Acadia Realty Trust

Thank you for standing by, and welcome to the fourth quarter 2021 Acadia Realty Trust 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 that portion of the call, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Joe Rizzoli. Please go ahead.

Good afternoon and thank you for joining us for the fourth quarter 2021 Acadia Realty Trust earnings conference call. My name is Joe Rizzoli and I am a property accountant in our accounting 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 16, 2022, 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 earning press release posted on its website for reconciliations of those 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.

Thanks, Joe. Good job. Welcome, everyone. Good afternoon. We had a strong quarter, and we will delve into the details in a minute, but first a few observations. While not ignoring the impact of Omicron on our healthcare system and the lives of many, from the perspective of our portfolio performance and our business plan. We remain very much on track as evidenced by our fourth quarter results and our forecast for this year. We did not see an impact on our collections, on our tenant interest, on leasing progress or investment efforts. If anything, from a transactional perspective, it may have helped nudge certain sellers off the sidelines, and we're seeing that reflected in our increasing investment volume. In terms of leasing and tenant performance, last quarter we continued to see a meaningful improvement in fundamentals after a very scary 2020 and frankly a few years of headwinds for many of our retailers even prior to that. The reopening that began in early 21 gained steam throughout the year. As a result, our second half NOI last year increased over 5%, and it looks like this above-average growth has several more years in front of us. These longer-term tailwinds have several important drivers. On a macro level, our retailers' performance, their balance sheets and business models are, with few exceptions, stronger today than pre-COVID. And the recognition by our retailers of the critical importance of brick and mortar real estate in an omni-channel world is certainly clearer today than it has been for many years. This re-embracing of physical stores is happening faster than we expected. And we are seeing this from a wider range of our retailers and formats. For instance, As it relates to Acadia and our street retail portfolio, we are seeing it from luxury retailers who are doubling down in our corridors ranging from Melrose Place in Los Angeles to the Gold Coast in Chicago, as well as here in Soho. Last year, we expanded YSL in Chicago, had solid renewal spreads in Melrose Place, and are busy signing leases in Soho. We're also seeing it with our digitally native retailers. the Warby, Parkers, and Allbirds of the world, as well as those brands who thrive around them. These DTC, direct-to-consumer retailers, are now showing up in force on many of our corridors. For instance, on M Street in Georgetown, last quarter we added Glossier, Sur La Table, and Gloss Lab, and in Soho we added Fila. And we continue to see it at our Armitage Avenue assemblage in Chicago as well, which continues to benefit from our curating a critical mass of the right retailers and where last quarter we profitably added Jenny Kane and Faherty. And especially as it relates to those markets that were hit hard during the pandemic, we are seeing a significant rebound in tenant activity And given this increase in tenant demand, it's beginning to look like the rental growth trajectory will be stronger than we had previously anticipated. And that obviously bodes well for our forecast of multi-year NOI growth. For instance, in Soho, after several years of rental headwinds that started around 2017, tenant performance and rents are now, in many instances, exceeding pre-COVID levels. And the reopening and acceleration of demand, it's still in its early stages. So as it relates to our SOHO assets, given our current in-place rents and available occupancy, even before any further market rent growth, we have nice embedded NOI growth that we have begun harvesting, and then assuming increased tenant demand continues, that growth will likely be even stronger than we anticipated. Keep in mind that given the headwinds of the last several years, market rents in SoHo could increase by an additional 50% from where they are today. and still not be at prior peaks. But tenant sales performance for many of our retailers is already well on its way to prior peaks. Now, some folks will say that rents will never get back to prior peaks. Well, given the recovery we're seeing, I doubt that. But if one defines never as being five years from now, Well then, if you do the math, that still looks pretty encouraging to us. Drilling further into our portfolio, we see tailwinds and above average growth from multiple drivers. This will first come from the lease up of valuable vacancy in our portfolio over the next year or so, as well as the profitable re-tenanting of other spaces. Example of both of these last quarter include in Lincoln Park, Chicago, on North Avenue. Last quarter, we signed a lease with Backcountry to replace a former Pier 1 and adjacent tenant. Then in the suburban side of our portfolio last quarter, we signed BJ's Wholesale Club at our Westchester, New York, Crossroads Shopping Center. That will replace our Kmart at that center at triple-digit spreads. Now, while the short-term impact of Omicron is passing quickly, we certainly will be focused on supply chain and longer-term inflationary pressures on both our retailers as well as our portfolios. And as we think about which segments of our retailers and our portfolios that are likely to be the most resilient in an inflationary environment, ultimately it's going to come down to where consumer spending will remain strong, which retailers have pricing power to hold on to their margins, and then which real estate portfolios can capture that growth. And from that perspective, while I think most segments of our portfolio should be in good shape, our street portion of our portfolio seems to be particularly well positioned. First of all, From a structural perspective, our street leases generally have stronger contractual growth and more fair market value resets than in our suburban assets. Thus, we'll have the ability to capture inflation-related growth sooner. Additionally, operating expenses are a much lower percentage of occupancy cost for our street-based retailers so the inevitable rise in operating expenses should be less impactful at our streets. Now, since inflation will likely result in increased top line sales, the rent to sales metrics, which have been a headwind during the deflationary period of the last decade, should reverse. That means the discussion with tenants will be less about top-line sales growth, and then more about their bottom line. And here again, street and flagship stores have an advantage in an omnichannel world where those national retailers, whether they're luxury or advanced contemporary, operate at higher margins and seem to be able to absorb this impact. But while we'll ponder the pros and cons of inflation, keep this in mind. Deflation is worse. it is becoming increasingly clear that we are past the highly promotional and deflationary pricing environment that existed in the past decade, where the consumer was trained that if they waited, almost everything would be less expensive. This decade-long trend was a significant contributor to the retail Armageddon, and most retailers seem to understand that this race to the bottom, it diluted their brands, it reduced their connection with their customer, and it was just not sustainable. Going forward in conversations with our retailers, they seem to understand the importance of curation and the risks of ubiquity. Most importantly, they understand the critical nature of their physical stores in terms of customer acquisition and retention, as well as profitability. So as we look out over the next few years, from an internal growth perspective, whether from lease up, re-tenanting, or contractual growth, we are increasingly encouraged by the rebound and rental growth trajectory we're seeing. Then turning to the new investment side, after a very quiet 2020 when lenders were highly accommodative and owners were fairly frozen. In the last quarter and now looking forward, we are seeing a nice growth in investment opportunities at attractive prices, both for our fund platform as well as for our core portfolio investments. On the fund side, and as Amy will discuss, Last quarter we added a $72 million investment and have an additional $120 million under contract where we have completed our diligence, but the closing is still subject to the typical closing conditions. These deals continue to be consistent with our Fund 5 higher yielding investment strategy that we have been successfully executing over the past several years. Then with respect to core acquisitions, We closed on $66 million and have a meaningful pipeline under agreement, but here our pipeline is still subject to our completing our review. The deals already closed are in markets we're very familiar with. In Soho, we added one of the best corners on Green Street, and in Washington, D.C., we added to our portfolio there with our acquisition of a portfolio of buildings on 14th Street. So in short, we are pleased with the external growth activity we're seeing, and as John highlights in our guidance, we are still seeing accretion levels of about 1% per 100 million of investment activity, whether it be core or fund. So this activity can really move the needle for us. Finally, I want to thank our entire team for their hard work last year during a year of recovery but also a year of whiplash we are now clearly seeing the fruits of your labor and i'd like to congratulate those of you who received much deserved promotions and last but not least i'd like to thank chris conlon for his over a decade of contribution to acadia's performance chris as coo oversaw our leasing and development areas and so much more he will be missed But of all of his great contributions, none was more important than the pipeline of talent he built, talent that is ready, willing, and able to step up and continue the efforts that Chris started. And with that, I will turn the call over to John.