Acadia Realty Trust

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2022 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. For assistance, please press star 0. I would now like to turn the call over to your host, Rial Green. You may begin.

Good morning, and thank you for joining us for the first quarter 2022 Acadia Realty Trust Earnings Conference Call. My name is Rielle Green, and I'm the Director of ESG at Acadia. 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, May 3, 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 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 Boenestein, President and Chief Executive Officer, who will begin today's management remarks.

Great job, Brielle. Thank you. Welcome, everyone. Good morning. We had another solid quarter, both in terms of our internal growth as well as our external investment activities. And while over the past quarter there has been significant volatility in the capital markets and legitimate concerns around inflation and economic growth, when we look at the fundamentals of our business, driven by tenant performance and tenant demand, the momentum that began a few quarters ago continues to exceed our expectations. Then when we couple this internal growth with external growth, either despite capital markets volatility or more likely as a result of it, Our leasing traction plus our investment activity are positioning us for solid long-term growth. In terms of leasing and tenant performance, as we noted last quarter, the reopening that began in early 2021 resulted in our second half NOI last year increasing by over 5%, and this above-average growth is continuing to play out this year as well. Over the last quarter, we saw an improvement in our collections and our leasing activity. And most importantly, tenant demand and market rents continue to exceed our earlier predictions. Now, this is not to suggest that inflation, supply chain, or recessionary issues are not relevant. But let's not lose sight of the strength of the job market and the strength of the consumer either. And as we think about which segments of our portfolio are likely to be the most resilient in this current environment, ultimately it's going to come down to where consumer spending will remain strong, which retailers have pricing power to hold onto their top line and their margins, or have wider margins to absorb supply shocks. And then most importantly, where can we as landlords capture that growth? And from that perspective, while I think most segments of our portfolio should be in good shape, the street portion of our portfolio seems to be particularly well positioned to absorb the speed bump of inflation. And then the affluence of the consumers that our retailers serve will likely insulate our retailers in the event of a recession. In terms of inflationary pressures, a few things to keep in mind. First, our street leases generally have stronger contractual growth and more fair market value rent resets than in our suburban assets. Second, tenant improvements as well as operating expenses are a much lower percentage of occupancy cost for our street-based retailers, thus less impactful on net effective rent growth. Third, Rents at many of our streets are at cyclical lows. And retailer sales, they're already rebounding rapidly. This means that many retailers are already doing sales well in excess of their pre-COVID volume, while rents are still in the early stages of recovery. Now, sales performance, both top line and bottom line, is obviously a critical driver of rent. But the other key driver, the supply-demand ratio. After several tough years, the supply-demand dynamic is finally turning in our favor. For instance, on Green Street in Soho, a year ago there were 14 vacancies on this corridor. Today there's one. Similarly for M Street in Georgetown, which got hit hard even before COVID. But because we and our partners control enough of the street, it has been rejuvenated in the last year by recent arrivals, including Everlane, Foxtrot, Faraday, and last quarter we added Glossier and GlossLab. So our forecast for a multi-year rebound in our portfolio is playing out nicely. Now I appreciate that after several years of powerful headwinds hitting our retailers and hitting our portfolio, there remains a understandable fog around the rebound in physical store retail, especially in the urban corridors. But whether it's luxury in Soho, digitally native on M Street, or advanced contemporary in Melrose Place, the recovery is happening. faster and stronger than we expected. And as you have been reading in the papers and hearing from a wide variety of retailers, customer acquisition cost, halo effect, profit margins, they're all converting bricks and mortar skeptics into long-term tenants. Then turning to the new investment side, over the last couple of quarters, we're also seeing nice growth in investment opportunities, both for our core portfolio as well as for our fund. On the core side, our focus has been acquiring assets in high barrier to entry markets where tenant performance and demand are likely to drive market rents materially higher over the next several years. What we're focused on there is picking the right retail corridors, where our retailers will want to cluster for a vibrant shopping experience and then making sure that there are adequate barriers to entry such that the retailers are reluctant to move off the block. And some of the markets we have successfully done this include Armitage Avenue, Chicago, Melrose Place in Los Angeles, Green Street in Soho, Greenwich Avenue in Connecticut. Now the markets I just mentioned were not immune to the headwinds of COVID. but they are rebounding quickly, and many are already performing better than pre-COVID. Our goal for our core investments is to have a combination of accretive going in yield, but then more importantly, strong embedded long-term growth. This growth will come from contractual growth, a rebound in market rents, as well as value-add components. For instance, in January, we closed on a $100 million portfolio in Williamsburg, Brooklyn. The portfolio is on Bedford Avenue, wrapping 3rd and 4th Streets. Our portfolio is adjacent to the Apple Store with our tenants ranging from Sephora to Sweetgreen, but also 23 residential units and a supermarket that's significantly below market. Thus, we have an accretive yield going in, strong contractual growth, and then long-term value-add opportunities as well. We made this investment through a recapitalization from the existing owner-borrowers and lenders, all whom we knew well, and this enabled us to complete the transaction before it went to market. We also acquired one of the great corners in SoHo on the corner of Spring and Green with Bang and Olson as our tenant. Here, market rents are rebounding quickly, and this key corner has strong contractual growth plus poised for long-term upside. Then in West Hollywood in Los Angeles, we added to our presence there with an acquisition on Beverly Boulevard. Again, strong contractual growth and long-term upside from potential redevelopment down the road. Finally, in Dallas, we closed on a portfolio on Henderson Avenue, which is part of the Knox-Henderson Corridor. We have been studying the Dallas market in general and Henderson Avenue portfolio specifically for many years. The positive demographic shifts over the last several years has turned Dallas into a must-have market for many of our retailers. And Henderson, given the popularity of Knox Henderson from a live-work-play perspective, will be an ideal entry point for many of our retailers. As I mentioned before, we're always looking for corridors with tenant demand and tenant performance that's similar to our entry in Armitage Avenue in Chicago or Melrose Place in Los Angeles. Additionally, we look for locations where the barriers to entry from a supply-demand perspective, where the current market rents, and then where the tenant performance enables long-term rental growth potential, and Henderson checks all these boxes. Because of the significant growth in the residential market, In Dallas in general and Henderson market specifically, the retail rejuvenation of this corridor is the next logical step. Henderson has long been an important corridor for great restaurants and a variety of more local tenancy. And then more recently, the digitally native retailers began showing up. Several years ago, it became clear that Henderson was ready to be taken to the next level. And prior ownership was successful in obtaining the zoning approvals for some key redevelopments, a process that took several years and was quite comprehensive. But before the plans could be implemented, COVID hit. We're now in a position to execute on those plans. The shorter term value add for us includes some releasing that's already in the works. then adding some important new retail and parking in the midpoints of the street that will further connect the dots. And then further down the road, the Sprout supermarket parcel will be a great redevelopment opportunity, which can add further densification and further upside. The size of this portfolio gives us a good initial starting point with additional investment opportunities down the road. from a pricing perspective for all of our acquisitions this quarter, while going in yields will vary deal by deal. We are making sure that our acquisitions are both accretive, but then more importantly, have the kind of long-term growth that complements our existing portfolio. We see contractual growth from these acquisitions being at about 3%. Then incorporating growth from tenant role and mark-to-market should take us to about 5% compounded annual growth. And then with the addition of value-add redevelopment components, the growth and accretion is going to be even higher. Turning to the fund side, and I'll let Amy discuss this in detail, but last quarter we closed on $130 million of deals that were previously under contract. Two deals are consistent with our Fund 5 strategy, and our fund investing remains very complementary to our platform and very profitable. Even with the rise in interest rates, we are still finding plenty of deals that pencil out. So in short, our internal growth driven by strong leasing and our external growth driven by our core and fund investments puts us in a good position to continue to create the growth that we saw last quarter and we see going forward. I want to thank our entire team for their hard work last quarter, and now I will turn the call to John. Thanks, Ken, and good morning.