AKR - Acadia Realty Trust: Priced At A Discount Following Strong First Quarter Results

2023-05-09 07:13:44 ET

Summary

• Acadia Realty Trust owns and operates retail-focused properties in three key densely populated regions in the U.S.
• Following a strong fiscal 2022, results have continued to surprise in the first quarter, led by better than expected same-property NOI growth.
• At current trading levels, shares trade at an attractive discount and come paired with a reoccurring dividend payout that is presently yielding just under 5.5%.
• Though I was previously neutral on AKR stock, I have turned more bullish following Q1 results.

Acadia Realty Trust ( AKR ) owns and operates shopping centers and mixed-use properties with retail components. Their core portfolio is concentrated in densely populated markets in the Northeastern, Mid-Atlantic, and Midwestern regions of the U.S.

Among their top tenants in their core portfolio are large, diversified retailers such as Target ( TGT ), who is their single largest tenant by annualized base rents (“ABR”), and also necessity-based retailers, such as Walgreens ( WBA ).

Bed Bath & Beyond ( BBBYQ ) is also a top tenant. And while that may instill concern in some, given the bankruptcy proceedings, the eventual departure of BBBY is shaping up to be a net-positive for the company.

In a prior update on the stock following their Q4 results, I viewed shares as a “hold” due primarily to the more challenging comparable environment in 2023 coming off a hot 2022. In addition, I cited my concerns relating to the gap in earnings from vacant space pending commencement. Since that update, shares have declined by about 8%. The broader S&P ( SPY ), in contrast, is down 6.5% over the same period.

Following their recently released Q1 results, I have become more bullish on the stock. Currently, shares trade near new 52-week lows and are trading at a forward multiple of just 10.9x. This is on full year guidance for funds from operations (“FFO”) that was just increased by over 3% at the midpoint following strong first quarter results. In my prior analysis, I saw upside of about 15.5% in shares based on consensus estimates. This upside potential is now about 25%. This would be in addition to a dividend yield of just under 5.5%. For investors seeking to rotate out of cash, I view AKR has a viable long-term opportunity at current trading levels.

Key Portfolio Metrics

AKR reported FFO/share of $0.40 in Q1. And looking ahead , management increased their full year guidance to a midpoint of $1.23/share from $1.19/share previously. This was due in part to a strong start to the year that exceeded expectations.

On an overall basis, the core portfolio was 92.8% occupied at quarter end. And during the quarter AKR executed on leases in excess of +$1M in ABR. In addition, they have an equivalent number of leases in advanced stages of lease negotiation. On these signings, the company realized spreads of 10% on new and renewed leases.

Continued Same-Property Strength

Promising same-property net operating income ("NOI") growth rates over the past several quarters provide confidence that AKR will be able to hit their multiyear goal of 5% to 10% annual internal growth.

In the current quarter, for example, same-property NOI growth landed ahead of expectations, at 7%. This would mark the sixth time over the last eight quarters where growth was above 5%. Moreover, over this eight-quarter period, growth has averaged about 7%.

Included in same-property results was the impact from prior period cash collections. This is notable since this caused a headwind of approximately 200 basis points (“bps”). Excluding this negative impact from results would suggest same-property NOI growth of over 9%.

Contributing to the positive growth is a reversal in sentiment on the sector, one that had been previously marked by fears over the rise in e-commerce. With retailers recognizing that the physical storefront remains their most profitable sales channel, demand has grown accordingly. This has resulted in a scarcity in supply, particularly on the higher-quality space, such as those owned by AKR.

Promising Outlook For The Street Portfolio

In addition, their street portfolio, which represents about half of their overall portfolio value , continues to thrive as the residential districts surrounding their properties continues to recover.

In fact, in over 70% of their street portfolio, performance is better than they were pre-COVID. Furthermore, in these markets, net effective rents have grown by over 15%, with some corridors seeing growth in excess of 20%.

Granted, occupancy levels still lag significantly, at just 85%. This compares to an occupied rate of 94.5% in their suburban portfolio. Management does, however, expect occupancy rates to ultimately increase to 95% in the years ahead.

And the lower occupancy levels are offset in part by strong same-property growth. In their prior release , for example, management had guided for same-property growth of 6% to 7% in their street portfolio. These expectations were handily surpassed, as growth came in excess of 8%.

The street portfolio is also inherently higher growth, with about 70% of the portfolio viewed as “high-growth” markets. In these markets, management expects 10% annual NOI growth between 2023 and 2025. This would equate to incremental NOI of $0.07/share. It’s also worth noting that their Soho market, alone, is expected to contribute nearly half of this expected growth.

Departure Of BBBY Is Likely A Net-Positive

AKR currently has exposure to two properties occupied by BBBY. In both, the impending departure works out to be a net-positive for the company. In the Wilmington, DE, location, the space has already been fully leased to DICK’S Sporting Goods ( DKS ), which was the adjacent tenant that made a decision to expand into the BBBY space. The new lease is over a 15-year period.

The second location is in a well-located urban shopping center in San Francisco where rents are currently well below market. The space, itself, is a two-level unit. At present, AKR has signed a lease with one store to anchor space adjacent to BBBY. And once the space is recaptured, management expects to activate the balance of the unit.

Why AKR Is A Buy

AKR is surpassing expectations and is on track to achieve their growth targets, supported in part by continued strength in their same-property portfolio. Their street portfolio, which represents about half of their overall portfolio value, also figures to be a larger driver of their operational strength in future periods.

From 2023 to 2025, for example, management is expecting 10% annual NOI growth from key street corridors. Strength is particularly notable in certain sections, such as their Soho market. A dramatic expected increase in occupancy levels from 85% to 95% is ambitious but not out of the realm of possibility.

Some markets, such as State Street in Chicago, have been slower to recover from the pandemic. And this may invite some skepticism on whether AKR can achieve their desired occupancy levels. But despite the concerns of the market, retailers are still posting strong sales figures. In some, sales are even at record levels.

The loss of one of their top ten tenants, BBBY, can also be cited as another concern. But this loss is shaping up to be a net-positive. Of the two locations, AKR has already leased one to DKS to a long-term lease. And in the other location, current rates are well below market, which will ultimately provide AKR an attractive mark-up opportunity.

Sure, there will be a time lag of when these leases ultimately commence. And I had cited this previously as one concern. But the element of uncertainty is less now than it was then. In addition, the risks already appear to be baked into the share price.

At less than 11x forward FFO, AKR provides upside potential of at least 25%. And with this comes a well-covered dividend payout that is presently yielding just shy of 5.5%. For investors seeking to rotate out of cash, AKR is one worth increased attention.

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