Acadia Realty Trust

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the third quarter Acadia Realty Trust earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Jared Elkman, Leasing Representative. Please go ahead, ma'am.

Good afternoon, and thank you for joining us for the third quarter 2019 Acadia Realty Trust earnings conference call. My name is Jared Seligman, and I am a leasing representative in our leasing 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, October 24, 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, Darren. Great job. Good afternoon, everybody. We had another solid quarter and made some important progress with respect to both our existing portfolio as well as new investments. So I'd like to start with an overview of some of the current trends we're seeing and then discuss the key drivers of growth for our business. Next, I'll turn the call over to John, who will discuss our quarterly results in more detail and our balance sheet metrics. And finally, Amy will discuss our fund platform and the progress we've made on that front. First, in terms of macroeconomic trends and their potential impact on our business. Since our last quarterly call, there has been plenty of attention and concern around trade and around the slowdown in growth, both in the global as well as the U.S. economy. From our perspective, while components of the U.S. economy seem to be decelerating, the job market and the consumer, they're still on solid footing. But almost immediately, irrespective of when we might think that the next recession could occur, we do think it prudent to proceed under the assumption that we are late cycle. And that means at least for retail-focused companies like ours. First and foremost is to focus on growing cash flow rather than increasing our exposure to new development. Second, is to make sure that our leverage and our liquidity is where we want it. Not eventually, but today. And then finally is to make sure that we have access to dry powder for new investment opportunities, whether they're arising today from the recent so-called retail apocalypse or opportunities arising down the road. So with these factors in mind, here's how we think about the key drivers of growth for our business. First in terms of our core portfolio, as we've discussed in the past, there's three key drivers of internal growth. First is through the successful lease-up of some key vacancies. Then second is the contractual growth that's embedded in our portfolio. And third and finally is the completion of a few key redevelopments in our portfolio. Now these Three drivers of internal growth are proceeding nicely to enable us to deliver the long-term 4 percent NOI growth that we have forecasted. And as John will discuss in further detail, our third quarter results are consistent with this thesis. Then complementing our core internal growth is the ability to add properties to our core portfolio when the stars align. The requirements And our goals are pretty straightforward. The acquisitions have to be accretive to our NAV as well as to our long-term earnings growth. And 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 4% growth embedded in our existing portfolio. And what we said on our last call is is that we are at what we describe as a bumpy bottom. Our acquisitions are not ignoring the fact that the retail real estate market is still facing challenges, that the highly disruptive separation of the haves and have-nots amongst retailers, it's still playing out, and that this has caused an increase in vacancy even in some of the best-in-class locations. And then the corresponding drop in rents in many instances has been significant. For some markets where rents grew too aggressively in 2010 to 2015 period, the fall has been dramatic. And we were clear during the run-up that we thought rents were growing at an unsustainable level. And we did our best to make sure that we navigated around this volatility. Thankfully, while it has not meant that we were immune to the corrections taking place, we have still been able to drive growth even through this period. And now that We're a few years into the correction. We are seeing some compelling opportunities arise from this rollercoaster ride. Many institutional investors are still sidelined from the whiplash of tenant occupancies, and sellers are finally beginning to transact at realistic valuations. And at the same time, in terms of leasing demand, for certain street retail locations, the recovery that we saw beginning a year ago is continuing. every day it's becoming clearer that our retailers, whether they are emerging or re-emerging, are recognizing and appreciating the necessity of certain key physical locations for reduction in customer acquisition costs, reinforcement of the brand, and then most importantly, more profitable omnichannel execution. So with tenant demand improving, with rents having, on a selective basis, bottomed out, with sellers beginning to be motivated to transact. These factors are combining for the first time in several years to create some exciting acquisition opportunities on the key streets that we're focused on. Year-to-date, we have announced $180 million of core acquisitions that are closed or under contract. Last quarter, we continued to add to our acquisition pipeline with sellers who, for a variety of reasons, are ready to move on. In Soho, we added another building contiguous to our previously announced Green Street assets. This property, occupied by Fury, is similar in economics and growth to our other Soho acquisitions. And upon closing on the balance of our Green Street assets, we will own five contiguous buildings on Green Street. Then in Chicago, on Armitage Avenue, we added two buildings to our Armitage Avenue portfolio, one contiguous with our existing properties and one across the street. And as you may recall, we already own eight buildings with tenants ranging from Warby Parker to Allbirds. In fact, the street's now dominated by exciting and unique retailers, with most of the prior vacancies being successfully occupied and rents now growing significantly over the past two years. What we found here and elsewhere is where we can aggregate enough buildings in the right locations where we can connect the dots in the right markets and then use our team's capabilities to curate these streets with the right mix of tenants. This creates a powerful portfolio. Additionally, we have found that when vacancies dry up, when scarcity and the rules of supply and demand kick in, well, rents grow. Along with executing this strategy in Soho and Lincoln Park, We recently agreed to acquire a portfolio of five contiguous storefronts on Melrose Place in Los Angeles. This supply-constrained market not only has strong surrounding local demographics, but for many retailers on the street, Melrose Place represents their key L.A. presence. The unique, smaller format storefronts that complement a mix of food, service, soft goods has enabled key retailers to create a presence on a luxury, L.A. retail corridor that is highly differentiated from Rodeo Drive or even other shopping corridors. And given the strong retailer performance, given the strong retailer demand, this supply-constrained market should provide strong growth opportunities driven by contractual growth, some mark-to-market opportunities, and then longer-term value creation opportunities over time. In terms of our fund business, Complementing the growth potential of our core portfolio, the other driver of growth and a further differentiator for us is through our fund platform. In the third quarter, we continued to grow our Fund 5 portfolio, and these acquisitions continue to be primarily out of favor but stable. Suburban shopping centers. Year-to-date, we've acquired... $330 million of property, and Fund 5 is now 60% invested. Amy will discuss our recent transactions in further detail, but in short, the driver of this thesis is acquiring stable properties at an attractive yield, further enhanced with non-recourse secured financing, where we can create mid-teens levered yields on our investment. So far, a few years in, we have acquired about $650 million of shopping centers at a blended unlevered yield of 8%, with approximately two-thirds leveraged, at a fixed rate blending to 3.7%, resulting in mid-teens plus current levered yields. Now, we recognize that the U.S. is over-retailed. And whether in primary or secondary markets, many shopping centers will not be able to hold on to their current yields. That's why we've had to be selective in the assets we're choosing. That's why we've avoided portfolio acquisitions. But by carefully screening these investments for the right locations, rent to sales, rent to market, discount to replacement costs, the right co-tenancy provisions, we have created a pool of stable cash flow. Now, we appreciate why these type of assets with limited growth might not make sense in the public market portfolios, but for a private fund like ours that can use more aggressive leverage, we think these investments are quite compelling. In fact, it is rare to see the spread between borrowing costs and unlevered yield be as wide as it is now, such that we can achieve our return goals from existing cash flow without material growth or capital appreciation. Since institutional capital... still seems to be hesitant to reenter the market for most retail, we expect this contrarian investment opportunity likely to continue. On the other side of the fund investment spectrum, while we are continuing to look at value-add opportunities, given that we are late cycle, given that construction costs are still growing faster than rental growth, the risk-adjusted returns for undertaking new developments are just not there yet. So in conclusion, as supported by our strong performance in the third quarter, we see enough opportunities for growth that we continue to drive solid same-store growth in our core portfolio, begin to carefully and accretively add assets to our core, and then utilize our fund platform for opportunistic growth. With that, I'd like to thank the team for another solid quarter and turn the call over to John.