time, but you can expect stability from that part of our business over the next couple of years. While I’m not offering guidance, I anticipate it will be at a similar level to this year.
Ki Bin Kim, Analyst
Okay. And going back to your comments about possibly monetizing some of your non-contributing assets, how does that manifest itself ultimately? Are the book values reflective of what you think those assets might be worth? Or as we get closer to cut that time point, could there be further impairment charges?
Ken Bernstein, CEO
Yeah. I would say that our book value should be the best proxy as the accounting rules would drive us to impair otherwise. So I would think book value would be an appropriate metric.
Ki Bin Kim, Analyst
Okay. Thank you.
Operator, Operator
One moment for our next question. Our next question comes from Linda Tsai with Jefferies. Your line is open.
Linda Tsai, Analyst
Hi. What percentage of your $8.3 million signed but not occupied are high-value street rents? How does that compare to 2Q's signed but not occupied?
Ken Bernstein, CEO
Yeah. Linda, based on the leases that AJ discussed, I would say that a significant portion, both in comparison to previous quarters and the $8.3 million, is estimated to be in the 75% or higher range, which reflects a higher percentage.
Linda Tsai, Analyst
And then in terms of monetizing the lower growth assets next year, just wondering if those sales you expect them to be chunky in terms of the first half versus second half?
Ken Bernstein, CEO
Stay tuned, Linda. I think we'll give more color on that. But I think what I would say from a run rate, I'm just picking the midpoint, the $0.32, I think between those three drivers would be the way to think about it.
Linda Tsai, Analyst
Thanks. AJ, you've mentioned before the strong demand from luxury retailers as they shift away from department stores to better manage their brands. How are those discussions evolving now that there are reports of a slight slowdown in sales?
AJ Levine, Head of Leasing and Development
Yeah. So those discussions continue. We continue to see those luxury brands and some of the aspirational brands pivot away from wholesale and department stores and really establish their own brick-and-mortar presence where they can control the narrative, where they can interface with the customer directly. As I had said, because of their performance over the last two years, frankly, and because they've acknowledged the critical nature of that physical store, most of them continue to see past that short-term choppiness, Linda, and are still focusing on long-term growth. So no slowdown in that sense.
Linda Tsai, Analyst
Thank you.
Operator, Operator
One moment for our next question. Our next question comes from Craig Mailman with Citi. Your line is open.
Craig Mailman, Analyst
Hey, good morning. Ken, maybe I want to go back to your earlier comment on where kind of the mark-to-market is on some of your street assets given the rising rents, particularly in New York, and as we think about that versus where interest rates are going and what that could do to kind of stabilize cap rates here. I'm just kind of curious, your thoughts as you kind of look at your blended implied cap rate here in the 7s and half of your portfolio is the Street assets. How do you connect the dots on that valuation versus what you're seeing from a mark-to-market and CapEx needs perspective versus other portfolios in the market or kind of private market comps?
Ken Bernstein, CEO
Yeah. There are certainly, as you just pointed out, a host of factors to try to digest at this moment in time. Let me do my best. First of all, the growth, which was what I was discussing, and that piece of it, in a period where interest rates are high, where the market is confused, where macro events seem to take control versus micro events like growth. It is hard to say here, what is the value of an asset that's growing at 5% a year versus assets that might be more stable, growing at 1% or 2%. I think there is that confusion right now. So I'm not going to tell you, well, this is the cap rate you should ascribe to that. But over any extended period of time, if you see more growth, we all know that the markets will reward that. Second point, CapEx. We've been talking about this for a while, and there is a meaningful distinction or at least there was a meaningful distinction between the CapEx expenditure relative to rent in our suburban portfolio versus in our streets. It's as a ratio of rent; higher rent to CapEx is much healthier in the streets. That used to be the case. Now that's the case times 2 or 3 because not only have CapEx gone up due to inflation, but the interest cost to carry that CapEx has gone up as well. Thus, that distinction is also one that we are, as an industry, only beginning to digest. Finally, your guesstimate of what inflation looks like over the next five, 10 years is as good as mine, probably better. We're going to operate under the assumption that it's going to be more important going forward to capture NOI growth sooner rather than later. The distinction I make between our suburban centers and our street retail, and AJ certainly touched on this as well, is that in the streets, we have higher contractual growth. I think that's going to become more important. In the streets, we have fair market value resets. I think that's going to become more important. In the streets, we have less CapEx. That’s a long-winded way of saying who the heck knows where values are. The markets are certainly debating it. But we think that over the next year or two, the markets will settle down and will recognize the importance of growth and less CapEx, especially if we go through an era of higher growth, which should be good for our rents, good for our tenants, and we should be able to deliver on that piece for that segment of our portfolio. So that's a long-winded way, Craig, of trying to touch on all those pieces in a very confusing time period.
Craig Mailman, Analyst
I very much appreciate the thoughts. I guess this leads to the question because you guys were able to pick off some of these street assets coming on the financial crisis you noted, right? But maybe even in distress with some of the mark-to-market pricing on a going-in may not look as good as people would think. But I guess, how do you guys prepare the Street or potentially communicate that from a long-term kind of growth, either earnings or NAV accretion, if maybe you're using some proceeds from potentially some higher cap rate asset sales just to kind of circle the square on the long-term attributes versus maybe the short-term dilution? How do you view the importance of that in your decision-making?
Ken Bernstein, CEO
Yeah. So let me be clear. I don't want to spook anyone to think that what I'm about to say in any way means brace yourself for short-term dilution because I think we can avoid that. But when rents are moving as quickly as we've seen in some of these corridors, especially at a time where institutional capital seems to be ignoring that, it presents an opportunity. Just think about the 45% spread we saw over 24 months on Prince and Broadway; the opportunity to acquire assets at 2021 rents, when AJ has conviction about what he can deliver for 2024 rents, that arbitrage is compelling, especially given that as opposed to a decade ago, there's just less competition there. Considering our expertise, our access to a variety of capital sources, I am hopeful that this quiet period in terms of acquisitions ends and that we can find value-add opportunities where we can turn that tenancy around. We are not viewing this as the right time to add diluted transactions. We would look forward to that accretion even if we have to wait 24, 36 months to go from 2021 leases to 2024.
Craig Mailman, Analyst
And then just one last one. As we look in '24 and maybe ‘25, how many fair market value adjustment opportunities do you guys have?
Ken Bernstein, CEO
John?
John Gottfried, CFO
Yeah. Craig, I would say the vast, vast majority of our streets have that provision. I think we do have several of those coming up. So I think that's an opportunity for those. I would say, over the next couple of years, constantly having roll, and we're going to see that opportunity. AJ sort of mentioned, we're working through some of that as we speak. So stay tuned.
Ken Bernstein, CEO
Let me point out, I don't want to continue this conversation too much. Just so everyone understands how fair market value resets work. The tenant has the option to renew at the greater of a contractual bump, which looks like most of our standard leases, and the fair market value. The good news is, it’s not as though this appraises rents downward. However, we weren't talking about fair market value resets from 2017 until 2022 for all of the obvious reasons is that tenants weren't exercising. We were using that opportunity to cleanse streets like M Street in Georgetown. Now we are in that period where tenants are exercising those options. The good news is, in conversations with our retailers, their sales are strong enough that they are more than happy to exercise those options and continue to grow their businesses. So let's move on to the next question.
Operator, Operator
One moment. Our next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is open.
Todd Thomas, Analyst
Hi, thanks. Good morning. Hey, John, I appreciate the detail around 2024. Question, though, as we think about that $0.30 to $0.34 recurring quarterly FFO run rate, should we expect the early part of the year to be below that $0.30 to $0.34 range and then the latter part of '24 at or above the higher end of the range as more SNO rent commences? Or are your comments meant to suggest that you think you should be in that range throughout the entire year?
John Gottfried, CFO
Yeah. So, Todd, I guess a couple of thoughts. One, I'll start: we are not formally giving guidance; we're certainly not formally giving quarterly guidance. What I would say, and I think right now, all else being equal, the $1.28 for the year is the one that measures a bunch of different variables, and we think we land at. I would say that it is probably a fair assumption, as the signed but not open pool does not all start on January 1, and our core is the biggest driver. There will be growth throughout the year on those leases that are already executed. I think again, without wanting to formally do it, I think picking the midpoint for an annualized number is as good of an estimate as we have right now.
Operator, Operator
One moment for our next question. The next question comes from Jeffrey Spector with BofA Securities. Your line is open.
Lizzy Doykan, Analyst
Hi, good morning. This is Lizzy Doykan on for Jeff. Just within the expectation for at least 5% same-store NOI growth in '24, should we assume a consistent level of contractual rent bump of 3% on street, possibly lower on suburban? If you can't speak to exact numbers, maybe if you could just speak to expectations around how that should change based on the demand environment?
John Gottfried, CFO
Yeah. So, Lizzy, I would say that the assumption, the 3% on the Street is absolutely still the norm. We do have some leases that AJ is able to negotiate at 4%, but I think it's fair to use the 3% in suburban; the typical is 10% every five years. So it averages just slightly below the 2% range. I would say that our contractual growth is consistent with what we've done in the past.
Lizzy Doykan, Analyst
Okay, great. I just wanted to go back to Ken's earlier comment around CapEx and leasing costs and keeping that under control for maintaining net effective rent growth. Just wondering if you could expand on that further and maybe give us a better idea of what the associated costs are for the $8 million in ABR from SNO and give us a better idea of a real-time update on how those costs should be recognized when the rents come online too.
John Gottfried, CFO
I would say that a significant portion of the $8.3 million that is signed but not yet open comes from the Street. As AJ mentioned, our payback period is a year or less, which is the best way to think about it. Regarding when we recognize those costs, we will incur them over different periods. Generally, we will pay leasing commissions when the tenant takes occupancy, and some upfront costs, like any build-out expenses, are paid in advance. Most of the $8.3 million is associated with the Street, and the upfront costs typically have a payback period of less than a year. That's how you can do the math. As for the suburban side, AJ, do you want to discuss the costs that you’re observing in that area?
AJ Levine, Head of Leasing and Development
Yeah. So I mean the cost to put in a junior box have been elevated really for the last 24 months. A typical junior box at this point is costing anywhere between $65 and $80 a foot to put in. Depending on where the rent is, that can be five to six years of payback. It certainly is very pronounced sort of the shorter payback periods that we're seeing on the street just given where the rents are.
Ken Bernstein, CEO
Let me end with some positive news in terms of all this. We are beginning to see some disinflation in terms of the actual costs to put in tenants in suburbia. While the cost to finance those build-outs has gone up with interest rates, when you look at the value per square foot or replacement cost, our retailers are recognizing that staying or opening in these locations is critically important. So we're able to drive rents. The suburban component, while expensive, will still be a profitable part of our business.
Lizzy Doykan, Analyst
Great, thank you.
Operator, Operator
One moment for our next question. Our next question comes from Paulina Rojas Schmidt with Green Street. Your line is open.
Paulina Rojas Schmidt, Analyst
Good morning. My apologies if I missed this. But from a big picture perspective, when you're thinking about tenant failure next year, what's your best case scenario? I want to have a pretty big idea because some of your peers have been sharing that they are thinking about a variable range of what could happen from a tenant sales perspective. I wonder, given the scenario of uncertainty we are facing, if you think that’s reasonable or not.
Ken Bernstein, CEO
Paulina, is your question on the credit side or the retaining, whether they're on renewals?
Paulina Rojas Schmidt, Analyst
The mix, I would say. So it could be a non-renewal or any type of OpEx, so both.
Ken Bernstein, CEO
I believe that aligns with my estimate of $0.01 to $0.03 for our core operations. Given our size, we can assess on a space-by-space basis. AJ and I are in close communication, and we have a shared perspective on whether tenants will remain in their spaces. Our portfolio allows us to take this individualized approach, and AJ, along with his team, engages with all our tenants daily. We haven't observed any significant changes regarding tenants who might leave; if anything, it seems to be more in favor of tenants wishing to continue their occupancy. Additionally, I closely monitor our reserves related to credit. I look for any signs of payment slowdowns or if our leasing and administrative teams receive inquiries about payment plans. So far, we haven’t noticed any increase in those inquiries. While we remain cautious with our reserves considering the $0.30 to $0.34 range, there hasn't been any significant follow-up on this matter.
AJ Levine, Head of Leasing and Development
Let me add a little color above and beyond our portfolio. Given the rise in interest rates, the likelihood is that tenant retention and/or tenant failure rates could be as likely to come from tenants' balance sheets as opposed to their business. We see tenants' business models, meaning their sales more often than we get to examine, especially the private companies, their balance sheets. That is something we will watch. If I were to guess where this stress could occur, it would be for our local retailers who received a lot of help during COVID, so we did not see the failure rate then. The local segment, especially in our suburban portfolio adjacent to supermarket anchors, those rents have grown nicely. So that's a segment we'll watch. So far, as John said, we haven't seen any slowdown, but common sense tells us that they may be more interest rate sensitive in terms of their business, so that's something we'll watch. In general, as John said, it feels like next year may be more boring than volatile on that side, but we'll see.
Paulina Rojas Schmidt, Analyst
Thank you. And then the second question regarding new openings in the portfolio. Are you seeing trends from a category perspective?
Ken Bernstein, CEO
So, AJ, why don't you take that in terms of what trends are we seeing in terms of new tenants and where demand is coming from?
AJ Levine, Head of Leasing and Development
Yeah. Look, obviously, the earlier days of COVID, the recovery was first led by the essential retailers, but then quickly behind that, we saw this huge influx of luxury into most of our high-growth markets. Of course, the aspirational brands clustered around them. I think for most of our high-growth streets, that's what we continue to see. We're seeing continued entry of luxury tenants. We’re continuing to see the clustering of those tenants that want to be near luxury. On the suburban side, a lot of new store openings or the growth we're seeing is being led by our discounters: the TJ Maxxs, the Rosses, and the Burlingtons of the world. They have been leading the way in terms of net new store growth as well as the dollar stores and those sorts of high-volume openers.
Ken Bernstein, CEO
Let me remind everyone, especially generalists who haven't thought about this. Some of the trends, some of the reason you're seeing this pent-up demand. A few years ago, there was this notion that online sales were going to be the best channel for growth. Now we understand in an omnichannel world, the stores are their most profitable. You're still seeing that pivot, whether it's luxury, whether it's advanced contemporary, or whether it's discount. Moreover, you are seeing retailers recognizing that now is still a good time to sign leases even with all of this uncertainty. So it wouldn't surprise me that we'll continue to see an economic slowdown, economic uncertainty, consumer spending will be choppy, some tenant results will be choppy, and I still think you're going to see good leasing results.
Paulina Rojas Schmidt, Analyst
Thank you.
Operator, Operator
And I'm not showing any further questions at this time. I'd like to turn the call back to Ken for any closing remarks.
Ken Bernstein, CEO
Great. Thank you all for your time. We look forward to speaking with you next quarter. Happy Halloween.
Operator, Operator
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.