Acadia Realty Trust (NYSE:AKR) Q4 2021 Earnings Conference Call February 16, 2022 12:00 PM ET

Company Participants

Joe Rizzoli - Property Accountant
Ken Bernstein - President and CEO
John Gottfried - Senior Vice President and CFO
Amy Racanello - Senior Vice President, Capital Markets and Investments

Conference Call Participants

Floris Van Dijkum - Compass Point
Todd Thomas - KeyBanc Capital
Linda Tsai - Jefferies
Ki Bin Kim - Truist
Katy McConnell - Citi
Mike Mueller - JPMorgan
Craig Schmidt - Bank of America

Operator

Thank you for standing by. And welcome to the Fourth Quarter 2021 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advise that today’s conference maybe recorded. [Operator Instructions]

I would now like to hand the conference over to your host, Joe Rizzoli [ph]. Please go ahead.

Unidentified Company Representative

Good afternoon. And thank you for joining us for the fourth quarter 2021 Acadia Realty Trust earnings conference call. My name is Joe Rizzoli, and I am a Property Accountant in our Accounting 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, February 16, 2022 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 those 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

Thanks, Joe. Good job. Welcome, everyone. Good afternoon. We had a strong quarter and we will delve into the details in a minute, but first, a few observations. While not ignoring the impact of Omicron on our healthcare system in the lives of many, from the perspective of our portfolio performance and our business plan, we remain very much on track as evidenced by our fourth quarter results and our forecast for this year.

We did not see an impact on our collections, on our tenant interest, on leasing progress or investment efforts. If anything, from a transactional perspective, it may have helped nudge certain sellers off the sidelines and we are seeing that reflected in our increasing investment volume.

In terms of leasing and tenant performance, last quarter we continue to see a meaningful improvement in fundamentals after a very scary 2020, and frankly, a few years of headwinds for many of our retailers even prior to that. The reopening that began in early 2021 gained steam throughout the year.

As a result, our second half NOI last year increased over 5% and it looks like this above average growth as several more years in front of us. These longer term tailwinds have several important drivers.

On a macro level, our retailers’ performance, their balance sheets and business models are with few exceptions, stronger today than pre-COVID. And the recognition by our retailers of the critical importance of brick-and-mortar real estate in an omnichannel world is certainly clearer today than it has been for many years. This re-embracing of physical stores is happening faster than we expected and we are seeing this from a wider range of our retailers and formats.

For instance, as it relates to Acadia and our street retail portfolio, we are seeing it from luxury retailers who are doubling down in our corridors ranging from Melrose Place in Los Angeles to the Gold Coast in Chicago, as well as here in Soho. Last year, we expanded YSL in Chicago, had solid renewal spreads in Melrose Place and are busy signing leases in Soho.

We are also seeing it with our digitally native retailers, the Warby Parkers and Allbirds of the world, as well as those brands who thrive around them. These DTC, direct-to-consumer retailers are now showing up in force on many of our corridors. For instance, on M Street and George Town, last quarter we added Glossier, Sur La Table and Gloss Lab, and in Soho we added FILA.

And we continue to see it at our Armitage Avenue assemblage in Chicago as well, which continues to benefit, from our curating a critical mass of the right retailers and where last quarter we profitably added Jenny Kane and Feherty.

And especially as it relates to those markets that were hit hard during the pandemic, we are seeing a significant rebound in tenant activity and given this increase in tenant demand, it’s beginning to look like the rental growth trajectory will be stronger than we had previously anticipated and that obviously bodes well for our forecast of multiyear NOI growth.

For instance, in Soho, after several years of rental headwinds that started around 2017, tenant performance and rents are now, in many instances, exceeding pre-COVID levels and the reopening and acceleration of demand is still in its early stages.

So, as it relates to our Soho assets, given our current in-place rents and available occupancy, even before any further market rent growth, we have nice embedded NOI growth that we have begun harvesting, and then assuming increased tenant demand continues, that growth will likely be even stronger than we anticipated.

Keep in mind that given the headwinds of the last several years, market rents in Soho could increase by an additional 50% from where they are today and still not be at prior peaks. But tenant sales performance for many of our retailers is already well on its way to prior peaks.

Now, some folks will say, that rents will never get back to prior peaks. Well, given the recovery we are seeing, I doubt that. But if one defines never as being five years from now, well, then, if you do the math, that still looks pretty encouraging to us.

Drilling further into our portfolio, we see tailwinds and above average growth from multiple drivers. This will first come from the lease up of valuable vacancy in our portfolio over the next year or so, as well as the profitable re-tenanting of other spaces.

Example of both of these last quarter include in Lincoln Park, Chicago, on North Avenue. Last quarter, we signed a lease with that country to replace a former Pier 1 and adjacent tenant. Then, in the suburban side of our portfolio last quarter, we signed BJ’s Wholesale Club at our Westchester, New York Crossroads shopping center. That will replace our Kmart at that center at triple-digit spreads.

Now, while the short-term impact of Omicron is passing quickly, we certainly will be focused on supply chain and longer term inflationary pressures on both our retailers, as well as our portfolios.

And as we think about which segments of our retailers and our portfolios that are likely to be the most resilient in an inflationary environment. Ultimately, it’s going to come down to where consumer spending will remain strong, which retailers have pricing power to hold on to their margins and then which real estate portfolios can capture that growth.

And from that perspective, while I think most segments of our portfolio should be in good shape, our street portion of our portfolio seems to be particularly well positioned. First of all, from a structural perspective, our street leases generally have stronger contractual growth and more fair market value resets than in our suburban assets. Thus, we will have the ability to capture inflation-related growth sooner.

Additionally, operating expenses are a much lower percentage of occupancy cost for our street-based retailers. So the inevitable rise in operating expenses should be less impactful at our streets.

Now, since inflation will likely result in increased topline sales, the rent-to-sales metrics, which have been a headwind during the deflationary period of the last decade should reverse. That means the discussion with tenants will be less about topline sales growth and then more about their bottomline.

And here again, street and flagship stores have an advantage in an omnichannel world where those national retailers, whether they are luxury or advanced contemporary, operate at higher margins and seem to be able to absorb this impact.

But while we will ponder the pros and cons of inflation, keep this in mind. Deflation is worse. It is becoming increasingly clear that we are past the highly promotional and deflationary pricing environment that existed in the past decade, where the consumer was trained, that if they waited, almost everything would be less expensive.

This decade-long trend was a significant contributor to the retail Armageddon and most retailers seem to understand that this race to the bottom. It diluted their brands, it reduced their connection with their customer and it was just not sustainable.

Going forward, in conversations with our retailers, they seem to understand the importance of curation and the risks of ubiquity. Most importantly, they understand the critical nature of their physical stores in terms of customer acquisition and retention, as well as profitability.

So as we look out over the next few years from an internal growth perspective whether from lease up, re-tenanting or contractual growth, we are increasingly encouraged by the rebound and rental growth trajectory we are seeing.

Then turning to the new investment side. After a very quiet 2020 when lenders were highly accommodative and owners were fairly frozen, in the last quarter and now looking forward, we are seeing a nice growth in investment opportunities at attractive prices, both for our fund platform, as well as for our core portfolio investments.

On the fund side and as Amy will discuss, last quarter, we added a $72 million investment and have an additional $120 million under contract where we have completed our diligence, but the closing is still subject to the typical closing conditions. These deals continue to be consistent with our Fund V Higher Yielding Investment strategy that we have been successfully executing over the past several years.

Then with respect to core acquisitions, we closed on $66 million and have a meaningful pipeline under agreement, but here our pipeline is still subject to our completing our review. The deal is already closed end markets we are very familiar with. In Soho, we added one of the best corners on Green Street and in Washington D.C. we added to our portfolio there with our acquisition of a portfolio of buildings on 14th Street.

So, in short, we are pleased with the external growth activity we are seeing, and as John highlights in our guidance, we are still seeing accretion levels of about 1% per $100 million of investment activity, whether it be core or fund. So this activity can really move the needle for us.

Finally, I want to thank our entire team for their hard work last year during a year of recovery, but also a year of whiplash. We are now clearly seeing the fruits of your labor and I’d like to congratulate those of you who received much deserved promotions.

And last but not least, I’d like to thank Chris Conlon for his over a decade of contribution to Acadia’s performance. Chris as COO oversaw our leasing and development areas and so much more. He will be missed, but of all of his great contributions, none was more important than the pipeline of talent he built, talent that is ready, willing, and able to step up and continue the efforts that Chris started.

And with that, I will turn the call over to John.

John Gottfried

Thanks, Ken, and good afternoon. Let me first start by addressing the 8-K that we filed last evening. As outlined in the filing, during the course of our year-end audit, actually within the past few days, we identified two fund investments, acquired about a decade ago, that were incorrectly recorded as consolidated investments rather than as equity method investments within our GAAP financial statements.

In plain English, this means we need to amend our prior year GAAP financial statements to show these two fund investments on a net basis rather than gross. And in terms of its impact, while we need to fix this, the netting down of these two investments -- these two fund investments does not change any of our previously reported pro rata financial information or any individual line items within our pro rata financial statements or any of our prior operating metrics.

Furthermore, this does not change any of our pro rata share of core, our fund net operating income, our net income, our FFO per share or our net worth. Rather, they simply reflect reclassifications between individual line items within our GAAP financial statements and our team is actively working through the process of updating all of our filings. We fully expect to meet the SEC reporting deadlines, enable us to access the capital markets in the ordinary course.

Now, moving on to our results, we have had an incredibly active few months with our fourth quarter full year 2021 along with our 2022 guidance exceeding our expectations on all fronts. As Ken mentioned, we are continuing to see elevated demand for our space with over $13 million of executed leases to-date, representing approximately 10% of our core ABR, along with meaningful amounts of external growth in both our core and fund businesses.

Starting with the quarter, our fourth quarter earnings of $0.29 a share came in ahead of our expectations and this was driven by recommencement on new leases and improved credit environment, with core cash collections exceeding 98%, along with the accretive impact from the approximately $250 million of external investments that we closed during the year, including $100 million in the fourth quarter.

And for the full year 2021, we generated a $1.10 of FFO, which came in 10% above the high end of our initial range after adjusting for the fund promotes that were included in our guidance. And this meaningful beat in our earnings was playing out throughout the year and it was driven by a combination of our core portfolio rebounding at a pace and velocity well beyond our expectations, along with a meaningful accretion from our external investments.

As Ken mentioned, our core portfolio started its rebound in the second half of the year, with our six-month same-store NOI growing approximately 5% and over 3% in the fourth quarter.

I want to focus on a few points within our same-store results for the fourth quarter. As highlighted in our release, our same-store growth this quarter was driven by a street in urban portfolio, outperforming our suburban portfolio by over 300 basis points.

It’s also worth noting that our percentage increase this quarter is fairly clean, meaning that it was not materially impacted by current or historical cash recoveries, as the amount of recoveries in the fourth quarter of 2021 roughly approximate of what was recognized in the comparable fourth quarter of the prior year. And more importantly, we are seeing the strength continuing into 2021, and in fact, for the next several years, with growth expectations ranging from 5% to 10%.

Now transitioning to our 2022 guidance, at $1.23 midpoint, we are projecting overall FFO growth of approximately 12% in 2022 or 10% growth in our FFO run rate when adjusting for anticipated fund profits and the onetime benefits from cash recoveries.

Our 2022 guidance reflects the continued strength that we are seeing across our key earnings drivers, meaning strong internal growth from both lease-up and profitable leasing spreads, meaningful accretion on our external investments, and the monetization of profits from our fund business.

Starting with internal growth. Our core NOI is anticipated to grow 5% at the midpoint in 2022. And this is the number that we actually intend to report, meaning it incorporates the expected headwinds from cash recovery accounting that occurred in 2021.

And as highlighted in our supplemental, we anticipate that our core NOI, excluding cash recoveries, will grow approximately 10% when including the redevelopments and our new acquisitions.

The projected internal growth in 2022, as well as we are expecting for at least the next several years, is poised to be above trend and this growth is driven by a continuation lease-up, profitable spreads of new and renewed leases, along with contractual rental growth.

In terms of growth from lease-up, our signed but not yet occupied spread within our core portfolio is at a historic high at 325 -- 320 basis points, representing approximately $5 million of pro-rata ABR. And this includes key street leases across all of our geographies that are anticipated to commence in the first half of this year, including many of the names that Ken mentioned, including on Lincoln Park and Armitage Avenue in Chicago, Soho in New York City and Washington, D.C.

And keep in mind that in addition to the $5 million of signed but not yet occupied space, this excludes the incremental amounts from any locations that have been pre-leased in advance of an existing tenant vacating, such as the profitable re-tenanting of 565 Broadway in Soho.

So at a 93% leased occupancy, we still have several hundred basis points of growth with high quality space remaining and our leasing team is off to a great start to the year, with an additional $6 million or roughly 5% of our core ABR and advanced stages of lease negotiation.

Again, on some of our key street locations in Soho, Lincoln Park, Chicago, along with several deals at our suburban shopping center in Westchester, New York, following the profitable recapture of Kmart and are re-tenanting to BJ’s.

I also want to highlight the 30 basis points decline in our core build occupancy this quarter. This is actually an instance of addition by subtraction. This decline was driven by the recapture of Kmart at Crossroads in December, representing approximately 100 basis points of built physical occupancy. And we replaced this roughly $6 rent at multiples of that with a new BJ’s lease that is expected to commence in the fourth quarter of 2022.

And from the fund perspective, we are seeing similar strength in our leasing efforts, with a signed but not yet occupied spread of approximately 200 basis points, representing approximately $2 million of ABR as our share.

Secondly, we are seeing strong spreads in both new and renewed leases, with cash spreads on our new leases an excess of 200% this quarter. As outlined in our release, in addition to the triple-digit spread we recognized on the re-tenanting of Kmart at Crossroads, we also reported high double-digit spreads in our street portfolio, primarily within our New York Metro portfolio.

Lastly, our portfolio benefits from strong contractual growth. As a reminder, our in-place street leases typically provide for a 3% contractual growth, which when blended with our suburban assets results in blended annual contractual growth of approximately 2%.

Lastly, I want to spend a moment on the profit expectations from our fund business. As outlined in our 2022 guidance, we anticipate $0.06 to $0.10 of profits, with an expectation that roughly half of this will come from fund investments other than from our ownership interest in Albertsons. And we should be able to operate at the similar run rate for the next several years, as our team works to harvest the embedded promotes across our various fund platforms.

So when we put the pieces together, core NOI is expected to be strong in 2022 and well poised to strengthen even further in 2023 and beyond. We have a strong and growing external investment pipeline, with over $135 million of deals completed since our last call.

And as Ken mentioned, we capture about a $0.01 for FFO for every $100 million that we invest whether it’s a core fund deal, which means that we don’t have to buy large portfolios to generate meaningful levels of accretion from our external investments. So between our strong internal growth and our growing external pipeline, we are well-poised to deliver above trend growth for the next several years.

Lastly, I want to touch on our balance sheet. As outlined in our release, we issued approximately $150 million of equity under our ATM since our last call at a gross issuance price of approximately $22.50 to fund our external growth, including those investments at up close to date, as well as to pre-fund our core pipeline on a leverage neutral basis.

Our balance sheet is in great shape, with no meaningful core debt maturities or capital funding needs, ample liquidity on our corporate facilities, along with various avenues to access capital. And this puts us in a position of strength as we continue to see actionable and accretive investment opportunities.

Lastly and as outlined in our release, we have increased our quarterly dividend by 20%. And at this payout level, I expect our AFFO payout ratio to be in the mid-60s, enabling us to retain a meaningful amount of operating cash flow to accretively fund our internal and external growth.

And assuming that our business continues to achieve the growth goals that I have outlined, we are well-positioned to have similar growth in our dividend over the next few years in order to meet our tax requirements.

In summary, we had a strong quarter with an optimistic outlook on our 2022 earnings, with increased optimism on our expectation of multiyear internal and external growth.

I will now turn the call over to Amy to discuss our fund business.

Amy Racanello

Thanks, John. Today, I’d like to provide a brief update on our fund platform, beginning with Fund V. First, deal flow remained strong. During the fourth quarter and as detailed in our press release, we completed a $70 million acquisition located in a suburb of New York City. We acquired the property at a cost of approximately $180 per square foot, which represents a substantial discount to replacement cost.

The 385,000 square foot open air shopping center is anchored by a high performing ShopRite supermarket in addition to PetSmart and Best Buy. Not only was the property acquired at an attractive going in yield, but also we have an opportunity to add value to the returning of two junior anchors totaling 60,000 square feet. Looking ahead, we have $120 million of fund acquisitions in our near term pipeline. The thesis here is consistent with the properties in our existing high yield portfolio.

Overall in Fund V, we have been acquiring properties in the 7th and 8ths on an unlevered basis and have been able to generate a mid-teens current return on our invested equity using two-thirds leverage. As a result of our typical five year hold, we can generate most of our total return from operating cash flow.

Since 2016, we have been assembling a $1 billion portfolio of handpicked high yielding suburban shopping centers in Fund V. As previously discussed, we see a tangible opportunity for outsized performance in this fund due to cap rate compression.

In fact, based on our current projections, an eventual sale of the Fund V portfolio at a blended 7% cap rate would bring our projected IRR into the low 20s and our projected multiple to a 2x on equity. While it’s still too early to declare victory, our cost basis in these assets is attractive and we are well-positioned to execute on a variety of opportunistic transactions at the right time.

Including this pipeline, we have now allocated approximately 85% of our $520 million of Fund V capital commitments. This is now the appropriate time for us to be engaging with our existing investors on Fund VI and it comes at a good time given the strong recovery and operating fundamentals for retail real estate and the strengthening appetite for this product type in the capital markets.

In the meantime, we still have approximately $200 million of gross buying power in Fund V, which we expect to deploy before the end of the Fund’s investment period in August of this year.

On the disposition front, we have also been quite active. For example, in February, we completed the $66 million sale of Fund III Cortlandt Crossing, 130,000 square foot ShopRite supermarket anchored property in Westchester County, New York. And there are still embedded profits in a couple of remaining investments in this fund.

Additionally, in January, we completed the $24 million sale of Fund IV’s Mayfair Shopping Center, 115,000 square foot supermarket anchored property in Philadelphia. This was one of two remaining shopping centers in our original eight property Northeast grocery portfolio and the last center is also under contract for $22 million.

Turning to the balance sheet, as of year-end 2021, the fund’s platform had $860 million of debt maturing in 20202, of which $590 million has no extension options. Excluding mortgages on property sold in 2022 or currently under contract, as well as the outstanding balances on two subscription facilities, which are used to short-term bridges for debt and equity, we have $420 million of expiring debt to address this year.

Of this amount, approximately 40% or $160 million is spread over six months and is expected to be refinanced or extended in the normal course of business. The balance or $260 million pertains to City Point, our mixed use property in Downtown Brooklyn.

The City Point debt that matures during the third quarter. Although, we are still several months away from the maturity, we are currently in the market to refinance the property and are pleased with our progress so far.

At the property level, we continue to see strong momentum. On the sales front, those tenants who report sales had a very strong December. For example, Han Dynasty, lululemon and McNally Jackson all registered all-time sales highs.

And as it relates to new leasing, construction is well under way on our new Primark, who is expected to open in the second half of this year replacing Century 21. Additionally, in February, we executed a 4,000-square-foot lease with Sixpoint Brewery, adjacent to DeKalb Market Hall on the concourse level.

In addition to new tenants, Downtown Brooklyn is welcoming new residents, with 22,000 new residential units completed or actively under construction, a new skyline with the tallest tower in Brooklyn topped off as of last fall and located adjacent to our Fulton Street entrance, a new green space with a 1-acre park currently under construction adjacent to our Gold Street entrance, and even New York Fashion Week, with City Point hosting its first runway show last weekend. If you haven’t been to Downtown Brooklyn in a while, come visit us.

So, in conclusion, heading into 2022, our fund platform remains well-positioned, with a successful capital allocation strategy and a portfolio of existing investments that continue to march towards stabilization.

Now, we will open the call to your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question comes from Floris Van Dijkum with Compass Point. Your question, please.

Floris Van Dijkum

Great. Hey, guys. Thanks for taking my question. Ken, maybe if you could touch on -- a lot of your competitors have been talking about the compression of cap rates as growth expectations are rising? How does that relate to the streets and urban portfolio? And are we seeing -- are you seeing signs of that and how will you plan to operate or how does your investment philosophy change as a result of maybe higher growth or lower cap rates?

Ken Bernstein

Sure. And obviously, they are correlative meaning, if you have better visibility as to growth, you are going in yield arguably could be less and still achieve your returns. What I would tell you is, we tend to do better when you have a more liquid market. In 2020, things were frozen.

What we are seeing now is, better visibility in terms of street and urban growth rates. But folks are still fairly cautious or scared in terms of competition. So we actually think this is a unique window right now, where if we can buy assets in some of the key streets. We mentioned, we acquired a building in the corner of Soho, so to pick Soho, for instance. But it’s true for many markets.

If you can buy an asset at today’s market rents, we believe that you are going to see substantially higher growth, both contractual, because street rents have higher growth and then mark-to-markets, which happen sooner just because of the bounce back, and as I mentioned, that bounce back rents could increase 50% and you are still not at the prior peaks.

So we have that conviction. There are some other folks out there. So as if there’s no competition, but there’s far less than for some of the other areas that institutions are starting to pile into. We welcome the capital markets recovering the way they are, but we do think we will see with increased conviction good buying opportunities.

Floris Van Dijkum

Great. And maybe if you could touch on the billion of, basically higher yielding suburban assets in your Fund V. And as you think about monetizing that, and I know, Amy, talked about a cap rate at 7% would basically double your equity already or roughly. But I mean, what we are hearing in the markets and what we are seeing in terms of other cap rate evidence, I mean, a 7% yield appears to be fairly conservative? How do you -- I mean, are there any near-term things that might cause you to pursue a portfolio trade or is this more likely to be split off in parcels over time?

Ken Bernstein

So I am not going to predict what avenue we choose over the next year or two. But your numbers are correct and I agree with Amy’s analysis as well. Let’s start with, what was our thesis around this, and keep in mind, it’s somewhat of a barbell approach.

On one hand, we like very much so the growth potential that we see in the street and urban markets. We prefer not to have gone through a global pandemic, but we already are seeing rents that are pre-pandemic levels and we see strong, strong growth rates there.

The other end of the spectrum is what we have been doing in Fund V over the last several years where we were able to buy out of favor retail, not counting on much, if any NOI growth and it has lived up to our expectations. And by that, I mean, not a lot of growth, but that’s just fine when you are buying in the 7s and 8s when you are levering 2 to 1, you are clipping mid-teens returns.

What do we do with that portfolio as there is recognized cap rate compression? Does it get recapitalized? Does it gets sold one-off? Well, as Amy pointed out, we still have a couple hundred million dollars, a few hundred million more of acquisitions that we have got to get done before we really have that fund fully invested.

But I do feel like that thesis has been well validated, the team has done a great job executing it and we will have a lot of different choices to ponder as to the best way to maximize the value for all of our stakeholders there.

Floris Van Dijkum

And does that lead you to raise more money in Fund VI? Is that the thought process?

Ken Bernstein

Well, we will see. So if you dial back six months to 12 months ago, not only was the $72 million acquisition not done, but the next $120 million that we still have another $200 million above that and our investors at that point would say, well, what is the recovery look like? Now that volume is renormalizing, I feel as though we have a very good thesis to continue the execution on for Fund VI of what we are doing on Fund V and I will leave it at that for now.

Floris Van Dijkum

Thanks, Ken. That’s it for me.

Ken Bernstein

Sure.

Operator

Thank you. Our next question comes from Todd Thomas with KeyBanc Capital. Your question, please.

Todd Thomas

Hi. Thanks. Good afternoon. First question, Ken, so look it sounds like there is a lot more activity in the core and in the funds than you have seen in some time and so I just wanted to circle back to cap rates a bit. Can you share the going in cap rates on investments completed in both the core and in the fund since the start of the fourth quarter, I guess? And what you expect may be to achieve during the year, if there’s sort of a way to bracket pricing or provide a sense of pricing that would be helpful? And then what does the $300 million to $500 million investment assumption that’s in the guidance look like for the year between the two segments of the portfolio?

Ken Bernstein

So let me touch on the last question first, so that I don’t forget it. And the answer is, I don’t know, Todd. The nice thing about the dual platforms is we can respond to opportunities as we see them, but not feel overly obligated to do something we don’t want to do.

For instance, if the public markets are not open for us to acquire assets accretive to NAV, accretive to FFO, we are not going to push that, and then you probably see us be more active on the fun side. But in general, over any extended period of time is generally a nice split of about 50-50. But in any given year, it’s never 50-50. So that’s that piece of it.

In terms of cap rates and you touched on this and I will try to answer it, but it’s a moving target. To state the obvious, a lot of cap rate pricing is dependent on what’s the growth rate look like, what you are levered returns look like and all of the moving pieces around that, as well as then what is the competitive bid? We tend not to be particularly impacted by what the competition is doing as much as does the pricing work.

In terms of fund yields, for the assets we have been successfully acquiring and there’s an increased percentage of off-market and private sellers as opposed to during the earlier days of the retail Armageddon where we are mainly buying from public REITs. That marketplace we have been able to hold on to are going in cap rates in the 7s, perhaps, 8s. But the difference is those cap rates may be down a bit where we see more lease up, more value-add, more growth.

But I don’t really care for that thesis whether you buy at 8% with no growth or perhaps even a little negative growth or you buy in the 6s and 7s with growth as long as we can get a decent chunk of our return out of levered cash flow, with potential upside and in the case of Fund V it looks to be somewhat asymmetrical upside, great.

And there are going to be well marketed trades that get a lot of bidders that you will point out that cap rates are substantially lower fine. You won’t see us be the winning bidder on that stuff. So that’s the fund side of the business. Same, similar math when we think about our core but much higher growth rate.

As we have outlined our internal growth at least for the next few years is looking 5% plus, so that’s a pretty high hurdle. What we are shooting for on acquisitions is probably about a 4% growth rate. For the foreseeable future through a combination of contractual growth, think of contractual growth is somewhere between 2% and 3% and then mark-to-markets depending on the assets, the leases, the timing, etcetera.

And so far in the pool of assets that we have either acquired or are in our pipeline is that looks readily achievable. Not every single asset. Not every single day. But overall blending to a 4% growth rate feels pretty good and exciting to us.

Going in yields, therefore, range in the 4%s and 5%s. The pool of assets that we have either acquired or looking to acquire is probably going to blend to a going in 5%. But this, again, we are using our network of sellers.

These are significantly off-market deals, where you are now seeing a fair amount of activity around lenders forcing transactions, whether through foreclosure or otherwise, partners forcing transactions and I give our team credit that we are one of the first call for those kind of assets, especially. We are one of the first calls and thus there is enough price discovery for us that we can get in at a fair price.

Todd Thomas

Okay. That’s really helpful. And John, the question for you on the guidance, last quarter you commented that, you thought $0.25 to $0.27 was the right range to think about from an FFO standpoint, excluding the promote income and ACI stock sale gains. You did a little better than that this quarter. Does that imply that the run rate heading into 2022 is a little higher or should we still be thinking about that $0.25% to $0.27 range to start the year, just given some of the maybe some of the move outs that you previously discussed in Soho, San Francisco, will we see that sort of step back a bit or has the range potentially changed?

John Gottfried

Yeah. Todd, so yeah, I think the range has changed. I think for the reasons outlined in the script. So I think, so the short answer is, yes. So between where an improved credit environment, the investments that we put to work and the leasing that we have done. I think that that range certainly has improved since the $0.25 to $0.27 that I said for the first half of next year. I think this feels like the new normal.

Todd Thomas

Okay. Great. Thank you.

Operator

Our next question comes from Linda Tsai with Jefferies. Your question, please.

Linda Tsai

Yes. Hi. Ken back to your comments on rents being able to grow another 50% and not being at prior peak, but sales being well on its way to prior peak. What does this translate in terms of -- what does it translate to in terms of current occupancy ratio and what do you think the market is willing to bear in terms of a steady-state occupancy cost ratio?

Ken Bernstein

So let me point out a few things, my 50% comment is factual, it’s just math, meaning rents peaked in 2017, they dropped in a very building-by-building and deal-by-deal, but they dropped significantly. We have been talking about that for five years now and so the rebound of 50% is just pure math and that doesn’t get you to the prior peaks.

But sales, for those retailers that have figured out how to use these streets, and Linda, you can remember a few years ago even pre-COVID, the jury was out as to whether luxury retailers were going to continue to dominate these streets and the answer is, yes, they will. The jury was still out as to whether the Warby Parker and Allbirds of the world and the other digitally native were ever going to need stores, and yes, they will.

So let me explain now occupancy cost. When you are talking about occupancy cost for luxury, it’s very different than when you are talking about occupancy cost for digitally natives or advanced contemporary, so I don’t want to give a one percentage one size fits all.

But if you just intuitively do the math, occupancy cost as a percentage tend to now be 20%, 30%, 40%, 50% less than what retailers were bearing during the prior peak. Different world, different choices, but what we are sensing from retailers is they have got a lot of glide path if their topline and bottomline continues to grow, and this is before we even think about things like inflation.

So what does this mean for rents? Well, there’s two things that drive our leasing team’s ability to rent space. One is rent to sales, and it’s an important one to watch, because just because a retailer wants the space that they can’t do the business, sooner or later that comes back to haunt us.

But the other then is supply and demand, and that is a key driver, and so when you have 10%, 20%, 30% vacancy on a given street, it doesn’t really matter how strong the retailer’s sales are, and in some instances, we saw that. They are going to negotiate for lower rates.

Well, thankfully, you didn’t see a lot of long-term leases getting done during the COVID crisis and otherwise. Thankfully, retailers held on to the 3% contractual growth more often than not and have allowed fair market value resets.

So assuming we see increased demand, which we are seeing, many of our streets, the spaces are spoken for. If you want to, come to Rush/Walton corridor, you kind of have to call us. If you want to be on Greene Street, you kind of have to call us. Armitage Avenue, the same.

So we are past the rent of sales conundrum, the rent to sales ratio, the tenant health ratios are much stronger than they used to be. We are back to a good supply/demand dynamic and the right retailers are showing up, and that’s why, again, we don’t have to get to prior peaks tomorrow. I don’t even wish that. What I wish is over the next five years, you get a rational layer of growth, which will be higher in our street portfolio than in the other components, and that excites us.

Linda Tsai

Thanks for that color. And then just one more follow-up, in terms of the Century 21 at City Point at 70% backfilled by Primark. Any updates on the 30% of the space remaining?

Amy Racanello

Now, we have been seeing solid momentum at the asset, like I mentioned with 6 point coming, as well as other tenants in our pipeline. So we look forward to continuing to share updates there.

Linda Tsai

Great. Thanks.

Ken Bernstein

Amy, doesn’t want to tell you what’s in our pipeline.

Operator

Thank you. Our next question comes from Ki Bin Kim with Truist. Your question, please.

Ki Bin Kim

Thanks. I am actually going to follow up on that last question. Can you just provide some more details or color in terms of what you are seeing in your forward leasing pipeline? Not necessarily for City Point, but I am asking more about the street and urban segment of your portfolio.

Ken Bernstein

Sure. And Amy, now you are off the hook. So what has been a pleasant surprise, if you dial back to pre-COVID, there was a lot of concern and we felt like, what after three years or four years of rental declines, that retailers were ready to step up. But then COVID happened and now let’s see where we are.

As a result of a combination of the cleansing process that had occurred during the Retail Armageddon, the confirmation process that had occurred as a result of omnichannel actually working.

We are now in a position where, luxury retailers are stepping up and meaningfully so, and they are stepping up in ways that are different than you saw five years, 10 years ago. The luxury retailers are not simply counting on their mall-based tenancy. They are not simply counting on their department store sales. They are recognizing they need to get in front of their important customers in these key areas.

And the sales are supporting this. These are not just showrooms. So expect to see, in many of the corridors we are active in and other corridors that we are not yet active in, luxury continuing to show up. That’s trend number one and our leasing team is excited by that.

Trend number two is that because omnichannel has worked for so many of the digitally natives, what you are seeing today compared to two years, three years ago where some of those online retailers said, we never need to open stores, as they have been going public, as they have been growing, they are all acknowledging that the store is the most profitable channel for them. And so expect to see the Warby Parker and Allbirds of the world open up stores in these corridors.

And that combination, plus everything in between is leading to a much stronger leasing environment than we certainly expected a few years ago or fear during COVID and we are in a position because we have enough vacancy to lease up, we have enough of the right spaces, we are in a position to capture that.

Ki Bin Kim

Got it. So how does that all translate into dollars and cents, meaning your street and urban retail portfolio is at 90% leased today at 4Q. I am not going to get as specific as what exactly embedded in your guidance for 2022, but I am just trying to figure out when does that get back to 94%, 95%?

Ken Bernstein

John?

John Gottfried

Yeah. Keeping the way I would think about it is, we put out a multiyear guidance that, we think we grow to 5% to 10%. So, rather than expecting when we RCT and what period, I would say, late 2023, 2024 timeframe is where I would model that we should be at that that level that we view with full occupancy to 94%, 95%.

Ki Bin Kim

Okay. And then just last question for me, in your past 2021 lease rolls, how much of high priced street retail has rolled and what does that mark-to-market look like for those group of asset and realizing that rolling kind of leases every year. So I am asking more specifically about like, if more about mark-to-market on lease roll in places like Soho versus like Flatbush, right, so more Gold Coast versus some more suburban type of locations. So the higher priced price point leases that have rolled, what has your experience been so far on mark-to-market?

Ken Bernstein

Let me take a first stab at that, John. But, so let’s be clear, it really depending vintage in and vintage out. If you were talking about a 2017 lease vintage signed rolling out during COVID, oh my gosh, that would have been horrific. Thankfully, we were really careful of not buying into that 2017 peak, so we avoided the peak, and along the way, we have had our fair share of valleys, but nothing as precipitous as that would be.

Rents dropped by anywhere from 20% to 50% in the different markets that you just touched on, less so on Armitage Avenue, less so on Melrose Place, but somewhere in that range. And if you were capturing that peak in valley in a Soho, boy, that would hurt. Thank goodness we avoided that.

And so what we have said is we have cleansed through in Soho, for instance. We have cleansed through most of the above market and even at todays market rents without further appreciation and I expect further rental growth. Even at today’s, we have material upside through the lease-up of some of those spaces that we lost over the last few years, as well as positive mark-to-markets. So, John, what might you want to add to that?

John Gottfried

Yeah. No. I think that explains it. Maybe give a couple of examples to make it probably cave in. So if we look at the Gold Coast in Chicago where we did have high lease rollover. So we lost Marc Jacobs on the corner of Rush and Walton, and we backfilled that properly with our existing tenant expanding that space, as well as adding Veronica Beard there at a positive spread. So I think that’s one example where we have been able to see rolls. Again, we look at Melrose similar and we talked about the spread that we saw in Melrose also a higher dollar lease.

And then I think the last thing I’d point out, just Soho in general is that, we put out and I am losing track of years when put this out, but it’s still a relevant data point is that, we showed that our NOI from our sort of -- our core -- from our Soho assets doubles over between and I am going to -- I have to remember the exact timeframe, but during this period of the 2023, 2024 that I mentioned to you and we are on pace to do that.

So, I think, again, there are some areas of occupancy fell up in there, but that’s also driven by rental rates as we are replacing tenants that we are at a basis that we are now exceeding that basis in rents that they were paying in that period of time. So we are seeing positive spreads and roll as we roll and our experience is supporting that.

Ken Bernstein

Final point on that. Not every single store will be positive spread. In our numbers, taking into account the growth we see, are going to be wins and losses. It’s just we are now seeing far more wins than we either thought and we are seeing fewer losses.

Ki Bin Kim

Okay. Thank you.

Ken Bernstein

Sure.

Operator

Thank you. Our next question comes from Katy McConnell with Citi. Your line is open.

Katy McConnell

Great. Thank you. Just wondering if you could walk us through your additional capital raising plans for this year to fund external growth and what are the main drivers of the higher interest expense that you are assuming for this year.

John Gottfried

Hi, Katy. So I think the capital drivers, one is, we have raised a decent amount of equity to fund what we think is our near-term pipeline, so with $115 million that we are confident it gets us to closing what we have expected in the near-term.

Additionally, and you think of the various capital sources within our business, we have some structured finance loans that that we are continually getting proceeds from. So that’s a source of capital and also a dividend payout ratio given where it’s at even with a 20% raise is enabling us to retain cash flow, as well as Amy mentioned, as we monetize some of the fund investments. That is a source of capital for us.

So that’s just internal cash flow. And then we need a cost of capital on the equity side. You have seen we have issued at a $250 price and we are able to deploy accretively. So I think that’s the other piece of it.

And our higher debt assumption factors in again the investments that we -- I will jumping to your second question in terms of the higher interest expense. First of all, we are hedged. So if you look at our long-term debt profile, we have long-dated interest rate swaps that are locking in our interest over a very extended period of time.

But as we added the nearly $250 million worth of investments throughout 2021, that’s the biggest driver of on a go-forward basis we added -- throughout the year that’s sort of the full year impact of those investments in 2022.

Katy McConnell

Got it. That’s helpful. And then it sounds like the overall tenant health and leasing environment continues to be really strong. But just wondering within your same-store NOI guidance, what you are assuming for new bad debt expense in 2022 and are there any specific closures or watch list tenants to be aware of so far for the first quarter?

John Gottfried

Yeah. And I think we are at a point in the cycle. Katy where our watch list is, I don’t want to say virtually non-existent, but it’s virtually non-existent. I think the weaker retailers have moved out and what we are seeing and I look at them very closely, our tenant sales are strong and growing.

So what I would say, the way I would think about our -- or the way I did think about our credit reserve is that, I am assuming in our -- what I will call our low case that we stay at a 98% collection rate and a roughly 2% reserve. And our higher case is going to go back to historic norms where we have ranged between 50 basis points to 125 basis points. So that’s the way that we have modeled our 4% to 6% range, as well as the NOI range.

Katy McConnell

Great. Thank you.

Operator

Thank you. Our next question comes from Mike Mueller with JPMorgan. Your question, please.

Mike Mueller

Yeah. Hi. I guess following up on Ki Bin’s, you don’t have a lot of street expirations in 2022, but in 2023 it looks like about 20% or so rolls. Can you give us like a rough sense of bracket as to where you think that group would roll to and does anything in particular stand out during that year?

Ken Bernstein

It really runs the gamut, Mike, and it’s a bit early. So I don’t have any specific numbers around it. There are some tenants that we are going to expect getting the space back and re-tenanting and then there’s others where we are in conversation right now about extending long-term. So, yeah, I -- my guess is over the next six months we will have much better visibility.

Mike Mueller

Got it. Okay. That was it. Thank you.

Ken Bernstein

Sure.

Operator

Thank you. Our next question comes from Craig Schmidt with Bank of America. Your question, please.

Craig Schmidt

Yes. Thank you. Just thinking about Fund VI, will you continue with the existing investor base or are you going to try to bring in some new names?

Ken Bernstein

What we have found historically and it varies fund by fund, but usually there are new investors that come join in. The world evolves. The core fund investors that have been with us over the decade are the endowments and foundations, but then there’s always new folks and we welcome that.

So, the first few is, we had to find profitable investments to put the money to work, because until Fund V was well on its way, hard to talk about VI. We are now at that point. And Amy and I are looking forward to starting those conversations.

Craig Schmidt

And thinking about the more seasoned endowment investors, how do they react during the COVID crisis?

Ken Bernstein

It ran the gamut because to some degree there are also heavy investors in tech and did quite well there. They have been supportive of us over the decades, so they know that we are watching carefully. But we were trying to communicate with them as regularly as we were communicating with all of you, because it was a scary time period when a large percentage of retailers stopped paying rent for a period of time.

But thankfully, we are past that. Thankfully, our collection rates are where we want them. And retail pre-COVID, there was questions about whether retail was an investable asset class. Now, as it relates to the kind of stuff we do, the answer is, yes, it is. And so the question is, what price? What returns? What is the profile look like going forward? And we are looking forward to having that conversation.

Craig Schmidt

Okay. Thanks.

Ken Bernstein

Sure.

Operator

Thank you. And I am not showing any further questions in queue.

Ken Bernstein

Great. Thank you all for your time. We look forward to speaking with all of you again soon.

Operator

And with that, we close our program today. Thank you for your participation. You may now disconnect. Have a wonderful day.