Acadia Realty Trust

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the first quarter 2023 Acadia Realty Trust earnings conference call. At this time, all participants are on 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 an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Jay Martin. Please go ahead.

Good morning, and thank you for joining us for the first quarter 2023 Acadia Realty Trust earnings conference call. My name is Jay Martin, 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, natural 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, May 3, 2023, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operation 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's my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks. Thank you.

Great job, Jay. Welcome, everyone. I'm going to give a few comments, then I'll turn the call over to Stuart Seeley and then John Gottfried. As you can see in our earnings release, our first quarter results represented another strong quarter. Same property NOI growth was ahead of our expectations at 7%, and our earnings were ahead of forecast as well. It's worth noting that this is not just one good quarter in isolation. In fact, following the painful drop during the pandemic, same property NOI growth has now been above 5% for six of the last eight quarters. And during that eight quarter period, the quarterly average growth rate has been over 7%. This multi-quarter trend reflects the strong recovery we're seeing at our properties and bodes well for our prospects, not just this year, but more importantly for our multi-year goal of 5% to 10% annual internal growth. And to be clear, this long-term growth should also show up in earnings growth. Notwithstanding this continued progress, we're certainly keeping an eye on the headwinds in the broader economy and the potential impact on our portfolio performance, thankfully. When looking at our current leasing pipeline, activity remains on track with our prior forecast, and we haven't seen any fallout in tenant demand. Furthermore, we believe our reserves for our tenant watch list and our credit reserves currently in place are adequately conservative to address any potential short-term disruption. Most importantly, even after taking into account the implications of a potential recession this year, we expect our leasing progress to more than compensate for any economic slowdown. Thus, we anticipate eight steps forward, even if there might be two steps backwards. On our last earnings call, I walked through in detail the likely reasons why our operating results are holding up despite near-term economic pressures, but let me emphasize three factors. The secular headwinds over the last several years from the rise of e-commerce have passed. Fears by both retailers and investors that online shopping and the so-called retail Armageddon will devastate the physical store. Well, that fear has abated and this multi-year headwind is now a tailwind as retailers recognize that stores are their most profitable channel in an omnichannel world. Second, there's a scarcity of high quality space and vacancies are quickly being absorbed, especially in our key corridors. Third, as Stuart will discuss, we still have high quality space in our leasing pipeline to drive meaningful growth over the next few years. And while there's solid growth throughout our portfolio, both urban and suburban, the rebound we are seeing is most significant in our key streets. Remember, our street portfolio comprises about half of our overall portfolio value. And given a tough couple of years during COVID, many folks questioned whether a sustainable recovery would ever occur. Given the significant distinction between the type of street retail that dominates our portfolio compared to street retail more dependent on return to office, it's clear to us the recovery in our street retail portfolio is still not fully understood. So it's worth highlighting a couple points. First, the vast majority of our street retail portfolio is not an amenity to office workers. Residential statistics are proving much more relevant. Where you have seen a residential rebound, our retail has rebounded as well. And for those corridors, retail fundamentals are now stronger today than before COVID. That means tenant demand, tenant performance, and market rents are now stronger today than in 2019. Second, this is not just a rebound. The growth appears to be longer in duration, and stronger than just a reopening. In fact, over the past year, as vacancies have been spoken for, market rent growth is continuing to accelerate. For over 70% of our street portfolio, specifically Soho, Williamsburg, M Street, Rush Walton, Armitage, Melrose Place, Henderson Avenue, Greenwich, and Westport, these corridors are not only performing Better than pre-COVID, but notwithstanding macro headwinds, rental growth is accelerating. We have seen net effective market rents over the past year grow by over 15% on average in these corridors. And from Melrose Place, Soho, and Williamsburg, market rents have grown over 20% over the past year. We're seeing this growth driven in our markets either where Luxury is expanding, or in other markets where foot traffic and tourism is returning. And while the rebound doesn't mean every retailer will thrive, nor has every corridor recovered, the positives in our portfolio are far outweighing the negatives. Corridors like North Michigan Avenue are still in early stages of recovery, but even there, we're seeing green shoes. And while we should always be prepared for vacancies created by bankruptcies like Bed Bath & Beyond since they're an inevitable part of our business, tenant demand seems to be outstripping supply coming from these tenants. John will discuss the economic details of Bed Bath & Beyond's bankruptcy, but as it relates to our two locations in our core portfolio, I'll briefly touch on it here. First, at Brandywine Town Center in Wilmington, Delaware, we have Leased the entirety of the Bed Bath & Beyond space there. It is being taken by the adjacent tenant, Dick's Sporting Goods, which plans to expand into the combined space as a flagship house of sport. Its newest comprehensive format. And as part of this profitable expansion, Dick's Sporting Goods executed a new 15-year lease covering the combined space. Our second location is 5559th in San Francisco. The property is a well-located two-level urban shopping center that is undergoing an important transformation. The street level includes a thriving Trader Joe's and an oversized two-level Bed Bath & Beyond that has rents that are well below market. We are turning the second level of this property into its own self-contained center with dedicated parking. we have signed a lease with the container store to anchor the second floor space adjacent to the Bed Bath and Beyond. And upon the recapture of the Bed Bath space, we can now activate the balance of the second level. This repositioning has been planned for several years and is always hinged on getting at least one of the levels of the Bed Bath and Space back. Finally, As it relates to City Point, the opening of Primark in December, anchoring our presence on Fulton Street, continues to meaningfully increase the energy for the whole project. Primark opened much stronger than anticipated and the foot traffic continues to be strong. This strength, as well as the impact coming from significantly expanded residential footprint from all of the developments surrounding this project, is translating. into increasing levels of tenant interest at rents that are above our expectations. During the past quarter and to date, we have executed leases in excess of $1 million of ABR, including a recent 8,000 square foot restaurant lease for our Prince Street Passage. We have an equivalent amount of leases in advanced stages of lease negotiation right now with several exciting retailers that will further energize this irreplaceable asset. So as it relates to our internal growth, Looking at our leasing activity and in our conversations with our retailers, they indicate that they're looking past the near-term cyclical headwinds and executing leases on their preferred locations based on their medium and longer-term expectations. All of this simply reinforces our view that our internal growth forecast for this year and beyond remain on track. Turning now to external growth and the transaction markets. Given the volatility in the capital markets, transactional activity remained muted last quarter as most sellers are on the sidelines. Nevertheless, our team remains very active underwriting and executing a variety of opportunities since it doesn't take much volume to move the needle for us. First, as it relates to unbalanced sheet acquisitions, our cost of capital kept us on the sideline last quarter and given the public market dislocation, we're exploring areas where we can sell assets opportunistically or reduce our concentration in certain markets and do so on an earnings neutral basis. In terms of fund five acquisitions, while that market is relatively quiet as well, the team remains active with several deals under review and the pipeline is robust enough that we will be successful in deploying the remaining capital even in this quiet market. More importantly, to the extent that larger opportunities arise, we are confident that we'll be in a position to successfully leverage our institutional relationships. This quarter we added one transaction to Fund 5 Mohawk Commons, which we discussed in detail last quarter. So to conclude, we recognize that macro news headlines continue to create uncertainty and concern for commercial real estate in general. But even in this challenging environment, our leasing fundamentals remain strong and internal growth is intact. And once we get past this period of Fed tightening and potential consumer slowdown, we're in a very good position to continue to drive internal growth and then capitalize on the external growth opportunities that should arise. With that, I'd like to thank the team for their hard work this last quarter, and I will turn the call over to Stuart.