Acadia Realty Trust

Good day, ladies and gentlemen, and welcome to the Q2 2019 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchdown telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Stephanie Nelson, and you may begin.

Good afternoon, and thank you for joining us for the second quarter 2019 Acadia Realty Trust Earnings Conference Call. My name is Destiny Nelson, and I am an intern in our finance department. Before we begin, please be aware that statements made during the call are not historical and 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, July 23, 2019, 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 these non-GAAP financial measures with the most directly comparable GAAP financial measures. 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.

Thanks, Destiny. Great job. Good afternoon, everybody. I'd like to start with an overview of some of our longer-term goals and the drivers of growth for our business. as well as then touch on how our solid second quarter results reflect on that progress in advancing those goals. Then John will discuss our quarterly results in more detail, as well as our forecast and our balance sheet metrics. Then finally, Amy will discuss our fund platform and our progress on that front. As we've discussed on past calls, there are a few key drivers of growth for Acadia. First, comes from our core portfolio, where there are two broad drivers of long-term net asset value growth and earnings growth. Most importantly, comes from the internal embedded growth in our core portfolio, driven by lease-up of some key vacancies, contractual growth, and then a few redevelopments. And these should combine to enable us to deliver three to four percent annual NOI growth from our existing core portfolio for the foreseeable future. As John will discuss, our second quarter results are consistent with this thesis, with same-store NOI growth coming in at the high end of our internal goals, and we're also making continued progress with our key redevelopments, most notably the city center in San Francisco, where we're working through the municipal approvals for adding Whole Foods to the property, And then the leasing of our shop space is also beating our internal estimates. Then complementing our core internal growth is the ability to periodically add properties to our core portfolio when the stars align. The requirements and our goals here are pretty straightforward. The acquisitions have to be accretive in that asset value as well as to our long-term earnings growth. And then they need to be consistent with our focus on street and urban properties in the key must-have markets. In other words, these acquisitions should have the ability to drive long-term rental growth that is in excess of the current 3% to 4% growth embedded in our existing portfolio. Now, these acquisitions are not ignoring the fact that the retail real estate market is still facing significant challenges. the highly disruptive separation of the haves and have-nots amongst retailers, it's still playing out. But on a selective basis, we're beginning to see a rebound. Whether retailers are emerging or re-emerging, they're recognizing and appreciating the benefits of a physical location for reduction in customer acquisition costs, reinforcement of their brand, and then most importantly, more profitable, omni-channel execution. And what our retailers are telling us is that they are most focused and most passionate about their key locations in the critical cities and the critical markets that continue to disproportionately attract the young, well-educated, well-employed customer. Thus, we're beginning to see in select markets and with careful analysis what we have described as a bumpy bottom. Bumpy bottom. because we can't ignore the challenges that our retailers face, nor the vacancies on many great streets. Bumpy because we recognize that we are likely at the late stages of the economic cycle, while still in the early stages of the future retail recovery. But bottom because in many of the key corridors where we're active, we're now seeing tenants showing up. And showing up with more enthusiasm and clarity today than one or two years ago. But bottoms are only obvious in hindsight. And we won't create shareholder value by waiting for the Wall Street Journal to say that it's safe to go back in the water. Thankfully, we're seeing this rebound even in markets where there is still significant vacancy, such as our retail adjacent to the Carlisle Hotel on Madison Avenue here in New York. After a quiet 2017 and 2018, we signed an important lease with Gabriella Hearst. Then earlier this year with Monica Venator. And then over the last week, we finished our final lease with Orla Bar-Brown, a subsidiary of Chanel, for our final vacancy at that property. In each instance, with improving economics. Now, Some of this bounce on Madison Avenue might be due to the meaningful decline in rents over the past few years, but this positive trend is also playing out in other markets where rents have not been as volatile. As we have discussed on past calls, on Armitage Avenue in Chicago, where our acquisition team has been able to acquire a nice concentration of buildings, and our leasing team has been able to attract new emerging brands, well, Rents are growing in excess of our goals. The street is now dominated by digitally native retailers that started with Warby Parker and Bonobos. And then more recently, we added Allbirds and Outdoor Voices. And last month, we leased our final vacancy there to a new exciting retailer, Lively. And this activity over the past two years has driven compounded annual growth of market rents by about 20%. then when we think about the retailers likely to populate our prospective acquisitions, they'll continue to be similar to the key tenants in our core portfolio today, a blend of necessity and value-based retailers such as Target or TJ Maxx, but then also new emerging brands. We're making sure that we're owning the kind of properties that are critical to great, more established retailers, whether they be Whole Foods or Lululemon, but also newer retailers who recognize that physical stores are a critical driver of their growth and of their profitability. And our team is ensuring that we are getting a significant portion of these retailers' attention on those streets and those markets that matter. What we have found is that by having the right locations in the right markets, then combined with the strong tenant relationships and market intelligence that we have, and then being able to own a concentrated cluster of buildings and use our team's capabilities to curate with the rightness of tenants, well, that creates a powerful portfolio, a portfolio where the whole is more valuable than the sum of the parts. We've successfully built this concentration on N Street in Georgetown, on Rush and Walton, and then Lincoln Park in Chicago, And now we're in the process of connecting the dots in SoHo with our recently announced acquisitions on Green Street and Mercer Street, where the leasing team can achieve the synergies it has elsewhere. Also, stars aligning means we have to have a cost of capital that enables us to compete with cash buyers. And John will walk through how we have been successfully funding our acquisitions on a leveraged, neutral basis. And finally, stars aligning means also requires sellers to be realistic and adequately motivated. Last quarter, we continued to add to our acquisition pipeline with sellers who, for a variety of reasons, are ready to move on. Hopefully, this growing pipeline then translates through into closed deals. We recognize we're still early in the rebound process and we can afford to be patient. But that being said, when the stars align, We see no reason that we cannot double the size of our approximately $2 billion street and urban portfolio over the next five years. And with some appreciation and value, we should be able to own a $5 billion portfolio of street and urban properties in our current key markets of D.C., New York, Boston, Chicago, San Francisco, and then perhaps a few other markets. And we believe that this will enable us to continue to differentiate ourselves and drive our net asset value growth as well as our earnings growth. Then complementing the growth potential from our core portfolio, the other key driver of our growth and further differentiator is through our fund platform. In the second quarter, we continue to add assets to our Fund 5 portfolio. These acquisitions continue to be primarily out of favor suburban shopping centers that we're adding on a very selective basis. Amy will discuss our recent transactions in further detail, but in short, the driver of the thesis is acquiring very attractive yield, further enhanced with non-recourse secure financing, where we can leverage it on a two-to-one basis to create mid-teens yield. Our goal here is not significant real NOI growth. We don't foresee significant net effective rent growth in this space, and we don't need it to make our investments work, nor do we need significant asset value appreciations just stability. If rental growth or capital appreciation shows up, great. But given the low interest rate environment and other macroeconomic factors, these investments feel appropriate and they feel prudent. In conclusion, as supported by our strong performance in the second quarter, we see enough opportunities for growth that we can continue to drive solid same-store growth in our core portfolio and begin to carefully monitor and accretively add assets to our core, and then utilize our funds platform for opportunistic growth. With that, I'd like to thank the team for their hard work and success last quarter, and I'll turn the call to John.