Acadia Realty Trust

good day and thank you for standing by welcome to the third quarter 2022 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 the session you will need to press star 1 1 on your telephone you will then hear a message that your hand is raised please be advised that your conference is being recorded I would now like to hand the conference over to your speaker today, Max Cole. Please go ahead.

Good morning and thank you for joining us for the third quarter 2022 Acadia Realty Trust earnings conference call. My name is Max Cole and I'm an analyst in our acquisitions 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, November 2, 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 them 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.

Great job, Max. Welcome, everyone. As you can see in our quarterly release, we had another strong quarter. Led by the outperformance of our street retail portfolio, fundamentals remain strong, and at the upper end of our forecast. Same-store NOI growth for the quarter came in stronger than forecasted at 5.4%. Leasing activity was robust with both an increase in physical and leased occupancy. Leasing spreads also reflected this momentum with cash leasing spreads in excess of 20%. Looking forward in our pipeline, we see continued strong leasing momentum. This is true both in our street retail portfolio, which is earlier in its recovery and growth trajectory and thus poised for higher long-term growth, but also in our suburban assets. While at a more mature stage of growth, still posting solid performance. This momentum should continue to drive strong NOR growth over the next few years, even after taking into account the potential headwinds from those tenants on our watch list or in our forecasted tenant role. Now, questions remain. How might macro headwinds from Fed tightening impact this leasing momentum? Well, as we look forward in our leasing pipeline, we are not seeing declining demand for space by tenants. Some of this stability may be due to the quality of our locations or the affluence of our shoppers, but from where we sit, demand seems strong. In the markets we're active in, such as Soho or Gold Coast of Chicago or Melrose Place in LA, we are seeing luxury retailers double down. These luxury retailers are not only experiencing incredibly strong sales, they're also increasing leasing demand and shopper interest for those retailers that surround them. We're also seeing increased demand and markets experiencing strong demographic growth. An example of this is our recent acquisition in Dallas on Henderson Avenue, where due to the growth of the residential community surrounding the Knox-Henderson corridor, we're already seeing leasing spreads of about 20%. And this is even before we have executed on the expansion and rejuvenation of our assets on that street. In conversations with our retailers in relation to new store commitments, they are generally looking past this current period of economic uncertainty and committing to key locations, especially for unique mission critical locations like we have in our portfolio. Now, we can get into this further during the Q&A, but there are a variety of reasons why this momentum may be continuing. A major contributor is the tailwinds from the ending of the so-called retail Armageddon. Over the past year, our retailers have made it abundantly clear that physical stores are once again the critical driver of their top line and bottom line in an omnichannel world. This is true for a broad selection of retailers, from luxury to young brands. And it's true whether it's in Melrose Place in LA, where Gucci recently came to the street, or Armitage Avenue, where we have a waiting list for tenants to join other young brands there in our portfolio. It's important to note that these shifts are causing our rents on many of our streets to not only recover to pre-COVID levels, but often exceed them. Retailer sales and tenant demand in most of our street retail corridors is stronger today than before COVID. This is partially because of pent-up demand or survivor bias, meaning those retailers that made it through the last couple of years are operating from a position of strength. But one way or another, it's being reflected in tenant sales. For example, M Street in Georgetown, still in the early phase of reopening, and our retailer sales there are in excess of 20% higher compared to pre-COVID. Rush Walton in Chicago, our tenant sales are 15% higher, and on Greenwich Avenue in Connecticut, sales are up 30%. Additionally, healthy tenant sales are only one part of what ultimately drives rent. Supply-demand dynamics are equally critical, and as we are seeing, there is very limited remaining high-quality vacancies in most of the corridors, and they are quickly being spoken for. For example, Green Street in Soho, which faced years of headwinds due first to the retail apocalypse and COVID lockdown, today virtually all of the quality space is spoken for. Or Bedford Avenue in Williamsburg, with retailers ranging from national tenants like Apple to regional superstars like Levain Bakery and local Michelin-starred restaurants. All of this is combining to create a dynamic shopping experience and strong tenant demand that is only now getting even stronger now that luxury is also beginning to show up there as well. Keep in mind, even with the strong rebound in rents over the past year, rents in many markets are still well below prior peaks. And while the gap is closing, given the strong tenant sales performance our retailers tell us, these streets our screening is very attractive. And importantly, as it relates to our portfolio in those markets, our in-place rents compared to today's market rents position us for strong NOI growth over time. So while not overlooking the current economic uncertainties in the marketplace around the Fed tightening, if our operating fundamentals are any indication this is not stacking up in any way like we had to navigate through in prior cycles during the global pandemic or the global financial crisis or the retail Armageddon, leasing efforts often felt like pushing on a strength. Whereas now, tenant demand is growing and so are rents. We are not ignoring headlines or headwinds, and we're certainly preparing for market volatility, but we have been through many cycles before and we have also been in periods where our stock was disconnected from its real estate values. Every cycle brings different conditions, but for us, there are always a few common areas of focus. First, we're going to continue to lease aggressively and drive internal growth and cash flow from our existing investments. Granted, it's pretty hard to fight the Fed, but it's fairly easy to lease space to tenants who want space. And successful leasing combined with embedded property-level growth should mitigate concerns about increased interest rates or longer-term inflation. we are slated to add 30 to $40 million of NOI to our core portfolio over the next three to five years. This growth is in excess of 25%. And if inflation runs hotter, the growth will probably be stronger. Second, we are making sure we can self fund our capital needs and minimize our exposure to rising rates. As John will discuss, We have capital from retained earnings and normal course of business return of capital to fund our relatively modest capital needs. Third, beyond simply self-funding our internal growth, when there is such a gap between private real estate values and our stock price, we need to look at ways to close that gap on a leverage neutral basis. While the large transaction market has slowed down significantly, one-off deals are still happening. And whether monetizing at the fund level or in our core portfolio, we can likely opportunistically sell some assets with limited impact to earnings growth and use the proceeds for a variety of compelling uses as they might arise. Finally, beyond having dry powder, we will make sure we're in a position to capitalize on opportunities that might arise as a result of the disruption, whether through remaining capacity in Fund 5 or by other means. Over the many cycles we've navigated through, we have been able to identify compelling opportunities and dislocations when these disruptions occur and then bring the right capital structure to that deal. This has been the case for us with our Mervyn's and Albertson's investments in our distressed retailer fund or our acquisitions of Lincoln Road in Miami and Cortlandtown Center shortly after the global financial crisis. The kind of disruption we are seeing today will create opportunity and we intend to capitalize on that as well. So to conclude, while the gyrations in the capital markets can be distracting and distressing, we know what we have to do. Our internal growth is continuing to drive strong results and should continue to do so for the foreseeable future. And as it relates to future external growth, today's distractions should be tomorrow's opportunities. With that, I'd like to thank the team for their hard work this last quarter and turn the call over to John.