Ken Bernstein: Yes and yes. Now to add a little more color to that. We are both for Fund III where we are in the process of liquidating assets, getting very close to that promote as those assets ripen for disposition, we would be in the money there. Fund V, very likely could be the next one because of the significant cash flow. Remember, we’ve been clipping mid-teens cash flow returns. And so a sale or recap of that could also provide accretion. And then to structuring going forward, very, very likely that going forward, we would come up with structures that would enable more consistent promotes than the multiyear lumpiness in our traditional funds. So you’re spot on both.
Ki Bin Kim: And if I could squeeze a third one here. The bad debt in your guidance of 150 basis points, how much of that is accounts for known move-outs versus kind of an unknown general reserve?
John Gottfried: I would say the vast, vast, vast majority is unknown in general.
Operator: Our next question comes from the line of Paulina Rojas of Green Street.
Paulina Rojas: You have talked about attractive going in yields for Street retail, given the growth you expect on those assets? Can you help us providing some numbers around this comment? Where do you see the going in yields for Street retail assets we felt material below or above market rents?
Ken Bernstein: And this goes back to the whole issue that investors in general seem hesitant to entering below private marketplace borrowing costs. Well, what does that mean? That probably means if you’re really good at executing on your mortgage debt, you’re at about 6%. And so that’s kind of the going in yield. What’s crazy about that is historically, again, different interest rate environment, but historically, cap rates tended to align with growth rates, but when you add that artificial floor and if everything starts at 6%, and I’m grossly oversimplifying, but if everything does and that’s kind of what we’re seeing, it grows from there. And so a highly motivated seller, maybe selling at a 7%, a more patient seller, maybe closer to 6%.
There will be examples where people break through and are in [5s]. But that floor is real, and we think that, that’s going to create asymmetrical upside for buyers like us who can avail themselves of both the public markets and the [markets].
Paulina Rojas: And you have mentioned that you see more rent growth in Street retail than other open air formats. So first, I wanted to make sure that your — with this comment, you’re referring truly to market rents and you’re not really capturing the different lease structures of the two segments. And if you were really referring to market rents, outside of the fact that in Street retail, you have more upside to historical values, can you elaborate on why you think there would be more rent growth in this asset class?
Ken Bernstein: So let’s separate because it is a combination of both market rent growth and the contractual nature. So part of our bullishness is that we get 3% contractual growth and fair market value resets in our Street retail, whereas in our suburban the contractual growth rate is less, and there are no fair market value resets. So some of this is structural. But what we experienced over the last decade is it doesn’t really matter how good your structure is if the supply and demand and rent to sales are not there. And so certainly, during COVID, it didn’t matter that you had that structure, you have to deal with the realities of a very difficult time period. Going forward now, what our retailers are saying is for a variety of reasons that A.J. touched on it otherwise, supply demand for these markets, they want to be there.
Secondly, they can afford to be there because of their sales. Now some of the sales lift was good old-fashioned inflation, which we’ve got to get past our inflationary period, but it sure is better than deflation for rent to sales. And then the second is the migration towards these type of stores. So what our retailers are saying is they always would like to pay less rent, but they’re more than happy to open profitably in these locations. And that combination, strong rent to sales, strong supply/demand and strong contractual growth means we think we will be able to, over the next one, three, five, 10 years, recognize more growth in that component of our portfolio than in the other open air that we mentioned.
Paulina Rojas: Can you put the comment around rent to sales and into a historical context, where it is or how it has changed?
Ken Bernstein: So with the beginning of the retail armageddon, so much attention went to driving sales online. And in fact, retailers who were in the omnichannel business would often shift their sales to online because they were getting a higher multiple on that. I think we’re all getting more and more comfortable that, that area has passed. What retailers are recognizing right now is that they can open these stores, that they can quickly get to a sales level and a rent to sales level. And again, here’s where it will defer, and A. J. help me. Some retailers need to be at 10%, restaurants probably lower than that of rent to sales and then luxury and aspirational can be well into the high teens than otherwise. And what we’re seeing is they’re achieving it and they’re achieving it off of comping to 2019.
So even when we see sales growth moderate over the last year, our retailers are showing up. The best evidence of retailers putting their money where their mouth is, is the recent acquisition by retailers of some of these locations. So if you want to know what an infinite life lease looks like when a retailer buys that location that’s as close as you get.
Operator: [Operator Instructions] Our next question comes from the line of Michael Mueller of JP Morgan.
Michael Mueller: I think you’ve talked about different parts of the Street portfolio. But the overall Street portfolio is about 85% occupied, and I know rent spreads can be erratic. So can you talk a little bit about new lease signing levels that you’ve signed so far and how to think about rents beyond that for additional lease-up?
Ken Bernstein: So A.J., why don’t talk about the level of tenant interest for the spaces that we’re leasing up as well as even [private]…
A.J. Levine: Like I said, the demand definitely outpaces the supply. I definitely have more tenants interested in space than I have space to lease. So from that perspective, we shouldn’t really expect to see a significant slowdown in leasing volume moving forward. Demand remains high on our Streets, there’s still a lot of great product out there.
John Gottfried: And Mike, I tried to elaborate in our remarks where over the next — because we have leases that are well below market that we just can’t get to in the next couple of years. So I think those we could guess on them, but it doesn’t really help us if we can’t get to them. So I think what I tried to do is lay out on a lease-by-lease basis, A.J. and I walked through and said, here’s where we think we can capture rents and we put a dollar amount on that. So that’s the $3 million to $4 million incremental dollars that think over the next two years, as we get expiring leases back, we’re able to mark to market. And the percentage could change quarter-to-quarter, period to period, but we’re seeing strong revenue.
Michael Mueller: So that $3 million to $4 million, that will take your occupancy from 85 up to what?
John Gottfried: Call it sort of gets to the — probably in the 93 to 95 range.
Michael Mueller: And that’s about what time period to go from 85 to 93?
John Gottfried: Yes, call it, two years.
Operator: Our next question comes from the line of Jeffrey Spector of Bank of America Securities.
Lizzy Doykan: It’s Lizzy on for Jeff. I just wanted to confirm if we have more clarity on what to expect on the cadence of FFO throughout the year or is the $0.30 to $0.34 range in each quarter, all that you’re kind of willing to put out for now?
John Gottfried: So what I would say is it’s going to be the cadence of rental start because as I mentioned in my remarks, since our core and core portfolio as those rents kick in, that’s going to drive it. So I would say how we get to the midpoint of the $1.28, I would suggest we’ll be in the lower 30s first half of the year and then upper 30s back half, if that makes sense. So again, not giving quarterly guidance, but just a cadence of when we get the full benefit of the rents coming online, it’s going to be a little bit back end loaded, but we’re talking a penny or two.
Lizzy Doykan: And just going back to A.J.’s comments at the beginning on City Point, it doesn’t sound like there’s too much new to gather, but just checking if maybe the discussions or the activity you’re seeing today for leasing, the remaining space changes any expectations around timing of when that gets into the same store pool, or maybe the potential accretion that you’ve consistently talked about?
John Gottfried: I mean we’re always trying to strike a balance between signing leases quickly, maximizing long term value, and Ken and I talk about this all the time. Of course, it’s critical that we remain focused on that long term value creation, and that’s why we’ve strategically held back a lot of that space. But all the things that I mentioned, the part coming online, the scaffolding coming down, Live Nation, residential occupancy gains. So in a lot of respects, we’re finally able to accelerate some of those signings like we did with Sephora, right, like we did with Fogo de Chao, and again, with all of these recent developments like we’ll do with a lot of that space around the perimeter of the project. So definitely good days ahead of us at City Point.
Ken Bernstein: And then in terms of whether it comes into the pool, right now, we do not have it slated to come in this year. And even if and when it comes in because the growth will be extraordinary and would skew the same store numbers, we would make sure to break it out so that you get a better sense of our same store without City Point even if and when it comes online, unless it comes online with a 5% to 10% growth, which is what we’re seeing in our other Street assets.
Operator: I would now like to turn the conference back to Ken Bernstein for closing remarks. Sir?
Ken Bernstein: I’ll close with how I started. Happy Valentine’s everybody, and we look forward to speaking with you again soon.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
