Acadia Realty Trust

Good day and thank you for standing by. Welcome to the Acadia Realty Trust first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Nathan Niemiec, please go ahead.

Good morning and thank you for joining us today for the first quarter 2021 Acadia Realty Trust earnings conference call. My name is Nathaniel Niemiec and I've been an intern in our development department since the summer of 2020 and will be transitioning to full-time this spring. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meanings 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, April 29, 2021, 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. 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.

Thank you, Nathan. Great job and welcome to the team. Good morning, everybody. I'm going to first discuss some of the trends that we're seeing and how they impact our business, and then we will delve into the details. First of all, the improving retailer demand, which we began to see in the fourth quarter of last year, has continued to accelerate. Leasing tours and negotiations, which began in the fall, are continuing at an increased pace. and are now converting into signed leases. We're at a point where our leasing team is seeing more activity now than prior to the pandemic. And while initially the leasing activity was weighted to our suburban and more necessity portion of our portfolio, looking forward in our pipeline, we are seeing strong and encouraging emphasis on street retail, and the more discretionary components of our portfolio. We're seeing this reflected in a variety of our improving metrics. Most significantly, though, looking beyond the quarterly results, this improvement is beginning to feel more long-lasting in duration as opposed to just a simple snapback. Now, to be clear, our country is still working through the pains of the COVID crisis And several of our gateway cities are still far from restabilized. Additionally, retail real estate had already faced several years of headwinds and disruptions before the pandemic. Nevertheless, it's becoming clearer every day that our tenants are positioning themselves for the reopening of the economy. And more recently, retailers are beginning to recognize that as a result of this multi-year disruption, if they can correctly position themselves going forward, and because of the painful shakeout that has occurred as opposed to despite it, the next several years could see spending levels and profit margins well in excess of pre-pandemic levels. Now, that doesn't mean simply the reopening of past businesses, nor does it ignore the crisis of ubiquity that we saw in the overbuilt and over-retailed landscape that existed pre-COVID. If the COVID crisis has been a great accelerant, what that has meant for physical retail real estate is not its demise, but rather an acceleration of change and an acceleration of the separation of the haves and have-nots, both for retailers and retail real estate. It means that valuable locations, once we get through this crisis, have the potential to be even more powerful and more valuable to our retailers than before the crisis. And our portfolio is well positioned for this. Whether it is digitally native retailers like The RealReal, coming to our Greenwich Avenue property last quarter, or luxury retailers like Watches of Switzerland, opening an additional store next month in Soho at our Spring Street location. Retailers are clearly focusing on more effectively connecting directly with customers, whether digitally or through their own stores, or ideally both, and thus using these stores in more powerful ways, whether as showroom or pickup or return, but then more importantly, to create an experience and reinforce their brand. Now, looking back over the COVID crisis and as we think about the different components of our portfolio, the approximately half of our portfolio that is focused on necessities, essentials, stay-at-home needs, that portion proved critical during the lockdown. With Target as our largest tenant and other tenants ranging from traditional supermarkets to TJX's home goods, this component continues to show stability. But now as we move past the lockdown, we are seeing a significant improvement in tenant interest for the discretionary side of our business, especially from those retailers whose customers are climbing out of this crisis with pent-up demand, with increased savings, and in some cases significant, perhaps unanticipated wealth from the appreciation of their homes and their stock portfolios. And this rebound is starting to show up in our numbers. You may recall a couple of quarters ago, we discussed that as we were assessing the impact of COVID on our portfolio, we anticipated a hit to our net operating income of about 10% or roughly $15 million. And we saw that drop rebuilding over the next few years, driven most significantly through our leasing pipeline. As you may recall, our pipeline started at around $6 million. Then as of the fourth quarter, it had grown to $8 million, and it is now currently well in excess of $10 million. And importantly, already over $5 million of this pipeline, or in other words, substantially all of the $6 million of initial pipeline has already been converted to sign leases. This pipeline has rebuilt faster than we had initially expected and has continued to improve both in terms of number of tenants engaging with us, and the overall rent profile. It also appears the trajectory of growth should continue beyond the simple recapture of lost NOI and continue for several years due to the growth and the rebound potential in the street component of our portfolio. And while early movers in our leasing pipeline were concentrated in the less dense markets that were generally quicker to reopen, such as Greenwich or Westport, Connecticut. More recently, we're seeing a rebalancing. With our recent activity now being in the more dense gateway markets, along with watches of Switzerland and Soho, for instance, we executed a lease for a new Mark 4G-owned restaurant in Tribeca and are finalizing a lease with a luxury tenant in Chicago's Gulf Coast. and it's not just in our portfolio. Neighboring properties are beginning to attract exciting complementary tenants as well, such as Cartier, Bottega Veneta, Valentino, and Soho. Similarly, in the Gold Coast of Chicago, neighboring retailers include luxury brands Christian Dior and Brunello Cucinelli, both who are expanding their stores on Rush and Walton. We're the first to acknowledge that this type of retailer demand will not backfill all of the space in the United States. Retailers are going to be selective and they're going to be disciplined. But for properties in our portfolio with our demographics and our density and our barriers to entry, we see far stronger recovery than we could have anticipated just a few quarters ago. To be clear, the current vacancy rates on some of these key streets that we do business in are a bit daunting. And don't expect that to change overnight. But this vacancy is also offering key corridors and opportunity for a significant refresh of concept. And while zero vacancy may sound comforting, if it translates through into stale retailers and a dull shopping experience, that's often even a worse long-term outcome. We are much more encouraged by corridors where new and exciting retailers are planting their flags than by just okay folks hanging around. And thankfully, our locations throughout the country are where the new exciting concepts are showing up. Whether Melrose Place in L.A. or M Street in Georgetown, we are seeing the right retailers once again planting their flags there. And while it may take a few years for these markets to fully regain and then exceed the pre-COVID rent levels, which, by the way, has almost always been the case during prior cycles, even during this transition period, we should still have plenty of embedded growth in our portfolio, and John will discuss the key drivers of that shortly. Then from a capital markets and investment perspective, both the debt markets and the equity markets are continuing to rebuild albeit selectively. The retail real estate sector is still a less favored asset class in the private markets. But this will likely play out to our advantage as there are likely to remain fewer well-capitalized teams with proven investment expertise and many groups that previously were active in this space have lost the muscle memory to navigate the new normal for retail. Then notwithstanding the huge short-term impact from the COVID crisis on collections and the stock volatility that many of us faced, today there has been much less actionable distress than we might have thought in the early days And there's a variety of reasons for this. But it currently appears that there will be likely fewer opportunistic buying opportunities in the more favored or less unfavored components of retail, such as supermarket anchored, shopping centers, or net leased assets. But we very likely could see increased opportunities in the other less crowded components, including certain properties and gateway markets. So what does that mean for our investment activity? Well, in terms of our core portfolio, while our stock price is not yet at a point where we have a cost of capital advantage in the private markets, given our retained earnings, given our healthy balance sheet, we are starting to dip our toes in and certainly gearing up for what we expect could be a very interesting investment period. And we're confident that as buying opportunities arise, we're going to be in a position to capitalize on them. Keep in mind, a relatively small size means that even modest amounts of external growth can really move the needle. And while we may have to wait a bit for the public markets to rebalance, fortunately, as Amy will discuss, we have our discretionary funds 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 retailers continuing to step up and get ready to capture the pent-up demand and then longer-term growth potential that we see in front of us. And it is becoming clearer every day that a portfolio like ours, dominated by unique must-have locations, with both stability and then strong prospects for growth, will once again be compelling. And then more importantly, management teams like ours, with access to multiple types of capital and a proven track record of deploying it, we'll be well positioned to execute on the opportunities in front of us. I'd like to thank the team for their hard work and their success last quarter, and now I will turn the call over to John.