Acadia Realty Trust

Good day and thank you for standing by. Welcome to the third quarter 2021 Acadia Realty Trust earnings conference call. At this time, all participants are in listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star then 1 on your telephone keypad. Please be advised that today's conference may be recorded. If you require operator assistance during the call, please press star then 0. I would now like to hand the conference over to Nicholas Telly, analyst.

Good morning, and thank you for joining us for the third quarter, 2021, Acadia Realty Trust earnings conference call. My name is Nicholas Telly, and I am an analyst in our asset management 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 27, 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, Nicholas. Great job. Welcome, everyone. As you can see from our earnings release, we had another solid quarter, and notwithstanding some macro concerns around delta and supply chain disruption, tenant leasing activity remains brisk and tenant performance remains strong in all components of our portfolio. Additionally, transactional activity continues to pick up. So before I turn over the call to John and Amy to delve into the details of the progress that we made last quarter, I want to reflect on an interesting inflection point that we find ourselves. because after a couple of years of meaningful headwinds for retail real estate, first from the so-called retail apocalypse, and then from the impact of COVID, we're now at a point where not only are we seeing solid leasing fundamentals that should provide strong internal growth for the next several years, but the other drivers of our business, most notably our external growth engines, both from our on-balance sheet investing as well as through our fund platform, are in a position to add important growth as well. In short, we have the potential to be hitting on all cylinders in a way that we have not seen in a very long time. So let me walk through the key drivers of this trajectory. First, there's internal growth. NOI growth is poised to be well above trend for the next several years. Now granted, some of this growth is from the rebound from the short-term setbacks from COVID, but we positioned ourselves to not just recapture past income, but then to grow nicely past that benchmark. This growth is going to come from a few key components. First, We anticipate taking our occupancy back to approximately 95% from the current level of approximately 90%. Now, occupancy for us is a very rough and very imprecise proxy, but however you choose to measure it, the growth associated with the restabilization is going to be impactful. And we're seeing this take hold. Year to date, We have signed over $11 million of leases, and considering our initial pipeline was $6.5 million, this is a pretty good start. And the growth is coming across the board. But notably, it is showing up in our key streets, streets that were boarded up and left for dead a year ago. And now they're coming back. For example, we recently signed a lease with Fila Sportswear for the corner of Prince and Broadway in SoHo, and notwithstanding the dire predictions as to the future of SoHo, the economics of this lease provided a positive spread and was largely consistent with our pre-COVID expectations. Then the next driver of growth is coming from the contractual growth and lease roll in our portfolio. Now, trees never grow to the sky and not all leases roll up, but the green shoots that we are seeing in Soho are beginning to take hold in other markets as well. We recently achieved positive lease spreads in Melrose Place in Los Angeles and in Armitage Avenue in Chicago, both at rents that were in excess. of our pre-COVID expectations. And importantly, tenant sales, as John will highlight, are supporting this trend. Many retailers are already comping positive to pre-COVID sales in many of the corridors that we're active in. Now, this fact is so different from what most of us expected during the early days of the pandemic. In fact, if COVID has commonly been viewed as an accelerant of trends, what it has really been for retail real estate is a cleansing and a validating mechanism. Cleansing in that the retailers who have made it through the storm seem to be in a much better position in terms of balance sheet strength and in terms of productivity. And then validating in that the importance of the physical store has clearly been validated in the post-pandemic omnichannel world that we are in. And this is true not only for the Target and Walmarts of the world who validated the importance of the store in their omnichannel success, but it's also true for luxury and bridge of power where you are seeing tenants recognizing the power of their stores as critical in connecting directly with their customer, especially in the must-have streets where we own. And it's also true for the digitally native retailers where our tenants like Warby Parker and Allbirds are making it clear that the physical store is essential to their growth and essential to their profitability. And keep in mind As recently as a year ago, many wondered whether these retailers would even want stores on these streets. And while everyone was wondering, the retailers doubled down. Then along with our growth from lease up, we will add additional internal growth from a series of redevelopments that are actionable and profitable. It's a bit early to update our progress on this front right now, but we should have some worthwhile updates by our next quarterly call. Then complementing our internal growth are the multiple components of our external growth engine. Firstly, we are doing on-balance sheet investing to add to our existing core portfolio accretively. Deal flow during the pandemic was quiet as most owners hunkered down and most lenders were highly accommodative. Distressed opportunities were underwhelming in almost every segment of real estate other than stock prices. And frankly, we did not have a cost of capital that enabled us to be competitive. But sellers are once again emerging. And as we look around, there are certainly fewer well-capitalized and knowledgeable competitors for our areas of focus. And we're beginning to see a recovery in the debt and equity markets such that we should have a cost of capital to accretively acquire, and it should be a good period to put dollars to work. Then along with on-balance sheet investing beginning to heat up, our fund platform is in a position to continue to add to our growth. We can add to our fund acquisitions both similar to Fund 5 or similar to other successful value-add or opportunistic initiatives that we've done in the past. In terms of Fund 5, and as Amy will discuss, we are continuing to buy out-of-favor open-air retail funds. at substantial discounts to replacement costs with attractive mid-teens yields. These investments have proven stable through COVID, and while I think we may have a couple more years of buying these yields at a discount, we're also seeing signs of cap rate compression. And if and when cap rates do compress, we'll have well over a billion dollars of retail in Fund 5 alone, clipping mid-teens yields while we wait. And keep in mind, buying out of favor existing cash flow is just one of the many ways we have created value in our fund platform over the years. Whether it's buying retailers with significant embedded real estate value, such as our investment in Albertsons and the rest of our RCP activity, or opportunistic acquisitions where we saw significant rent bumps and then monetized opportunistically, as was the case in Lincoln Road in Miami. or a variety of redevelopments and value-add projects where tenant demand warrants it. And thankfully, we're off to a good start this year with approximately $230 million of core and fund investment activity teed up so far, and our pipeline continues to grow. Our team and our balance sheet are built to do multiples of this volume, and we're starting to see the stars aligned. Finally, keep in mind, at our size, roughly every $100 million of new investments, whether core or fund, adds about 1% to our earnings. So to conclude, as we are climbing out of the horrors of the global pandemic and recognizing that the impact that was felt was especially hard on so many of our assets, The rebound is becoming clearer every day. And it's also becoming clearer that our company, both in size and ability, is well positioned for accelerated growth from this recovery. The combination of strong embedded internal growth and the ability to drive external growth, both on balance sheet and then through our funds, should enable us to maximize value in multiple different ways. With that, I'd like to thank the team for their hard work and achievements last quarter, and I will turn the call over to John.