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Text: Before we delve into the details of the last quarter, I'd like to spend a few minutes on some of the trends we saw last year and what we're seeing looking into 2021 and 2022.
While we're still working through an ongoing health crisis and ensuing economic headwinds, there is clearly light at the end of the tunnel.
Looking at our collection rate in the fourth quarter, our leasing activity, our discussions with our retailers, it's comforting to see both stability with respect to current operations and then, more importantly, very encouraging green shoots in terms of new leasing activity, in terms of existing retailer performance and our collections as John will discuss.
Collections throughout our portfolio have stabilized to above 90%.
Initially, this was driven by the more essential and suburban components of our portfolio, but more recently, the street retail component has begun to restabilize as well.
And while the range of potential outcomes remains very wide, and I suspect focus on monthly collections will continue for another few quarters.
There are a few worthwhile trends that are beginning to emerge.
One of the more notable trends we saw in the fourth quarter and accelerating to date is that tenants are looking past the pandemic and positioning themselves for the reopening of the economy in the second half of the year.
Retailers are showing up, and most recently, not just in the suburban portion of our portfolio, but also in the street and urban components.
In terms of our current leasing pipeline, which we mentioned on the last call as being approximately $6 million and now it has grown to over $8 million.
And this number is relevant because this pipeline already represents a rebound of about half of the 10% short-term hit to our NOI that we estimated as a result of COVID.
This pipeline has rebuilt faster than we had initially expected and has continued to improve over the past month.
To date, we have executed $3 million of leases in this pipeline, we are at lease for another $3 million and then the balance is at the letter of intent stage.
Leasing activity in our pipeline is now weighted fairly proportionate to our portfolio weighting, meaning that while initially the activity was weighted to our suburban and necessity portion of our portfolio, looking forward in our pipeline, our deal flow is now rebalancing, and about 70% is in street and urban.
Now, given that the street portion of our portfolio represents about 40% of our core portfolio and is a key area of differentiation for us, I think it's worth spending a few minutes on the encouraging rebound we're seeing there.
After a very scary and quiet couple of quarters, retailers are actively touring and going to lease in these markets.
The early movers we saw for the street component, they were in the half of our street portfolio located in the less dense markets that were generally quicker to reopen for business.
For example, in Greenwich and Westport, Connecticut, in the last few weeks, we have finalized leases in both of those markets.
Rents there are approaching pre-COVID levels.
But even more encouraging in terms of street retail trends is the recent activity in the more dense gateway markets.
We are finalizing several leases in Manhattan including in Soho, several leases in Chicago including in the Gold Coast.
And here, we're seeing a variety of retailers stepping up in these markets from luxury leaders to up and coming digitally native brands, all preparing for a post COVID economy and using these stores to further differentiate themselves in an omnichannel world as these retailers focus on the shifting channel of distribution.
Our retailers are looking past the harsh short term realities that we're facing this winter, as well as the oversimplified longer term narrative around retail real estate.
And based on the number of retailers touring, and many of them signing leases, our retailers are making it clearer every day that the key markets in our portfolio will remain long term must have locations.
Now starting rents compared to pre-COVID rates are going to vary space by space and street by street and they are certainly well off of their 2017 peaks.
But we have built our portfolio to avoid some of these peaks and valleys.
And these leasings -- leases will be compelling especially if the long-term rents are consistent with our pre-COVID goals and so far, they are.
And our retailers are telling us that the ratio of rents to their anticipated sales performance looks compelling from their perspective, which is also essential for this recovery.
It's still early, but if these trends hold, the street portion of our portfolio will be a key driver of our longer-term growth metrics.
We recognize that the significant portion of our portfolio both urban and suburban that is weighted with necessity and value-based tenants like Target and TJ Maxx.
That provided us a very important ballast to weather a truly 100 year storm.
But it is becoming clearer that the longer-term growth will come from our mission critical locations for a few reasons.
First of all, our releasing potential here is of uniquely high quality locations and we were -- are working off of decades low occupancy level.
Second, the contractual rental growth rate in our street portfolio is a 100 basis points to 200 basis points higher than in the other components of our portfolio.
And finally, from an AFFO perspective, since the cost of retenanting in these higher rent markets is substantially less as a percentage of rent, the net effective rent growth will be stronger than in the lower rent portions of our portfolio.
Now this is not ignoring some of the longer-term trends that are playing out in our industry, the accelerated move to digital commerce, the reality that the U.S. is over retailed in general, and that some formats are facing functional obsolescence.
Nor does ignoring a workforce that's pondering where they might live, how they might work.
These are real challenges.
Challenges that our industry is being forced to adapt to on an accelerated basis.
But notwithstanding these challenges, we are seeing signs of recovery and our portfolio is well positioned for that.
And some of this rebound in hindsight, will look obvious.
For example, it's important to keep in mind that the consumer in general and especially that segment of the consumer that is shopping at the stores in our portfolio, that consumer is climbing out of this recession in a much different spot than prior recessions.
Now for that significant portion of the population that could not shift to remote work, that is living paycheck to paycheck or worse, the impact of this crisis is heart-wrenching.
But for that portion of the economy that has been able to shift to remote work, that has seen their house values and their stock portfolios rise, for those consumers, their savings rate and disposable income is much stronger than when they were climbing out of the global financial crisis.
But to date, spending by this segment has been down as the short-term trend has been on necessities, on essentials, on pajamas, almost irrespective of the financial condition of that specific consumer.
Not because of fear or belt tightening by the affluent as much as just the realities of the lockdown.
And as we move past this lockdown, our retailers are expecting shifts in consumer spending as well.
And our retailers are seeing not just short term pent-up demand, but longer-term trends and are planning accordingly.
From a capital market's perspective, both the debt markets and the equity markets are slowly beginning to rebuild albeit selectively.
The retail real estate industry is still working through the drama around the collection crisis of last spring.
And while that is abating, the aftershocks are still with us in many of the traditional and found metrics that our industry has historically used to evaluate location quality have paused.
Last spring, for instance, property level collection rates trumped credit quality, and credit quality trumped location quality.
Now during the darkest days of the crisis, this might have made sense.
But longer term, location quality tends to win out.
And while this trend is beginning to resolve, it's going to take time.
Additionally, many institutional investors are overweight retail due to their mall holdings, and even investors who are not overweight retail are looking for clarity.
Clarity, as to what the cost to restabilize assets will be, clarity as to when and what level will rents and tenant performance stabilize.
And then finally, what will the longer-term growth rates look like?
Now, I get that providing this clarity sounds like a tall order; it always does at this point in the cycle.
And then the rebound happens usually, faster than most of us predict.
In terms of our investment activity with our stock at a discount to NAV, and our cost of capital being elevated, we don't anticipate acquisitions in our core in the short term.
In fact, we'll be opportunistically monetizing assets as we recently did with a freestanding Home Depot in New Jersey, where the net lease retail market is still robust and properties are trading at peak pricing.
But we are hopeful that as significant buying opportunities arise, we'll be in a position to capitalize on them.
Given that retail is in such disfavor and many folks who previously dabbled in it are gone, there will be less competition.
And our expertise will be in demand and it will be of value.
And while we wait for the public markets to rebalance, fortunately, as Amy will discuss, we have our discretionary fund, where we still have plenty of dry powder and deal flow is finally picking up after a quiet year.
So to conclude, we are pleased to see tenants stepping up.
And while it's hard to predict when the capital markets will also respond and kind, when they do, a portfolio like ours dominated by unique must have locations with stability and then strong prospects for growth, we'll once again become compelling.
And management teams like ours, with access to multiple types of capital and a proven track record of deploying it, we'll be well positioned to execute on the opportunities in front of us.
I know that it felt like at times that the earth stopped spinning around its axis.
I assure you, it didn't.
And your efforts and your commitment not only helped us get through this treacherous period and survive, but helped us plant the seeds going forward for our ability to thrive as well.
I will start off by providing an update on our cash collections, along with our fourth quarter results, followed by a discussion of our 2021 guidance and then closing with our balance sheet.
Now starting with collections.
In hindsight, the initial and immediate impact of the pandemic was staggering, with our April 2020 results barely achieving a 50% collection rate.
But over the course of the year, we quickly saw improvement, not only with the collections at current rent, but also in past due amounts.
In fact, as we look back over the course of the pandemic, we actually ended up collecting over 86% of our billings during the three quarters in 2020 and over 90% when we looked at the third and fourth quarter alone.
And as that we outlined in our release, we are now consistently collecting in excess of 90% of our rents.
And as we experienced throughout the pandemic, our collection percentages remain consistent throughout our street, urban and suburban locations, given the relatively comparable credit that exists across our portfolio.
As I discussed last quarter, our balance sheet continues to reflect our collection efforts.
Not only did we see our net tenant receivables decline from the prior quarter, in fact they're actually even lower than they were as compared to the fourth quarter 2019.
In terms of tenant deferral agreements, we have approximately $3 million on our books at December 31st, and as our approach was to largely focus our deferral efforts on credit tenants, we remain on track for full repayment in 2021.
Moving on to quarterly earnings.
Our FFO as adjusted for special items was $0.24 a share for the fourth quarter.
We anticipate that our quarterly FFO prior to any transactional items should remain around the current level for the next few quarters, give or take a few pennies in other direction as we navigate through the pandemic.
As we highlighted in our release, we have provided our 2021 guidance with a range of $0.98 to $1.14 of FFO before special Items.
Now, we continue to expect ongoing variable in our results for at least the first half of 2021.
We've not attempted to predict the impact of this within our guidance, but as we've done throughout the pandemic, we will continue to point out any significant items in our quarterly results and will update our expectations accordingly.
Additionally, although we didn't include any specific NOI assumptions, I want to provide a bit more color as to how we're thinking about it.
Consistent with what we experienced the past couple of quarters, we expect that our quarterly pro rata core and fund NOI should trend in the low to mid $30 million range for at least the first half of 2021.
And this is based on our assumption of maintaining a 90% collection rate along with no meaningful tenant expirations or no leases coming online.
In terms of overall occupancy, as we've said in the past given the wide range of rents that exist within our portfolio, the percentage change in and of itself is generally not particularly well correlated to the NOI impact.
Our expectation is that our physical occupancy percentage drops a bit further in Q1 and Q2 primarily to natural lease expirations within our suburban portfolio, before it begins climbing in the second half of the year.
It's worth highlighting that our current spread between physical and leased occupancy is in excess of 1% and given the velocity as to which our leasing team is building the pipeline and executing leases, we anticipate this spread, particularly in our street and urban locations to continue to expand throughout the year.
Now, as we move into the latter half of 2021, we anticipate that our quarterly NOI run rate will increase by approximately $1 million to $3 million.
And this is coming from a combination of reduced credit losses along with the additional NOI from the leasing efforts beginning to come online.
Now in terms of rent commencement on those new leases.
Of the $8 million pipeline that Ken mentioned, approximately 40% of this involves -- or $3 million involves executed leases, and we expect about $800,000 of that will show up in the second half of 2021 and the remaining portion coming online at various points throughout 2022.
And as I will touch on shortly, we are becoming cautiously optimistic that this will be the start of what we believe is a meaningful, multi-year NOI growth trajectory.
In terms of other assumptions within our fund and transactional side of our business, I want to point out a few things.
Consistent with our past practice, we will continue to exclude any changes in value from our unsold Albertsons shares.
Rather, we will only include the realized gains if the shares are sold.
And as I mentioned on prior calls, we expect that the remaining Albertsons shares should be sold over the course of the next 18 months to 24 months.
As a reminder, we own on a pro rata basis, approximately 1 million shares, which are subject to certain lockup arrangements.
And based upon the current share price, this equates to approximately $16 million of gains as the shares are sold.
Additionally, we have guided toward $2 million to $5 million of a temporary reduction in fund fees.
This is primarily a result of the pandemic-driven timing delays and our acquisition and leasing activities, and we anticipate these fee should revert back to more normalized levels in 2022.
I also want to point out and Amy will discuss further, we have approximately 40% remaining in Fund V to deploy.
And if we invest that consistent with the Fund V returns to date, this provides us with an additional $0.05 to $0.06 of incremental FFO on an annual basis.
Now in terms of the multi-year core NOI growth trajectory.
Not only does our base case model have us returning to pre-COVID levels by late 2022, early 2023, we are also starting to see the building blocks forming to grow above and beyond that, and we are becoming increasingly optimistic that this shows up within the next few years.
The key drivers of that return to pre-COVID, core NOI and the ongoing growth beyond that are expected to come from two primary sources.
First, a reduction in credit losses.
And we estimate that should result in roughly $7 million of annual NOI.
We continue to estimate that about half of our non-paying tenants get to the other side of the pandemic and revert back to contractual rents.
In terms of timing, as I mentioned in my guidance, we expect to see some improvement beginning in the second half of 2021 with stabilization at some point in '22.
Secondly, lease up and more specifically, lease up in our street and urban portfolio.
Our overall core occupancy is at a decade low occupancy of 90% with the street and urban portion at 87% in some of our best locations available.
In terms of timing of lease-up, as Ken mentioned, our team has made strong progress in this past several months with building out an $8 million pipeline, the majority of which is coming from street and urban locations.
So we certainly have a lot of hard work in front of us.
We are encouraged at the leasing activity we have seen and continue to see and the opportunities it presents for meaningful and profitable multi-year NOI growth.
Now moving onto the balance sheet.
I want to highlight just a few items along with an update on our dividend.
We continue to maintain ample liquidity between our cash on hand and available liquidity under our various facilities with no material near-term core capital needs.
And at a 90% cash collection rate, coupled with a breakeven below 50%, we are continuing to retain cash flow.
In terms of the dividend, as we highlighted in our release, we expect to initially reinstate our dividend at $0.15 a share.
Our initial payout was conservatively determined based upon what we currently expect will be the minimum payout required to maintain recompliance.
And at this level, we should be able to generate meaningful amounts of liquidity and to set ourselves up for strong dividend growth over the next several years, as we execute on the lease-up opportunities within our portfolio.
In summary, while we are still in the midst of the pandemic, we are starting to see the green shoots.
And while our earnings will continue to feel the impacts of the pandemic for the next couple of quarters, we are starting 2021 with increased optimism and a positive outlook as we look forward.
While I usually discuss all our funds on these calls, today, I will focus my remarks primarily on Fund V which is our current fund vehicle for new investments.
When we launched this fund in 2016, we were already facing disruption in the retailing industry and knew we were late cycle.
In response, we chose to focus this fund on selectively acquiring out of favor suburban shopping centers where most of our return comes from existing cash flow.
Our thesis was, buy it in 8% cap rate, leverage at two-thirds, in our case at a sub 4% interest rate and then clip a mid-teens coupon.
We did not anticipate any material growth in NOI, nor was it required to make an attractive return at an 8% going in yield.
This thesis proved to be prudent.
While the events of the past year were certainly unexpected, consistent with our original expectations for our Fund V portfolio, the properties have largely been performing consistent with plan.
For example, last year at the property level, we achieved roughly a 14% leveraged yield on invested equity including deferred rents.
Looking ahead, we expect 2021 and 2022 to achieve similar mid teens returns reflecting continued growth in NOI, but also continued investment of equity as we complete various leasing activities.
Second, collections have rebounded since April and May and are now roughly at or above the 90% level.
Third, our team has built a strong leasing pipeline which has enabled us to maintain our NOI.
Post COVID outbreak, our Fund V leasing pipeline has 32 leases, aggregating annual base rent or ABR of $5.1 million of which 20 leases and approximately $2.6 million of ABR have already been executed.
These metrics provide further evidence of our acquisition selectivity and our overall careful approach to capital allocation.
I'd also like to share a couple of examples at the property level.
First, since recapturing a 95,000 square foot Kmart at Frederick County Square in Maryland, last February, we have successfully pre-leased 83% of that box to Lidl, Ollie's Bargain Outlet and Harbor Freight Tools together with our partners at DLC management.
We are also negotiating a lease to the remaining 17,000 square feet.
The blended rents for the four new leases is more than five times Kmart's rent.
Next, consistent with our core portfolio, we monetized two parcels at Family Center at Riverdale in Utah.
The parcels located at the back of the shopping center generated $10 million of gross sale proceeds.
Given the strength of the net lease market, we were able to achieve roughly a 200 basis point spread between the allocated cap rate in our underwriting and our actual exit cap rates.
This translates into about $2.5 million to $3 million of profit on these two sales alone.
Looking ahead to new transactional activity, we have approximately $200 million of discretionary equity available to invest, which gives us approximately $600 million of buying power on a leveraged basis.
We are still seeing opportunities consistent with Fund V's existing high yield strategy and hope to close several more of these types of deals this year.
The good news is, we're seeing an increasing appetite among our vendors to finance these types of properties.
On the other end of the risk spectrum, we are also focused on the acquisition of more deep distressed and opportunistic investments ranging from buying distressed debt to restructurings to heavier lifting, value add projects, all areas where we have successfully invested in the past.
These opportunities have been for a variety of reasons slower to emerge, but they are clearly coming.
Most importantly, we will make sure that we are being rewarded appropriately for the risks we're taking.
Given the success of Fund V and the long-standing support of our investors, we remain confident that we will have the time we need to put the balance of the fund to work.
At the same time, we continue to proactively mine our existing fund portfolio for disposition opportunities, be they smaller transactions, less reliant on debt or large levels of debt or traditional shopping centers with a larger share of essential retailers.
Finally, on the debt front, during and subsequent to quarter end, we successfully extended approximately $150 million of loans across our fund's platform at a weighted average duration of 17 months.
In conclusion, our fund platform remains well positioned with a successful capital allocation strategy and ample dry powder to continue to execute on it.

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q4 ffo per share $0.24 excluding items.

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