Acadia Realty Trust

Good day and thank you for standing by. Welcome to the Acadia Realty Trust second quarter 2021 earnings conference call. At this time, all participants are in the 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 1 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 Teresa Wang. Thank you. Please go ahead.

Good morning and thank you for joining us for the second quarter 2021 Acadia Realty Trust earnings conference call. My name is Teresa Wang. I'm a summer intern in our finance department. Before we begin, please be aware that statements made during this 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 to the date of this call, July 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 reconciliation of these non-GAAP financial measures with the most direct 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 a call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.

Thank you, Teresa. Great job. And thanks to all our summer interns for joining us this summer. Good morning, everyone. As you can see from this quarter's results, several of the trends that we have discussed on past calls are now showing up in our earnings performance. So today I'll spend a few minutes discussing how these trends are positively impacting our business and then we'll delve into the details. First of all, retailer demand continues to accelerate and it continues to broaden. As we've noted on past calls, while leasing activity was initially weighted to the necessity and suburban portions of our portfolio, we're now seeing a meaningful pivot from lockdown-oriented necessities to more discretionary spending. We're also seeing retailers once again focusing on the key street locations in the major markets that we're active in. And while we're seeing solid performance throughout our portfolio, one of the key differentiators of our company is our ownership of street retail in key gateway markets, a differentiator that certainly caused legitimate concern during COVID. Thankfully, the rebound here is both welcome and worth discussing. So let me spend a few minutes on the street retail segment of our portfolio. As you know, roughly 40% of our core portfolio NOI consists of street retail, and about half of that is in the highest density corridors of the major gateway markets. During the early days of COVID, this half of our street retail was hardest hit. Whether it was SoHo in New York, the Gold Coast in Chicago, M Street in Georgetown, retailers were facing an existential crisis of unknown duration. And thus understandably, in the early days of the lockdown, it was the other half of our street retail in the lower density markets, such as Greenwich Avenue in Connecticut or Armitage Avenue in Chicago, as well as other necessity retailers and suburban components of our portfolio that had the most retailer activity. And while this lower density component continues to perform well, we are seeing a shift in attention by our retailers back to the higher density corridors. And we're seeing this much sooner than we expected. In the luxury segment, for example, many retailers are not only staying in their flagship locations, but they're expanding their footprints, especially in key must-have markets. This is evidenced by our second quarter lease with YSL at our Gold Coast location at Rush & Walton in Chicago, where they are expanding their existing store by over 50%, and they entered into a new 10-year lease. Across the street from us, Dior is expanding their space as well, providing further evidence of this sub market's rebound from 12 months ago. And this is certainly not just a Gold Coast phenomenon. This trend is playing out in Soho as well as other key markets. And it's not just luxury retailers. Bridge and aspirational retailers are also beginning to show up as well. For example, In Melrose Place in Los Angeles, after the end of the quarter, we extended a lease with one of our retailers there for another five years at a double-digit lease spread, showing the strength of this corridor and retailer confidence in Los Angeles. Now, to be clear, retailers are still being selective on which markets they are choosing to expand into, and it is still a tenant's market. but what recently felt like a decade's worth of vacancy is quickly being absorbed. And while retailers and landlords are climbing out of several years of headwinds, headwinds that predated COVID, the recovery is encouraging with vacancies being leased up and COVID discounts or heavily structured leases quickly being replaced with real deals that are approaching or in some cases exceeding pre-COVID rents. Then along with luxury retailers, we're seeing the digitally native and other up and coming direct to consumer retailers stepping up. Retailers whose influence seems to go far beyond their physical footprint. Only a few years ago, these retailers debated the need for physical stores. That debate is over. whether it's Warby Parker or Allbirds, the best in class digital retailers are seeing the significant benefit of physical stores. For instance, on M Street in Georgetown last quarter, we added digitally native retailer Everlane to our portfolio. And this is encouraging because Georgetown is still in the early stages of reopening. And the fact that tenants such as Allbirds, Buck Mason, my family's favorite Levain Bakery, are arriving on M Street. All of this is further evidence of the support for this corridor. And it's not just retailers hoping to capture a future rebound. Tenant sales performance is already confirming the recovery. For several retailers in our portfolio or in our corridors, they are beginning to post sales performance that is already comping positive to pre-COVID sales. And this is before the return of international tourism and before a full reopening. Even in markets that have been slow to reopen, such as San Francisco, despite all of the headlines, we're beginning to see positive activity. And as these key streets continue to activate, we are entering into what is setting up to be a nice multi-year rebound. Not only are rents significantly below prior peaks, but it appears clearer now that retailers are committed to connecting directly with their customer, both digitally, but also through these important stores. So whether it's LVMH or Warby Parker, we are seeing the increased recognition of the importance of these locations in an omnichannel world. As John will discuss, even before taking into account anticipated additional market rent growth, we should be able to drive above-trend NOI growth at higher levels for the next several years. For instance, in SOHO, notwithstanding the huge gut punch over the past 18 months, we forecast our SOHO portfolio NOI to nearly double over the next few years. And then assuming that this rebound continues, the growth could be even better in the street retail component of our portfolio where we have more opportunities to mark to market our leases than in our suburban portion of our portfolio since fair market value resets are much more common in our street portfolio than in our suburban. Then from a capital markets and investment perspective, while there has been less actionable distress than one might have thought in the early days of the crisis. Interesting and actionable deal flow is increasing. In terms of our Fund 5 investing, as Amy will discuss, we are seeing a nice increase in acquisition opportunities, and this is due to the fact that in the private markets, retail real estate still remains somewhat out of favor. Now, we expect that this will shift Over time, given that in the debt markets, borrowing costs and debt proceeds have returned to pre-COVID rates and levels. And in the public markets, we have seen significant compression in implied cap rates over the past year. But for a variety of reasons, it may take some time for the private markets to catch up. And in the interim, we will continue to deploy capital opportunistically. So with respect to Fund 5, we're continuing to selectively buy out of favored properties with unleveraged yields of about 8%, then lever them 2 to 1 with borrowing costs well below 4%, and clip a mid-teens current cash flow. Now, this doesn't ignore the fact that the United States is over-retailed. Or that achieving real net effective rental growth is going to take hard work, and it's going to take some luck. But these acquisitions don't require significant growth. They just require stability. And if we see cap rate compression commensurate with the public markets, which certainly seems likely over the next couple of years, the opportunity for asymmetrical upside feels pretty compelling. Then with respect to our core portfolio investments, our acquisition pipeline is also heating up. As you know, our focus here has been to selectively acquire assets in the highest barrier to entry markets where we can achieve superior long-term growth. Now, obviously, COVID and related issues were a real gut punch for many of the corridors we're active in. But thankfully, we are seeing encouraging signs of long-lasting rebound driven by three important factors. First, Rents in many key streets that we're active in are at a cyclical low point. Second, many of the tenants we do business with have now successfully navigated the so-called retail apocalypse and are in a much stronger position to succeed in an omnichannel world. And third and finally, the consumer is in very healthy shape and returning. to discretionary spending. Given the amount of disruption we have seen in the major markets, it's understandable that deal flow initially slowed, but sellers are beginning to return. And given the rollercoaster ride they went through, we are seeing sellers being realistic on rental growth and other assumptions. So while it is still a bit early, based on the improving deal flow we are currently involved with, And what we are seeing in the pipeline, we expect to be able to acquire best-in-class retail properties in the key high barrier-to-entry corridors where retailers are going to continue to cluster. And while in the second quarter, we began to put some dollars to work accretively, we are confident that as meaningful buying opportunities arise, we will be in a position to capitalize them. And while our strong embedded internal growth certainly means we can afford to be disciplined and we can afford to be patient, our relatively small size means that every $100 million of acquisitions adds about 1% to our earnings base. So to conclude, we are pleased to see our quarterly results reflect the rebound in leasing and operating trends. It is also encouraging to see retailers stepping up again for the unique must-have locations that dominate our portfolio. And then most importantly, it is exciting to think about the potential opportunities in front of us, especially for management teams like ours with access to multiple types of capital and a proven track record of deploying it. So with that, I'd like to Thank our team for their hard work and success last quarter, and I will turn the call to John.