Acadia Realty Trust

Good afternoon, and thank you for joining us for the fourth quarter 2019 Acadia Realty Trust earnings conference call. My name is Brandon Clark, and I'm an analyst in our acquisitions 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, February 13, 2020, and the company undertakes no duty to update them. During this call, management referred to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earning 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, will begin today's management remarks.

Thanks, Brandon. Good afternoon. We had another solid quarter, but before we drill into last quarter's results, I'd like to start with a review of some of the trends that we are seeing and how we have been positioning Acadia to capitalize on them. After that, Amy will discuss our fund platform and our progress on that front. And then finally, John will discuss our quarterly results, our balance sheet metrics, and our forecasts for 2020. First, in looking back on 2019, the year played out consistently with what we previously described as a bumpy bottom for retail real estate, meaning that while not ignoring the continued headwinds, by most measures, leasing demand and tenant performance was better in 2019 than than it was in the prior two years. And so far this year, we see that trend continuing. But we call it bumpy because we are still working through a slower than desirable separation of the haves and have nots amongst both retailers as well as retail real estate. Fortunately, as we begin to cut through the fog of the last few years, we can see with increased clarity how the recovery from this highly disruptive period is playing out. Now, this does not ignore the impact of e-commerce or other headwinds. But it is becoming increasingly clear that almost all types of retailers are recognizing the importance of the physical store. And last year, we saw the following positive drivers begin to take form. First of all, there is still no simple one-size-fits-all answer for what is the formula for a successful 21st century retailer. But thankfully, there are a variety of formats that are succeeding. On one end of the spectrum, retailers ranging from TJX to Trader Joe's, both who are significant tenants in our portfolio, they continue to drive very profitable businesses, primarily retail. if not exclusively from their stores, with limited investment or distraction from the rise of e-commerce or the cost of free delivery. So one driver of store demand is simply coming from this group of traditional retailers that continue to expand and do solid in-store business. These retailers are being selective, and they're generally using their cloud to locate in the best as opposed to the least expensive locations. Thus, our portfolio benefits from this migration in quality. Then on the other end of the spectrum, a second driver of new store demand is coming from several dominant retailers who are successfully using technology combined with the benefits of their stores to drive their omni-channel execution. Both Target and Walmart are great examples of retailers investing both in their stores as well as their online initiatives. For instance, Target, who's the largest tenant in our portfolio, is differentiating itself by adding stores closer to their shoppers. Their focus on key gateway markets throughout the country, including here in New York, is consistent with Acadia's portfolio, where amongst our target locations is Sullivan Center in Chicago, our city center redevelopment in San Francisco, and our city point development in Brooklyn. Then a third driver of increased demand for stores is coming from the growth of DTC, or direct to consumer, where retailers who formally focused on online-only sales or wholesale distribution through department stores are now recognizing the importance of having their own stores. In the case of the online digitally native retailers, while e-commerce retailing is going to continue to grow, it is becoming clearer that investor subsidized growth without a clear pathway to profitability is becoming an increasingly difficult challenge for all but the best capitalized e-commerce companies. Most importantly, many of these retailers are are now recognizing that the store is the best pathway to profitability for them. Retailers are increasingly telling us that when they open a successful store where they previously only had an online presence, their online sales go up in that market as opposed to being cannibalized. And while we're seeing this trend play out on several of our key retail corridors, one of the More compelling examples is Armitage Avenue in Lincoln Park, Chicago. Over the past two years, our team has successfully converted Armitage from more traditional apparel retailing to some of the more exciting younger and digitally native brands. And through a series of acquisitions, we control enough of Armitage to have been able to replace tired retailers, with exciting tenants beginning with Warby Parker and Bonobos, but now including Allbirds, Serena and Lilly, Outdoor Voices, and several others. And now that the vacancies on the street have been filled, now that these new retailers are showing successful results, we now have enough incremental demand and enough supply constraints to enable us to see attractive rental growth. In fact, We have seen market rents grow over the past two years by approximately 20%. We are also seeing increased DTC demand from brands who previously relied more heavily on department stores and other wholesale channels and are now focused on opening mission-critical stores in key streets and key markets. We are seeing this have a positive impact throughout our street and urban portfolio, but certainly It was part of the rationale of a recent acquisition in Melrose Place in Los Angeles, where in the fourth quarter we acquired a portfolio of five contiguous buildings. For many retailers on that street who might have previously focused primarily on wholesale distribution through department stores, Melrose Place is now key to their L.A. presence. Finally, what we have found throughout our street and urban portfolio is that 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 can lead to strong long-term growth. Now, that being said, rents on many of the great shopping corridors have been a rollercoaster ride. As we have pointed out many times, In years past, rents grew way too fast and then corrected abruptly. We have worked very hard to make sure we have mitigated our exposure to this volatility. And thankfully, not only were our results solid last year, but if we look at our results over the last decade, while it has been a bumpy road, NOI growth for our street and urban assets has averaged 4% over that extended period. And we see this trajectory continuing when we look forward over the next several years. While our NOI this year will be impacted from some long anticipated bankruptcies of tenants like Pier 1 and Forever 21 and a couple important releasings, we are well on our way to the profitable releasing of these spaces. As these positive trends continue to play out, we believe Acadia's portfolio is well positioned to disproportionately benefit from them, then complementing this internal growth is the accretion from our external investment activity, both with respect to our core portfolio and our fund platform. Our acquisition team did a very strong job this past year of finding and executing on compelling investment opportunities that are consistent with the trends I've been discussing. During 2019, we completed over $500 million of new acquisitions. The team also completed $100 million of dispositions. Collectively, this activity, the additions from acquisitions, the subtractions from dispositions should add about 5 cents or roughly 3 percent of annual FFO accretion. More importantly, in terms of our core acquisitions, They include great additions in Soho, Armitage Avenue, Melrose Place, and are consistent with our focus on those streets and urban properties in key must-have markets where we believe we can capture outsized growth over an extended period of time. All of these acquisitions are well-positioned to capitalize on the retailing trends I discussed earlier. And while these portfolios are well-leased today, we also have received strong retailer interest for when we have the opportunity to release some of these locations. Then, in addition to these core investments, subsequent to year-end, we closed on a structured finance loan on a retail and mixed-use property in Brooklyn adjacent to Industry City. We'll get into the details of this on our Next quarterly call, but the transaction is in conjunction with a borrower, Madison Capital, who we have done significant business with over the years and hold in high regard, and a lender, Blackstone, who we've also done significant transactions with over the years. Our position in the capital stack affords us a very attractive risk-adjusted return and a comfortable position on a price-per-square-foot basis as well as yield on stabilizations. Then turning to our fund investments, while our focus for our core has been in supply-constrained must-have markets, in our fund platform, we have, for the last couple of years, been opportunistically acquiring out-of-favor suburban shopping centers where, through careful underwriting, we have been able to achieve mid-teens levered returns. Last year, we completed $320 million worth of these investments on behalf of Fund 5, So far, a few years in, we have acquired about 650 million of centers that have successfully maintained levered yields in excess of 15%. It is rare to see the spread between borrowing costs and unleveraged yields be as wide as they are now, such that we can achieve our return goals from existing cash flow without material growth or capital appreciations. Fourth quarter activity was quiet as sellers over the last couple of years, primarily public REITs, had substantially slowed their disposition process, in some cases making acquisitions. But now we're seeing private institutions seeking liquidity for a variety of reasons, and we expect our fund investment pipeline to refill. While this transition often takes a couple of quarters, most indications are that there is still a lack of institutional capital to cause pricing to have moved materially from the last couple of years. Eventually, that's going to change. In the interim, we'll continue to opportunistically add similar assets as attractive leveraged returns continue. And if cap rates begin to compress materially below the 8% yield that we're now at, there's nothing against are profitably recapitalizing or selling existing fund four and fund five suburban shopping centers that would be worth in excess of a billion dollars. While our investment thesis does not require capital appreciation to achieve mid-teens returns, there is absolutely nothing wrong with outperforming those goals. So in conclusion, as supported by a strong performance in the fourth quarter, we see enough opportunities for growth that we can continue to drive solid NOI growth in our core portfolio Continue to carefully and accretively add assets to our core. And then finally, utilize our fund platform for opportunistic growth. I'd like to thank our team for their hard work last year, and now I'll turn the call over to Amy.

Thanks, Ken. Today I'll review the steady and important progress that we continue to make on our fund platform's buy, fix, sell mandate, beginning with acquisitions. During 2019, we completed approximately $320 million of acquisitions. Over the past few years, we've successfully aggregated an approximately $650 million portfolio of open-air suburban shopping centers on behalf of Fund 5, and we've done so at an unleveraged yield of approximately 8%. With two-thirds leverage at a blended all-in interest rate of 3.7%, We are currently clipping a high teen's yield on our invested equity. This 14-property portfolio has strong geographic diversity. Based on invested equity, 39% is in the Northeast, 26% is in the South, 12% is in the Midwest. These are primarily non-supermarket anchored properties, and top tenants include the TJX Companies, Ross Dress for Less, Best Buy, and Walmart. As previously discussed, cash flow stability is key to our strategy. To that point, we're pleased to report that these carefully selected assets continue to perform consistent with our underwritten expectations. Turning now to dispositions. During 2019, we completed approximately $100 million of dispositions. This compares to approximately $75 million of fund disposition volume in 2018. Looking ahead, we continue to actively assess our portfolio for monetization opportunities. Finally, with respect to existing investments, strong leasing velocity continues at CityPoint, our urban retail property in downtown Brooklyn. During 2019, we executed leases for more than 60,000 square feet of space. And looking ahead, we have a healthy pipeline. Our 2019 activity included an expansion of Alamo Drafthouse, which is already one of the most productive movie theaters per screen in the country. Alamo leased another 25,000 square feet at City Point, which will enable it to respond to strong demand from moviegoers by doubling its screen count and adding a second kitchen. During 2019, we also executed an 18,000 square foot lease with NYU Dental on the fourth and fifth floors. And on the ground floor, We were pleased to welcome Camp, a family experience store, and Casper, both now open. Looking ahead, McNally Jackson, a longstanding New York City-based independent bookstore, is planning to open on Prince Street this month. And we are accelerating leasing discussions with other leading national brands for Prince Street space. Overall, as it relates to this final lease-up, we have remained patient and selective, focused on merchandise mix and retailers' ability to deliver strong sales volume at the successful project. After all, our concourse level is already delivering sales of approximately $100 million. CityPoint benefits from its strong location at the epicenter of growth in downtown Brooklyn and its critical mass of compelling food, entertainment, and soft goods uses. which continues to drive strong foot traffic and anchor sales. In conclusion, we had another productive quarter in our fund platform as we continue to execute on our opportunistic and value-add investment strategy, monetize our stabilized properties, and create value within our existing fund portfolio. Now I'll turn the call over to John.