Yahoo Finance Acadia Realty Trust (NYSE:AKR) Q1 2024 Earnings Call Transcript
Acadia Realty Trust (NYSE:AKR) Q1 2024 Earnings Call Transcript April 30, 2024
Acadia Realty Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to Acadia Realty Trust First Quarter 2024 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. [Operator Instructions] I would now like to hand the call over to Jose Vilchez. Please go ahead.
Jose Vilchez : Good morning and thank you for joining us for the first quarter 2024 Acadia Realty Trust earnings conference call. My name is Jose Vilchez, and I'm an Analyst in our Capital Markets 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 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, April 30, 2024, and the company undertakes no duty to update them.
During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for a reconciliation for the non-GAAP financial measures with the most directly comparable GAAP financial measures. [Operator Instructions] 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: Great job, Jose. Thank you. Welcome, everyone. I'm here with John and Stuart and A.J. Levine. And I'll give a few comments, then hand the call over to A.J. Then John will discuss our earnings guidance and our balance sheet metrics. And after that, our team is here to take questions. As you can see in our earnings release, our first quarter performance was strong and continues a multiyear trend of peer-leading top line growth that is reflective of both the cyclical as well as the secular tailwinds that our portfolio is experiencing. I'll let A.J. and John discuss the building blocks of our NOI growth going forward and the moving pieces of our earnings in detail, but short. The strong rebound and continued acceleration of the street retail component of our portfolio continues to drive this performance.
As A.J. will discuss, the combination of strong contractual growth and favorable recurring mark-to-market opportunities is positioning us for continued strong internal growth going forward. And as John will discuss, the stability of our balance sheet, further enhanced with our recent extension and expansion of our bank credit facility, positions us with limited maturities and limited floating rate exposure. All of this supports our goal of creating superior top line growth at the property level and then having that growth translate into bottom line's earnings growth. The positive trends we're seeing in both supply-demand dynamics and retailer performance means that we are past this being just a cyclical COVID recovery story. Even once we get our portfolio to full economic occupancy, our internal growth still looks strong.
That's because our street retail component should provide long-term growth of a couple hundred basis points higher as our suburban assets. Our goal here is to continue to craft the portfolio driven by street retail that has the highest likelihood of producing superior annual net effective growth in excess of wherever the new normal lands for both inflation and GDP growth. So this brings us to external growth. While the bid-ask spread for transactions is still a bit wide and the bond market volatility is elongating that reconciliation, the spread is narrowing. And we're beginning to see actionable opportunities for external growth. This is true both as it relates to additions to our core portfolio as well as opportunities for our investment management platform.
First, in terms of balance sheet additions, here, our primary focus will be adding street retail to our core portfolio, both due to what we view as compelling risk-adjusted returns and because we believe our shareholders will be rewarded by our continuing to grow this differentiated strategy in the public markets, where we are the only REIT with this as a major focus. We have several hundred million dollars of deals consistent with this focus in our pipeline. Some are further along than others, and the stars still have to align. So we'll see how many actually come to fruition, but I am more encouraged today than I have been in a long time. In terms of funding, we should be able to do this accretively, leverage-neutral basis through a variety of different sources, including capital recycling from portions of our core portfolio that might not be as high growth or as mission-critical.
Along these lines, we have subsequent to quarter end finalized an agreement for the sale and recapitalization of one of our high-quality but lower-growth suburban assets currently in our core portfolio. Assuming it closes as anticipated this quarter, we will retain a 5% ownership stake plus customary fees for operating the asset with an additional promote potential upside on the eventual resale. The transaction is anticipated to set the table for future acquisition opportunities with this institution, and it will be modestly accretive at closing but then create more growth as we redeploy the capital. Along with our focus of accretively growing our core portfolio, we're also seeing opportunities through our investment management platform, where we can leverage our skills, leverage our deal flow and match it with our institutional capital relationships.
The benefits of this component are it's a profitable business. It enables us to punch above our weight. It makes us better investors. It also enables us to participate in special situations, whether it's transactions like Albertsons or Mervyns or distressed debt, where being solely reliant on the public market may not be the right fit. We also have several deals in our pipeline in this category. After quarter end, we put one deal under contract and are in the process of completing our diligence. These deals will likely look similar in structure to our Fund V business. And similar to the capital recycling that we're doing in our core, we will fund this activity with the recycling of capital in this platform as well. Now keep in mind, given our size, it doesn't take much volume to move the needle for us.
Even a few acquisitions, whether on balance sheet or in our investment management platform, can have an important impact to earnings. So to conclude, it was another strong quarter for us on multiple fronts. And as we think about the 3 key drivers of our business, first, maintaining solid internal growth, A.J. will walk you through our strong results and continued momentum. Second is maintaining a solid balance sheet, and John will walk through our progress here and the important recasting of our bank facility. And then finally, creating accretive external growth. I discussed that briefly and I suspect I'll be spending more time discussing this on future calls as well. And so with that, I'd like to thank the team for their hard work this last quarter.
And I'll turn the call over to A.J.
A.J. Levine: Great. Thanks, Ken. So once again, I'm happy to report that from where I sit and from what I'm hearing and seeing from our retailers, the positive trends, both secular and cyclical that have fueled a strong recovery over the last 36 months, continue unabated. That's true for our suburban assets, but even more so on the high-growth, higher barrier-to-entry streets where we operate from SoHo to Melrose Place, the Gold Coast to M Street and everywhere in between. We are still seeing more demand than the markets can accommodate. Our tenants are healthy, and their sales are significantly above where they were in 2019. There continues to be a shift out of department stores and non-A malls, and into open-air street retail.
And for the vast majority of our retailers, the physical store remains the primary driver of profitability for their businesses. And as time moves along, we're seeing leases getting signed well ahead of where we thought rents were just 1 quarter prior. Now Ken mentioned the building blocks of NOI growth in our portfolio. Why will we continue to outperform and provide a higher rate of growth than our peer set? We'll start with our SNO pipeline. At the end of the quarter, our SNO pipeline sat at $7.7 million, which represents 5.5% of in-place ABR. That includes the $1.2 million we added in the first quarter, and we've already doubled that number in April, which puts us right on pace with last year. We see no signs of a deceleration and have an additional $6 million of ABR in advanced stages of negotiation.
And of course, it's only April, and there are no meaningful expirations on the horizon. It is worth noting that the vast majority of that SNO pipeline originates from our street portfolio, which provides for higher contractual increases, typically 3% per annum as opposed to the blended 1.5% typical of suburban assets. And of course, there are those FMD resets at outsized mark-to-market opportunities that are embedded in our street portfolio. So let's expand on that a bit and use Armitage Avenue in Chicago as a proxy for what's happening across our streets. So the average retail rent on our 12 buildings on Armitage is around $80 per square foot. We are receiving offers to backfill space upwards of $120 a foot. So over the next several quarters, we should have the ability to mark-to-market a large percentage of that portfolio at close to a 50% spread.
In fact, since the end of the quarter, we signed a new lease at 823 West Armitage at a 50% spread. So why is that? Number one, scale. We control 12 buildings on the street. No other single landlord controls more on the 4 relevant blocks on Armitage than we do. And having scale not only gives us pricing power, but it allows us to curate the street and foster the best ecosystem of tenants to drive traffic and accelerate sales growth. Number two, barriers to entry. 4 blocks, that's the entire market. The L train to the West and Halstead to the East continues to serve as a barrier that a certain category of retailer just won't cross. If you're looking for space along Armitage, we are your first and only call. Number three is performance. Armitage is just one example of a street that saw a lift in sales as a result of COVID.
People were staying closer to home and shopping local. And even now with people back to work, those tenants continue to post solid sales growth, and their performance remains well above pre-pandemic levels. And number four, of course, is basic supply-demand. No vacancy on the street, a waiting list of tenants that consider Armitage to be a must-have location. And we are able to promote a highly competitive leasing environment where we can drive rents while we continue to curate the street. But this is not unique to Armitage. This is our street retail business, identifying the right markets and the right streets where we can scale meaningfully and do what we do best to drive growth. You can swap out Armitage for Greenwich Avenue, the Gold Coast, Knox-Henderson in Dallas or M Street, and it's largely the same dynamic.
We have scale, we have barriers to entry and we have performance. At Melrose, it's a similar recipe, but in the case of Melrose, you can add luxury to the list of ingredients. And we know that luxury expansion is one of the strongest catalysts for rent growth. We've continuously seen this play out over the last 36 months in SoHo, on the Gold Coast in Chicago, on Madison Avenue and even in Williamsburg. So it's no luxury -- I mean no mystery that luxury tenants are capable of paying strong rents. But it is the ripple effect that luxury has on the overall market that makes the biggest impact. It's the cluster of advanced contemporary and aspirational brands and the competition for space around those luxury tenants that truly drives rent in a market.
Clustering is one byproduct of that secular shift of luxury and advanced contemporary tenants pivoting away from malls and department stores and focusing primarily on our high-growth streets. This is not a fad. This is the new reality for these dynamic tenants that are focusing their growth on where their customer wants to shop. Now I say this all with a caveat that despite our efforts, we will not get all of our under-market space back all at once. But over the next 3 to 5 years, we should be able to make a meaningful dent in unlocking that embedded value within our portfolio. Some of that will occur through natural lease-up, and some will come from those fair market value resets that are relatively unique to street retail. And others, as our team has shown their ability to do, will be accelerated through our pry-loose strategy where we are constantly looking for opportunities to pry loose leased space and accelerate a positive mark-to-market.
Now not all streets have begun their rebound. In San Francisco and on North Michigan Avenue, those markets are slower to recover but fall squarely into the bucket of when and not if. In the meantime, we can afford to be patient, and we're using this time to figure out highest and best use for each of our projects. In San Francisco, for example, both of our projects are under serious consideration for the addition of significant residential to meet a city and state push for additional housing. Too early to go into detail, but we are spending this time exploring what would be needed to advance those initiatives. On North Michigan, the interest we're seeing is starting to feel like the early days of recovery on Fifth Avenue and Madison Avenue.
Still a ways to go, but there are several retailers that are circling the market. And when they land, they should kickstart that recovery that we always knew was coming. And earlier this year, we were happy to see a luxury tenant like Paul Stewart relocate from the Gold Coast to 822 North Michigan Avenue, just one block south of our asset at 840 North Michigan. Turning to City Point. The wind is firmly at our backs, and the pieces continue to fall into place. Scaffolding is down, the park is finished, is scheduled to open this month, and we can finally unlock those valuable spaces facing the park that we've been strategically holding back. Fogo de Chão had their grand opening last month and has already added a new vibrancy and stretching the hours of operation along Prince Street.
And Sephora, who will anchor the opposite end of Prince Street, is in possession of their space and is working to meet an anticipated opening in the summer. Including Sephora and Fogo, we will add 9 tenants to City Point this year, representing over 40,000 square feet of GLA. With all the pieces continuing to fall into place we will look back on 2024 as a transformative year for City Point and for Downtown Brooklyn. So wrapping it all up, strong fundamentals, continued sales growth, healthy tenants, a favorable supply-demand dynamic and the ability to leverage those factors into better curation and, of course, sustained rent growth on our streets. And with that, I will turn things over to John.
John Gottfried : Thanks, A.J., and good morning. We are off to a strong start with our operating results and key metrics coming in ahead of our expectations. We have also made considerable progress on our balance sheet. In addition to improving our debt to EBITDA by over 0.5 a turn during the quarter, we also successfully extended the maturity of our $750 million unsecured facility by an additional 4 years, along with upsizing our borrowing capacity, all while maintaining our existing credit spreads. I will now provide some further color. Starting with our first quarter results. We reported FFO of $0.33 per share, coming in slightly ahead of our expectations with strong tenant credit, along with solid property operating fundamentals.
And we are continuing to see encouraging trends within our portfolio. But as we just issued our guidance a few weeks ago, we felt it was a little too premature to make an upward revision at this point. But we remain on track to meet, if not hopefully exceed, our expectations, which as a reminder, year-over-year FFO growth of 7.5% after stripping out promote income with this projected earnings growth being driven by an increase of 5% to 6% in our same-store NOI. In addition to year-over-year growth, I thought it would be helpful to walk through our sequential growth and how we see that quarterly trajectory contributing to our annual expectations. Sequentially, our first quarter FFO grew by approximately 7% or an increase of about $0.02 a share after excluding promotes and the $0.03 of termination income we highlighted in our release.
And precisely as we had anticipated, it was our core NOI or more specifically our differentiated street retail portfolio that drove this growth. But before diving into the numbers, I'm going to pause and do a quick overview of how we report and discuss our results, both those that are newer to the name as well as a refresher for those that know us well. All of these numbers can be easily traced back to our financial statements and supplemental, and we are always available to assist should anyone have any questions. First, our total NOI, defined as our share of net operating income from our core and fund business, was $43.4 million for the first quarter. And this sequentially increased by approximately 4% from the $41.8 million that we reported in the fourth quarter of 2023.
And in terms of quarterly run rate, prior to factoring in any acquisitions or dispositions, we expect that this $43.4 million that we reported this quarter will increase to approximately $45 million by Q4 of this year. Within the $43 million of pro rata NOI, our share of fund NOI was sequentially flat, approximately $7.5 million. Thus, it was our core portfolio that drove our growth, sequentially increasing by about 5% or about $0.02 of incremental FFO to $36 million. And to drill down even further, it was the street retail portion of our core portfolio that drove this growth, sequentially increasing by about $2 million or the $0.02 of FFO. And just to be clear, I am referring to total pro rata core NOI growth inclusive of redevelopments, not same store, which I'll discuss in a moment.
And I want to reiterate a point that I made last call: we remain on track to grow our total core NOI inclusive of redevelopments by 4% in 2024. And the 4% projected growth is even with the 500 basis point drag from our redevelopment projects at North Michigan Avenue in Chicago and 555 9th Street in San Francisco. As we have discussed last call, the long-discussed impact from these redevelopment projects is now behind us. Our share of NOI from these 3 assets, meaning 664 and 840 North Michigan Avenue in Chicago and 555 9th Street in San Francisco, declined from approximately $9 million of NOI in 2023 to less than $2 million in 2024, which we believe demonstrates the resiliency and strength of our portfolio by achieving solid growth in spite of these significant headwinds.
Now moving from total NOI to same-store NOI. As outlined in our release, we reported 5.7% same-store growth for the quarter. And again, while early, our model has us trending towards the upper end, our 5% to 6% initial guidance range. It's also worth highlighting that the first quarter of this year faced a headwind of about 100 basis points from the April 2023 bankruptcy of Bed Bath & Beyond. As we've previously discussed, dislocation in Brandywine Delaware was profitably released to Dick's House of Sport with an anticipated rent commencement date in the fall of this year. As A.J. discussed, we sequentially increased our signed-not-yet-open pipeline by approximately 10% during the quarter to $7.7 million. As a reminder, the $7.7 million is just our core same-store signed-not-yet-open pipeline.
Approximately $6 million of this amount is coming from street leases. In terms of timing, approximately 30% of the signed-not-yet-open pipeline is expected to commence during the second quarter with the remaining balance weighted towards September and October of this year. I want to provide a moment giving an update on our growth expectations from our street portfolio over the next several years. A.J. gave a great overview of the retail demand and opportunity for mark-to-market across our straight markets. And it's worth mentioning that while I share A.J.'s optimism and I am seeing the same trends, our internal models do not, meaning we have built in more conservative estimates in the base case I'm about to discuss. Our base case is projecting growth of $20 million of incremental NOI or $0.18 of FFO from our street retail portfolio loans.
And just for some further context. The starting point is year-end 2023 through year-end 2027. And this is just same-store, meaning it excludes the 2 North Michigan Avenue redevelopments, which is as we just discussed, is only upside for us going forward, should this iconic retail corridor rebound faster than our base case model is anticipated. And as we discussed previously, neither our 2024 guidance or base case multiyear projections factor in any near-term recovery. Getting back to the $20 million. This growth equates to about 10% annual growth, which means our same-store NOI growth should continue trending well above historical norms for the next several years. But keep in mind, we are not anticipating nor do we need 10% annual growth from our streets in perpetuity.
While we still have a lot of embedded growth remaining, once we get past this profitable lease-up, our base case model is showing stabilized net effective rental growth of about 4% from our streets, which is double what we are projecting from our suburban portfolio. In terms of building blocks, the $20 million of incremental NOI is being driven by a combination of lease-up, mark-to-markets on expiring leases and 3% contractual growth. In terms of lease-up, as outlined in our supplemental, our street is approximately 84% occupied at March 31. And we anticipate achieving full occupancy, which we define as 95% by late 2025, early 2026, which gives us an incremental $10 million of ABR. And we have made meaningful progress on our lease-up goals with more than half or about $6 million of executed street leases included in our signed-not-yet-open pipeline at March 31.
Secondly, mark-to-markets. We anticipate incremental NOI of about $4 million for marking to market street rents on expiring leases over the next several years. And we are optimistic we have upside here if A.J. and his team are successful in the pry-loose strategy he discussed in his remarks. And lastly, we anticipate another $6 million coming from the 3% escalations that are built into our street leases. I recognize I just threw out a lot of numbers. But given our excitement at these trends we are seeing, we felt this level of granularity was important. So please reach out with any questions should any of these points need clarification. Now moving to our balance sheet. We have had a busy and productive few months on the capital markets front.
In addition to extending our $750 million unsecured lending facility by an additional 4 years, we have also improved our debt to EBITDA by more than 0.5 a turn, along with clear visibility of a pathway to get us back into the 5s by year-end. In terms of the extension of our unsecured facility, we are thrilled with the execution and the strong support from -- that we receive from our long-standing capital providers. Not only did we have the full support of our bank group to extend our facility at the current pricing, the facility was oversubscribed, enabling us to upsize our borrowing capacity. Now pivoting to interest rates. I want a moment to talk about our interest rate exposure, or more importantly, the lack thereof. Starting with our core.
As outlined in our release, we have no significant debt maturities for the next several years. Secondly, and this is worth highlighting, is I believe we may be an outlier here amongst our peers. But through our use of interest rate swaps, we have locked in base interest rates on all of our floating rate debt, leaving us with virtually no exposure to interest rates until mid-2027, along with significant swap protection extending through 2030. And just to further highlight what I believe is differentiation, our hedging and risk management strategy is to manage interest rates independently from the maturities of our variable rate obligations, meaning we have interest rate swaps that are not coterminous with the maturities of our variable rate debt, the most significant being the $750 million of variable rate debt that we just extended.
And just to be clear, we are not in the business of speculating on interest rates. Rather, our risk management strategy is to dollar cost average in our swap portfolio, which enables us to manage and mitigate the exact risk that has just played out. As it relates to our fund debt, given the buy-fix-sell nature of this business, we appropriately match fund our assets and liabilities and utilize shorter-duration debt. Thus, our prior year earnings have already experienced the impact of the rapid rise in short-term rates. So if and when the Fed starts cutting rates, every 100 basis points is about $0.01 of upside to our FFO. So in summary, not only does our balance sheet have the necessary flexibility and liquidity to pursue the external opportunities we are seeing, but with limited maturities and fully hedged against interest in volatility, we are well positioned to ensure that the continued top line NOI growth from our portfolio will drop to our bottom line.
And with that, we will now open up the call for questions.
See also
Jim Cramer is Recommending These 10 Stocks Heading Into May 2024 and
Democrats and Corporate Insiders are Buying These 10 Stocks.
To continue reading the Q&A session, please click here.
