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Text: My name is Theresa Wang.
I'm a summer intern in our finance department.
You may ask further questions by reinserting yourself into the queue and we will answer as time permits.
As you can see from this quarter's results, several of the trends that we have discussed on past calls are now showing up in our earnings performance.
So today, I'll spend a few minutes discussing how these trends are positively impacting our business and then we'll delve into the details.
First of all, retailer demand continues to accelerate and it continues to broaden.
As we've noticed noted on past calls, while leasing activity was initially weighted to the necessity and Suburban portions of our portfolio, we're now seeing a meaningful pivot from lockdown-oriented necessities to more discretionary spending.
We're also seeing retailers once again focusing on the key street locations in the major markets that we're active, and while we're seeing solid performance throughout our portfolio, one of the key differentiators of our company is our ownership of street retail in key gateway markets, a differentiator that certainly cause legitimate concern during COVID.
So, let me spend a few minutes on the street retail segment of our portfolio.
As you know, roughly 40% of our Core Portfolio NOI consists of street retail and about half of that is in the highest density corridors of the major gateway markets.
During the early days of COVID, this half of our Street retail was hardest hit.
Whether it was Soho in New York, the Gold Coast in Chicago and Street in Georgetown, retailers were facing an existential crisis of unknown duration.
And that's understandably, in the early days of the lockdown, it was the other half of our street retail in the lower density markets such as Greenwich Avenue in Connecticut, our Armitage Avenue in Chicago as well as other necessity and Suburban components of our portfolio that had the most retailer activity.
And while this lower density component continues to perform well, we are seeing a shift in attention by our retailers that to the higher density corridors, and we're seeing this much sooner than we expected.
In the luxury segment for example, many retailers are not only staying in their flat locations, but they are expanding their footprints especially in key must have markets.
This is evidenced by our second-quarter lease with wire sales at our Gold Coast location at Rush and Walton in Chicago, where they are expanding their existing store by over 50% and they entered into a new 10-year lease.
Across the street from us, yours is expanding their space as well, providing further evidence of this sub-markets rebound from 12-months ago.
And this is certainly not just a Gold Coast phenomenon.
This trend is playing out and so how as well as other key markets and it's not just luxury retailers.
Bridge an aspirational retailers are also beginning to show up as well.
For example, in Melrose Place in Los Angeles, after the end of the quarter, we extended a lease with one of our retailers there for another five years at a double-digit lease spread showing the strength of this corridor and retailer confidence in Los Angeles.
Now let me clear, retailers are still being selective on which markets they are choosing to expand into, and it is still a tenants market.
But what recently felt like a decade's worth of vacancy is quickly being absorbed and while retailers and landlords are climbing out of several years of headwinds, headwinds that predated COVID.
Their recovery is encouraging with vacancies being leased up and COVID discounts are heavily structured leases quickly being replaced with real deals that are approaching or in some cases exceeding pre-COVID rents.
That along with luxury retailers, we're seeing the digitally native and other up and coming direct to consumer retailers stepping up.
Retailers influence seems to go far beyond their physical footprint.
Only a few years ago, these retailers debated the need for physical stores.
That debate is over.
Whether it's Warby Parker or Allbirds, the best in class digital retailers are seeing the significant benefit of physical stores.
For instance, on M. Street in Georgetown last quarter, we added digitally native retailer ever linked to our portfolio.
And this is encouraging because Georgetown is still in the early stages of reopening and the fact that tenants such as Albertsons, Ball Mason, my family's favorite Levain bakery are arriving on M. Street.
All of this is further evident of the support for this corridors.
And it's not just retailers hoping to capture a future rebound tenant sales performance, is already confirming the recovery.
For several retailers in our portfolio or in our corridors, they are beginning to post sales performance that is already comping positive to pre-COVID sales.
And, this is before the return of international tourism and before a full reopening.
Even in markets that have been slow to reopen such as San Francisco despite all of the headlines, we're beginning to see positive activity.
And as these key streets continue to activate, we are entering into what is setting up to be a nice multi-year rebound.
Not only are rent significantly below prior peak, but it appears clear now that retailers are committed to connecting directly with our customer both digitally, but also through these important stores.
So whether it's LVMH or Warby Parker, we are seeing the increased recognition of the importance of these locations in an omnichannel world.
As John will discuss, even before taking into account, anticipated additional market rent growth.
We should be able to drive above trend NOI growth at higher levels for the next several years.
For instance in Soho, notwithstanding the huge gut punch over the past 18-months.
We forecast our Soho portfolio NOI to nearly double over the next few years.
And then, assuming that this rebound continues, the growth could be even better in the street retail component of our portfolio, where we have more opportunities to mark to market our leases than in our suburban portion of our portfolio since fair market value resets are much more common in our street portfolio than in our suburban.
Then from a capital markets and investment perspective, while there has been less actionable distress than one might have thought in the early days of the crisis, the interesting and actionable deal flow is increasing.
In terms of our Fund V investing as Amy will discuss, we are seeing a nice increase in acquisition opportunities and this is due to the fact that in the private markets, retail real estate still remains somewhat out of favor.
Now, we expect that this will shift over time given that in the debt markets borrowing cost and debt proceeds have returned to pre-COVID rates and levels and in the public markets we have seen significant compression and implied cap rates over the past year, but for a variety of reasons.
It may take some time for the private markets to catch up and in the interim, we will continue to deploy capital opportunistically.
So with respect to Fund V, we're continuing to selectively buy out of favor properties with unleveraged yields of about 8% than lever them two to one with borrowing costs well below 4% and clip a mid-teens current cash flow.
That it doesn't ignore the fact that the United States is over-retail.
For that, achieving real net effective rental growth is going to take hard work.
It's going to take some work.
But these acquisitions don't require significant growth, they just require stability and if we see cap rate compression, commensurate with the public markets, which certainly seems likely over the next couple of years, the opportunity that asymmetrical upside feels pretty compelling.
Then, with respect to our Core Portfolio investments, our acquisition pipeline is also heating up.
As you know, our focus here has been to selectively acquire assets in the highest barrier entry markets where we can achieve superior long-term growth.
Obviously, COVID and related issues were a real gut punch for many of the Carter's we're active in.
First, rents in many key streets that we're active in are at a cyclical low point.
Second, many of the tenants we do business with have now successfully navigated the so-called retail apocalypse and are in a much stronger position to succeed in an omnichannel world.
And third and finally, the consumer is in very healthy shape and returning to discretionary spending.
Given the amount of disruption, we have seen in the major markets, it's understandable that deal flow initially slowed, but sellers are beginning to return.
And given the roller coaster ride, they went through.
We are seeing sellers being realistic on rental growth and other assumption.
So, while it is still a bit early based on the improving deal flow we are currently involved with, and what we are seeing in the pipeline, we expect to be able to require best-in-class retail properties in the key high barrier to entry corridors where retailers are going to continue to cluster.
And while in the second quarter, we began to put some dollars to work accretively.
We are confident to that as meaningful buying opportunities arise, we will be in a position to capitalize.
And while our strong embedded internal growth, certainly means we can afford to be disciplined and we can afford to be patient.
Are relatively small size means that every $100 million of acquisitions as about 1% to our earnings base.
So to conclude, we are pleased to see our quarterly results reflect the rebound in leasing and operating trends.
It is also encouraging to see retailer stepping up again for the unique must have locations that dominate our portfolio.
And then most importantly, it is exciting to think about the potential opportunities in front of us, especially for management teams like ours with access to multiple types of capital and a proven track record of deploying it.
I'll start off with a discussion of our second quarter results followed by an update on our Core NOI growth expectations and then closing with our balance sheet.
Starting with the quarter, FFO came in above our expectations at $0.30 a share, and this was driven by a combination of 2 items.
First, rent commencement on new street leases, including in Chicago with Veronica Beard on Rush and Walton along with J. Crew and Lincoln Park and in New York City with Watches of Switzerland and Soho and consistent with what we had observed last quarter, we are continuing to see leases commence earlier than we had initially anticipated as retailers expedite their store openings in an effort in an effort to capture the extraordinary consumer demand.
And secondly, we are continuing to see significant improvements in our credit reserves.
The improvements this quarter was driven by increased cash collections.
We collected 96% of our pre-COVID rents during the second quarter and saw continued consistency within our Street Urban and Suburban portfolios.
And that a 96% cash collection rate, our quarterly reserve should trend in the $2 million range or $0.02 or $0.03 a share.
Additionally, during the second quarter, we recognized a one-time benefit of approximately $0.02 from cash collections on past due rents.
The majority of this benefit came from our German theater tenants that represent approximately 4% of our core ABR.
As outlined in our release, given the continued growth and conversion of our pipeline into executed leases along with a significantly improved outlook on our operations, we have once again raised our full-year FFO guidance with an updated expectation of $5 to $14 and this represents a 7% increase at the low end of our original guidance.
And in terms of our FFO outlook for the second half of the year, we are anticipating that our quarterly FFO should trend in the 25% to 27%.
And this is before any possible benefits from cash basis tenants or the sale of Albertsons shares.
As it relates to Albertsons specifically, we have revised our 2021 guidance to reflect an updated range of zero to $7 million or $0.00 to $0.08 a share for potential share sales.
And as a reminder, irrespective as to when the shares are actually sold, given that our cost basis in our Albertsons stock is zero.
It's simply a question of when, not if that this upside shows up in our earnings.
Using today's share price, we have over $20 million of profit representing am excess of $0.20 a share of FFO.
In terms of timing, while a share sale is still possible this year, that decision with our partners is based upon a variety of factors.
And for purposes of modeling 2021 earnings, it may be prudent to push any realized gains into next year.
So not only are we incredibly pleased with the performance of our portfolio this quarter, we are also increasingly optimistic about the much more impactful Core NOI growth that we believe is still in front of us.
This growth is being driven by the recovery in our street and urban portfolio and if our business continues to perform in line with our expectations, this should provide us with meaningful multi-year internal growth, which in summary has us growing our Core NOI between 5% to 10% annually through 2024 with an expectation of more than $25 million of incremental NOI over 2020 that we believe gets us to $150 million in 2024.
So, while it's premature to provide multi-year FFO guidance at this point, given the leasing progress we have made to date, and the acceleration of recovery within our portfolio, not only are we anticipating meaningful FFO growth in 2022, but we are well positioned for strong FFO growth for the next several years.
And that's even before we layer in the impact of any accretive redevelopments, external growth or the profitable transactions that we anticipate should continue to rise from our Fund business.
The three key drivers of this growth include first, profitable lease up of our Core Portfolio.
Second, further stabilization of our credit reserves and lastly contractual rent growth.
Now, I'll provide a bit more granularity on each of these pieces.
First, on the lease-up.
As outlined in our release, we have approximately $14 million of pro rata ABR in our core pipeline with more than half or approximately $7.5 million dollars of that already executed.
And to further highlight the recovery that we see playing out within our street in urban markets, 60% of our executed leases have come from our street and urban portfolio with New York City alone representing nearly 40% on our current pipeline.
In terms of the pipeline itself, you may recall when we initially started discussing it in the second half of last year, it stood at $6 million.
So with the $7.5 million of leases that we have signed to date, not only have we signed 125% of our original pipeline, but we have also more than doubled in a short period of time.
And this is providing us with an increased confidence on both our ability to successfully execute profitable deals and equally important, the strong and increasing demand for our prime street and urban locations.
And these leases that have been executed are starting to meaningfully show up in our metrics.
The spread between our physical and leased occupancy grew over 100 basis points during the quarter to 260 basis points with our New York metro portfolio leading the way with a pro rata physical to lease spread of approximately 700 basis points at June 30.
The $14 million pipeline represents our pro rata share of ABR and is comprised of over 400,000 square feet of space with approximately 70% of the $14 million being incremental to our 2020 NOI.
In terms of the timing as to when we expect that our pipeline will impact earnings, we anticipate that about 2 million this will show up in 2021 as compared to our initial expectation of $800,000 with an incremental $6 to $8 million in 2022 and the balance coming in during 2022.
The second drive of our NOI growth involves our expectation of ongoing stabilization of our credit reserves.
As I mentioned earlier, at a 96% cash collection rate, this translates into quarterly reserves in the $2 million range or $8 million when annualized equating to $0.09 of FFO.
We anticipate that of the $8 million in annualized reserves that approximately 75% or $6 million when annualized will ultimately revert back to full rents with the remaining 25% or $2 million annualized ultimately not making it to the other side, providing our leasing team with the opportunity to profitably retanating space into what we are currently experiencing as a very robust leasing environment.
And the last piece of our growth comes from contractual rent growth.
Driven by the higher contractual rent steps built into our street leases, this blends to about 2% a year across our portfolio and contributes approximately $3 million of incremental annual NOI.
As a reminder, given the impact of straight-lining rents, contractual growth doesn't increase our FFO.
But nonetheless, is an important driver of our NOI and ultimately NAV growth.
As an update on near-term expirations, consistent with the tenant rollover assumptions that we provided on our last call, our NOI forecast continues to assume that we get back approximately $9 million of ABR at various points over the next 18 months from our remaining 2021 and 2022 these expirations.
This $9 million includes approximately $4 million of ex of ABR expiring within the next six months from two tenants located in some of our best locations and we have meaningful traction to profitably retenant these locations with a portion of the space already reflected in our pipeline.
Now, moving onto our balance sheet.
During the second quarter, we successfully closed on a $700 million unsecured credit facility with an accordion feature enabling us to upsize it to $900 million.
This new facility significantly increased our liquidity, along with extending our maturities for five additional years and we saw incredible support on this deal.
The transaction was oversubscribed with all of our existing banks remaining in the facility and we successfully added four additional banks.
The successful execution of this transaction gives us further confidence in our ability to pursue and execute external investment opportunities.
Additionally, through improved operations and deleveraging, we have also brought our core debt-to-EBITDA down to the mid-sixes and are on track to get into the fives in 2022 as we begin to see the meaningful NOI growth show up in our results.
Lastly, as outlined in our release, we raised approximately $46 million through our ATM at an average issuance price of 20 to 37 and we were able to accretively redeploy these proceeds to the funding of investments and repayment of debt.
In summary, we had a strong quarter, we came in ahead of our expectations and have continued optimism as we look forward in the next several years.
And with the additional liquidity that we generated this past quarter, we are well positioned to pursue an aggressive external growth strategy.
Today, I'd like to provide a brief update on each of our four active funds, beginning with Fund V. First, we are pleased to report that fund deal flow is kicking in with our fully discretionary capital finally getting the credit it deserves.
We currently have approximately $170 million of Fund V acquisitions under contract or under agreements in principle.
This includes the $100 million we previously reported as of the first quarter.
Consistent with Fund V existing investments, this committed pipeline is comprised of higher yielding suburban shopping centers.
For stable properties, pricing remains at approximately an 8% unleveraged yield.
In fact, private cap rates for these types of suburban shopping centers have remained at this level since at least 2016 when we began leaning into the strategy with Fund IV.
At this going in cap rate, we have been able to maintain an approximate 400 basis point spread to our borrowing costs, enabling us to equip a mid-teens leveraged yield on our invested equity.
More recently, we are also seeing new acquisition opportunities with some immediate value added releasing, which plays to our strengths as retail operators.
At the beginning of the year, we had allocated 60% of Fund-V $520 million of capital commitments.
Including our committed acquisition pipeline, we are now approximately 75% allocated, and we have until August of 2022 to fully deploy the rest of our dry powder.
Due to our selectivity at acquisition, our existing Fund V assets have navigated the pandemic well with the collections rate that is now in the mid '90s consistent with our Core Portfolio.
And notably, throughout the pandemic, this carefully selected portfolio has delivered a consistent mid-teens leveraged returns.
Over the life of our investments, we expect to generate most of our return from operating cash flow.
That said, there is a tangible opportunity for outsized performance due to cap rate compression.
After all, real estate borrowing costs have returned to their pre-pandemic levels and public market cap rates for retail real estate have also compressed while private market cap rates remain the same.
As a result, we believe that signals are pointing to reversion to the mean in the private markets to over the next few years.
And every 50 basis points of cap rate compression would add 250 to 300 basis points to our projected IRRs.
Given the amount of capital on the sidelines and recovering retail fundamentals, this is also a good time to opportunistically harvest properties.
One area of focus is our grocery anchored properties, which have gotten a pandemic boost and remain in favor in the capital markets.
To that end, during the second quarter, we completed the sale of four grocery anchored properties all located in the State of Maine.
These were part of Fund IV in Northeast grocery portfolio.
At one property, we had recently completed the installation of a new junior anchor and at two others, the supermarket anchors had recently exercised their next five-year options providing enhanced cash flow stability and finance ability for the next buyer and better exit pricing for us.
Finally, turning to Fund II and City Point, we continue to see positive momentum at this iconic property with shopper traffic and tenant sales both continuing to increase.
Recall that City Point is located at the epicenter of a development boom in Downtown Brooklyn, which has resulted in the completion of nearly 16,000 new residential units since 2004, and another 13,000 units either under construction or in the development pipeline.
Among on New York city neighborhoods, Downtown Brooklyn, now ranks 13th for median home price up nearly 80% year-over-year to 1.4 million.
This should all in order to the benefit of our mixed-use project.
On the City point leasing front, we've seen strong interest in the former Century 21 space from both traditional retail users and commercial tenants.
There is also strong interest in the concourse level which is anchored by our decal market hall.
And we're pleased to announce that we recently executed a lease with Sphere physical therapy for a 2000 square feet space fronting Gold Street and the New York City development of a new one acre park.
With all these positive indicators, this is the perfect time for us to go to market to refinance this project over the next 12 months.
So in conclusion, our fund platform remains well positioned with the successful capital allocation strategy and a portfolio of existing investments that continue to march toward stabilization.

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acadia realty trust quarterly ffo before special items $0.30 per share.

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