Operator: Our next question comes from the line of Todd Thomas of KeyBanc Capital Markets.
Todd Thomas: First question, I just wanted to go back to the comments around capital recycling. I think you commented that some of that activity might be from both the core and from the funds. You haven’t really sold much in the core over time. And I’m just curious how you think about the core portfolio and how much property you consider to be non-core? And also whether you’re marketing assets for sale or is the thought process that investments and capital needs will drive the decision to sell over time?
Ken Bernstein: So multiple components to that. Let’s stick with the core portfolio first, Todd. The 50% that is Street, the 20% that we call urban, vast majority of those are core markets. And there are one or two that we have mentioned over time that were probably overweighted and would look to trim some. But in general, we see those as growth markets and are less likely to recycle there other than due to overexposure. Then for the 30% of our core portfolio that is traditional solid suburban, what we have found is there have been inbound inquiries or we’ve reached out in general to investors who want to participate in those kind of assets and want a operating partner, and that would be best execution for us. Because as I’ve said, we think we are best when we are agnostic as to the different components within open air retail.
And so bringing in capital on that side may be more advantageous, both economically but also just in terms of making sure our team can stay on top of the game. So it could be a recap of some assets, but could be sale as well. If they are lower growth and less consistent with our long term growth strategy, there is no reason not to sell at the right time. So you pointed out, we haven’t shed in the last few years. I would say it’s been a tough time to be a seller of assets. Thus, you saw the lack of volume of a friend called and said, hey, I want to sell an asset. In 2023, I’d say brace yourself. Now 2024 increased investor interest, it is starting to feel like the bid ask spread declines and maybe we can have transactions there. More importantly, though, the couple of billion dollars of assets that we have in our fund platform, there is increased investor interest and that might also translate.
It might translate through to the old way we have and the traditional way of buy, fix and sell, nothing wrong with that, it would be great to see some more promote income come in. But there are also investors saying, how about we just recapitalize some portion of Fund V, some portion of Fund IV. And so we’re certainly having those conversations in terms of potential transactions there. That’s a fair amount of information, Todd, for what may or may not be a key driver of our capital. We’re not looking to necessarily shrink the company. We don’t have to. We are just saying, here are different ways we can create shareholder value. And to the extent that those numbers make sense we will do it.
Todd Thomas: And then, John, you mentioned that you’re past the painful vacates and I think expirations on North Michigan Ave, and that there’s no recovery there really assumed in guidance. But can you provide an update on the status of H&M and some other movement at those assets that was anticipated, whether there’s any NOI in the 4Q run rate and if there’s any vacate activity that I guess could impact results in the near term, just as we think about the quarterly cadence of earnings throughout the year?
John Gottfried: So why don’t I — I’ll walk through the numbers, and then I’ll have A.J. talk about what early — I mentioned some early signs of exciting things on the Street, I’ll turn it over to him. So I think within our 2024 guidance highlighted that the pain is behind us. So H&M is on a very short term lease. So they found a new space, they will be moving later this year, but they’re effectively on a month-to-month lease, Todd, that’s baked into our numbers. Verizon is out very early this year. So I think they have a little bit left in the quarter and then they’ll be fully out, but that’s baked into our numbers.
A.J. Levine: I mean what I would add to that is North Michigan Avenue still has a little ways to go. We are very encouraged by what we’re seeing happening on the Street, Alo Yoga opening up, Aritzia not far behind opening up in 50,000 feet, the number of tours that we’ve had at our assets, the LOIs that we are aware of on the Street has increased significantly over the last three to six months. And then, of course, there’s the success that we saw on the Gold Coast, which is just a block over, the high level of demand, the incredibly low level of supply and the inevitable spillover back onto the avenue that’s going to occur as a result of that. And then, of course, Chicago, I’m yet to meet a retailer that in some form or fashion doesn’t view Chicago as a market that they need to be in. So not at a sole level of recovery quite yet but we’re certainly on our way and we’re very encouraged by what we’re seeing.
John Gottfried: Todd, just to reclarify what I said in our remarks. All of that optimism, while I’m rooting for A.J. is not in our multiyear model. So whenever we talk about North Michigan from this point on, it’s going to be upside.
Todd Thomas: But John, is there any way to just quantify, I guess, how much ABR or really NOI is still being — those assets are still generating and how much might come offline during the course of the year?
John Gottfried: On the top of my head, I don’t have the exact number, but it’s de minimis. And I’ll tell you, H&M’s not covering their taxes, right? So this is one that’s insignificant amount of rent throughout the year.
Todd Thomas: So you’re already — it’s already a drag on earnings, that’s in the run rate today?
John Gottfried: That’s right.
Operator: Our next question comes from the line of Floris van Dijkum of Compass Point LLC.
Floris van Dijkum: Thanks for the color on everything. Can you remind us, I think your Street portfolio currently is only, I think, 91.5% leased or 91.4% leased. What is the actual percentage of paying or physical occupancy? And can you also remind us where peak occupancy was obviously in a different time, and give us an indication of what kind of upside potential we could look at?
Ken Bernstein: So let me start, while John looks at those numbers. When we say peak occupancy at a different time, we’re getting pretty close to that different time, Floris. There is more demand for quality space than there is space. And A.J., I won’t criticize you on a live earnings call, but why aren’t we 100%? Obviously, it takes time to get the spaces open. But right now for quality space, Floris, I think we can, in the key markets, get to fall that probably translates through into the mid-90s because there’s always different spaces. But John, why don’t you give the numbers?
John Gottfried: So Floris, we are — right now, we’re about 89% physically occupied and to where we’re historically can spot on. We were in the mid-90s up to [96.4] from what I recall. So we were — we have a ways to go. And in my prepared remarks that $18 million to $20 million does not — there’s still room to run after that. So those are pretty well base case assumptions.
Floris van Dijkum: I mean if you do the math, I mean, your average Street and urban rent is $71 and it depends a little bit on where that vacancy is located. I mean there’s some significant upside, it appears. Maybe two things I was curious on as well. You mentioned something about M Street, Ken, I think and maybe A.J. did as well in his remarks about there’s no luxury there yet, but you expect that, that could potentially happen. What do you see in terms of the signs for that? And what kind of impact, in your view, would that have on your holdings in that particular quarter?
Ken Bernstein: So there is no confusion. We are not currently predicting luxury shows up on M Street. I think A.J.’s point was simply even without luxury, you can have thriving corridors. Think of Armitage Avenue in Chicago, think of M Street. Certainly though, if and when luxury shows up as it did on Melrose Place, there is that additional lift. But our point would be let’s not limit our thoughts to just where luxury is, there is a broader universe than just pure luxury. And then if luxury shows up as we are now seeing, let’s say, in Williamsburg, great. But if it didn’t, Williamsburg would still be great.
Floris Van Dijkum: And then my last question was, so where do you think SoHo market rents are today? Obviously, we’ve seen some massive growth. And I think in prior peaks, it was close to $700 or even actually above $700 a square foot. Clearly, the rents bottomed, I think, somewhere around $300 square foot off the top of my head. Could you tell us a little bit or maybe, A.J., could you give a little more color where — what levels per square foot rents are being signed out in that particular market?
Ken Bernstein: So I’ll let A.J. answer it other than to really emphasize it’s space by space. Some spaces are $700, some are $200, it has to do with frontage. That’s why it can be idiosyncratic. But the movement in general is a trend that is happening more or less across the board, A.J. so answer Floris’ question in those caveats…
A.J. Levine: We’ll do the best we can. I mean it’s a very nuanced market as a lot of these Street markets are. So to pinpoint a number, whether it’s $700 or $1,000 or $300 is a little bit of a loaded question. There are certainly corridors that are quickly approaching the prior peak. There are certainly corridors, perhaps further south or further west that still have a significant amount of room to run. So hard to pinpoint an answer there but the growth has been tremendous and we think that there’s enough growth ahead of us there where there’s still a lot of value to capture.
Ken Bernstein: And let me take one more stab at it, Floris. So again, not all spaces are equal. But if the space at prior peak was $700 and dropped to $300 during the dark days of COVID, it is certainly more than halfway back with room to run, and we’re starting to see some leases getting done at prior peaks. So it has been a significant acceleration. But if you want to write that we’re halfway there fine, if you’re saying we’re less than halfway there, I would disagree. And if you say we are back to prior peaks across the board, I would disagree as well.
Floris Van Dijkum: So to summarize, Ken, just make sure that I understand that correctly, I think your average rent in place in SoHo is around $370 a square foot. So if you’re back halfway to prior peak, would it be fair to assume that market rents are somewhere in that $500 a foot range now?
Ken Bernstein: With all the caveats, I already said. If you look at some of the recent spreads that A.J. and his team have executed on, that would be consistent with your thinking.
Operator: Our next question comes from the line of Ki Bin Kim of Truist.
Ki Bin Kim: First question, just on the G&A guidance, it’s a little bit lower than I thought. Any kind of commentary you can provide?
John Gottfried: You say the G&A guidance?
Ki Bin Kim: Basically, you’re not projecting it to grow, which is typically unusual. So just curious if you can provide any commentary around that?
John Gottfried: No, we’re basically give it a penny or two flat down to last year. So nothing dramatic but constantly looking at ways to operate more efficiently.
Ki Bin Kim: And on the institutional capital front, your V funds are currently not in the promote period. So a couple of questions. Are we getting any closer to realizing promotes? And secondly, when you’re talking about new possible joint venture partners or funds, are you thinking about restructuring some how you actually earn and promote maybe tie it to individual properties versus a fund format, which might have some pitfalls?
