Acadia Realty Trust

Thank you for standing by, and welcome to the Q4 2020 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'll 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, Alex Berger. Please go ahead.

Good afternoon, and thank you for joining us for the fourth quarter 2020 Acadia Realty Trust earnings conference call. My name is Alex Berger, and I'm an analyst in our acquisitions department and previously interned at Acadia in the summer of 2019. 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 for the SEC, Forward-looking statements speak only as of the date of this call, February 11, 2021, and the company undertakes no duty to update them. During this call, management will 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. Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue, and we will answer as time permits. 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.

Great. Thank you, Alex. Good job. Good afternoon, everybody. Before we delve into the details of the last quarter, I'd like to spend a few minutes on some of the trends we saw last year and what we're seeing looking into 2021 and 2022. While we're still working through an ongoing health crisis and ensuing economic headwinds, there is clearly light at the end of the tunnel. Looking at our collection rate in the fourth quarter, our leasing activity, our discussions with our retailers, it's comforting to see both stability with respect to current operations and then, more importantly, very encouraging green shoots in terms of new leasing activity. Terms of existing retailer performance and our collections, as John will discuss, collections throughout our portfolio have stabilized to above 90%. Initially, this was driven by the more essential and suburban components of our portfolio, but more recently, the street retail component has begun to restabilize as well. And while the range of potential outcomes remains very wide, And I suspect focus on monthly collections will continue for another few quarters. There are a few worthwhile trends that are beginning to emerge. One of the more notable trends we saw in the fourth quarter and accelerating to date is that tenants are looking past the pandemic and positioning themselves for the reopening of the economy in the second half of the year. Retailers are showing up. And most recently, not just in the suburban portion of our portfolio, but also in the street and urban components. And thankfully, we're seeing this in our current leasing activity. In terms of our current leasing pipeline, which we mentioned on the last call as being approximately $6 million, and now it has grown to over $8 million. And this number is relevant because this pipeline already represents a rebound of about half of the 10% short-term hit to our NOI that we estimated as a result of COVID. This pipeline has rebuilt faster than we had initially expected and has continued to improve over the past month. To date, we have executed $3 million of leases in this pipeline. We're at lease for another $3 million, and then the balance is at the letter of intent stage. Leasing activity in our pipeline is now weighted fairly proportionate to our portfolio weighting, meaning that while initially the activity was weighted to our suburban and necessity portion of our portfolio looking forward in our pipeline, our deal flow is now rebalancing and about 70% is in street and urban. Now given that the street portion of our portfolio represents about 40% of our core portfolio and is a key area of differentiation for us. I think it's worth spending a few minutes on the encouraging rebound we're seeing there. After a very scary and quiet couple of quarters, retailers are actively touring and going to lease in these markets. The early movers we saw for the street component They were in the half of our street portfolio located in the less dense markets that were generally quicker to reopen for business. For example, in Greenwich and Westport, Connecticut, in the last few weeks, we have finalized leases in both of those markets. Rents there are approaching pre-COVID levels. But even more encouraging in terms of street retail trends is the recent activity in the more dense gateway markets. We are finalizing several leases in Manhattan, including in Soho. Several leases in Chicago, including in the Gold Coast. And here we're seeing a variety of retailers stepping up in these markets, from luxury leaders to up-and-coming digitally native brands, all preparing for a post-COVID economy and using these stores to further differentiate themselves in an omnichannel world as these retailers focus on on the shifting channels of distribution. Our retailers are looking past the harsh short-term realities that we're facing this winter, as well as the oversimplified longer-term narrative around retail real estate. And based on the number of retailers touring and many of them signing leases, our retailers are making it clearer every day that the key markets in our portfolio will remain long-term must-have locations. Now, starting rents compared to pre-COVID rates are going to vary space by space and street by street, and they are certainly well off of their 2017 peaks. But we have built our portfolio to avoid some of these peaks and valleys. And these leases will be compelling, especially if the long-term term rents are consistent with our pre-COVID goals, and so far they are. And our retailers are telling us that the ratio of rents to their anticipated sales performance looks compelling from their perspective, which is also essential for this recovery. It's still early, but if these trends hold, The street portion of our portfolio will be a key driver of our longer-term growth metrics. We recognize that the significant portion of our portfolio, both urban and suburban, that is weighted with necessity and value-based tenants like Target and TJ Maxx, that that provided a very important ballast to weather a truly 100-year storm. But it is becoming clearer that the longer term growth will come from our mission critical locations for a few reasons. First of all, our releasing potential here is of uniquely high quality locations and we are working off of decades low occupancy level. Second, the contractual rental growth rate in our street portfolio is 100 to 200 basis points higher than in the other components of our portfolio. And finally, from an AFFO perspective, since the cost of retenanting in these higher rent markets is substantially less as a percentage of rent, the net effective rent growth will be stronger than in the lower rent portions of our portfolio. Now, this is not ignoring some of the longer-term trends that are playing out in our industry, the accelerated move to digital commerce, the reality that the U.S. is over-retailed in general, and that some formats are facing functional obsolescence. Nord is ignoring a workforce that's pondering where they might live, how they might work. These are real challenges, challenges that our industry is being forced to adapt to on an accelerated basis. But notwithstanding these challenges, we are seeing signs of recovery, and our portfolio is well positioned for this. And some of this rebound, in hindsight, will look obvious. For example, it's important to keep in mind that the consumer in general, and especially that segment of the consumer that is shopping at the stores in our portfolio, that consumer is climbing out of this recession in a much different spot than prior recessions. Now, for that significant portion of the population that could not shift to remote work, that is living paycheck to paycheck or worse, the impact of this crisis is heart-wrenching. But that portion of the economy that has been able to shift to remote work, that has seen their house values and their stock portfolios rise, For those consumers, their savings rate and disposable income is much stronger than when they were climbing out of the global financial crisis. But to date, spending by this segment has been down as the short-term trend has been on necessities, on essentials, on pajamas, almost irrespective of the financial condition of that specific consumer. Not because of fear, or belt tightening by the affluence as much as just the realities of the lockdown. And as we move past this lockdown, our retailers are expecting shifts in consumer spending as well. And our retailers are seeing not just short-term pent-up demand, but longer-term trends and are planning accordingly. From a capital markets perspective, both the debt markets And the equity markets are slowly beginning to rebuild, albeit selectively. The retail real estate industry is still working through the drama around the collection crisis of last spring. And while that is abating, the aftershocks are still with us. And many of the traditional and found metrics that our industry has historically used to evaluate location quality have paused. Last spring, for instance, property level collection rates trumped credit quality. And credit quality trumped location quality. Now, during the darkest days of the crisis, this might have made sense. But longer term, location quality tends to win out. And while this trend is beginning to resolve, it's gonna take time. Additionally, many institutional investors are overweight retail due to their mall holdings. And even investors who are not overweight retail are looking for clarity. Clarity as to what the cost to restabilize assets will be. Clarity as to when and what level will rents and tenant performance stabilize. And then finally, what will the longer-term growth rates look like? Now, I get that providing this clarity sounds like a tall order. It always does at this point in the cycle. And then the rebound happens, usually faster than most of us predict. In terms of our investment activity with our stock at a discount to NAV and our cost of capital being elevated, we don't anticipate acquisitions in our core in the short term. In fact, we'll be opportunistically monetizing assets as we recently did with a freestanding Home Depot in New Jersey where the net lease retail market is still robust and properties are trading at peak pricing. But we are hopeful that as significant buying opportunities arise, we'll be in a position to capitalize on them. Given that retail is in such disfavor and many folks who previously dabbled in it are gone, there will be less competition and our expertise will be in demand and it will be of value. And while we wait for the public markets to rebalance, fortunately, as Amy will discuss, we have our discretionary fund where we still have plenty of dry powder and deal flow is finally picking up after a quiet year. So to conclude, we are pleased to see tenants stepping up And while it's hard to predict when the capital markets will also respond in kind, when they do, a portfolio like ours dominated by unique must-have locations with stability and then strong prospects for growth will once again become compelling. And management teams like ours with access to multiple types of capital and a proven track record of deploying it will be well positioned to execute on the opportunities in front of us. So with that, I'd like to thank our team for their hard work and their focus over the past year. I know that it felt like at times that the earth stopped spinning around its axis. I assure you it didn't. And your efforts and your commitment not only helped us get through this treacherous period and survive, but helped us plant the seeds going forward for our ability to thrive as well. And with that, I'll turn the call over to John.