Acadia Realty Trust

Good day and thank you for standing by. Welcome to the Q2 2023 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 an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mackenzie Tepper. Please go ahead.

Mackenzie Tepper Good morning and thank you for joining us for the second quarter 2023 Acadia Realty Trust earnings conference call. My name is Mackenzie Tepper and I am an intern in our marketing 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 FDC, forward-looking statements speak only as of the date of this call, August 2, 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 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 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. Great job, Mackenzie. Thank you to you and all of the summer interns. It's been a pleasure to work with all of you. Welcome, everyone. I'll give a few comments, then I'm going to turn the call over to Stuart and then to John. As you can see in our earnings release, we had another solid quarter. Same property NOI growth was a strong 5%, and our earnings were ahead of forecast as well. And this is not just one good quarter in isolation. For more than two years now, our same property NOI growth has averaged just under 7%, and we've raised our earnings forecast six times. And notwithstanding, the most anticipated recession in my career And the fact that retailer quarter over quarter performance has been choppy, retailers are continuing to look past any short-term shifts in consumer demand and are continuing to pursue key locations. On our last couple of earnings calls, I discussed the likely drivers of this continued growth. And while I run the risk of this feeling like Groundhog Day, let me briefly reinforce a few key drivers. In terms of macro trends, first of all, the threat of the retail Armageddon has passed. While online retailing is here to stay, retailers recognize that physical stores are their most profitable channel in an omnichannel world. Second, tenant demand, especially in our key corridors, is quickly outpacing existing supply, and retailers are stepping up to secure these must-have locations. Whether it's brands establishing their own stores or luxury retailers continuing to double down on key streets, the demand is there and the rental growth is following. Then more micro or specific to our portfolio, the combination of increased tenant demand coupled with several hundred basis points of potential occupancy gain in our street portfolio positions us for several years of above average growth. And while there's solid growth throughout our portfolio, both suburban and street, a further differentiator for us is the continued strong growth we are seeing in our key streets. As Stuart will discuss, this growth contrasts significantly with a narrative of shoppers moving out of key cities or the negative impact of hybrid work on retail in markets like New York. In fact, Over the past year, as vacancies have been spoken for, market rent growth for the majority of our street portfolio is continuing to accelerate. Soho, Williamsburg, M Street, Rush Walton, Armitage, Melrose Place, Henderson, Greenwich, Westport. These corridors are not only performing better than pre-COVID, but notwithstanding macro headwinds, tenant demand for our locations is not declining. It's not leveling off. It's increasing. And when demand increases, along with adding occupancy, there are additional ways we can further drive growth. One example. In SoHo, at one of our locations on the corner of Prince and Broadway, we signed a lease for that space in October of 2021 at a rent that exceeded pre-COVID rents. and was a positive indicator for the rebound of SOHO. However, recently we were able to negotiate the recapture of the space, and last week, less than two years later, we executed a new lease at a 45% spread to the prior lease. John will discuss the significant economic impact of this lease, but all of this bodes well for our continued growth. Another driver of additional growth is from fair market value resets, which is a feature unique to the street portion of our portfolio. Not only do our street leases have higher annual contractual growth, the way these FMV provisions work is, upon a tenant exercising its renewal options, the rent resets to the greater of fair market value or a fixed percentage. This year, for the first time in a while, we have achieved resets ranging from increases of about 20% up to nearly 50% increases above prior rent. All of this simply reinforces our view that not only are our internal growth forecasts of 5% to 10% on track, But as John will discuss, we see upside potential beyond simply remaining on track. And to be clear, our growth assumptions also include a sober outlook for our re-tenantings in slower to recover markets such as San Francisco or North Michigan Avenue, as well as conservative credit loss if and when the looming recession becomes a reality. But even after taking this into account, we expect our leasing progress to more than compensate for any of these retenancies. Turning now to external growth and the transaction markets. Given the volatility in the capital markets and borrowing costs significantly higher than two years ago, transactional activity remained muted last quarter as many sellers are still on the sidelines. We are starting to see a gradual increase in deal flow, and we are hopeful that we'll be able to close on some compelling and accretive opportunities this year. Since it doesn't take much volume to move the needle for us, even a few acquisitions, whether on balance sheet in conjunction with capital recycling or utilizing our institutional capital relationships, this can be added meaningfully to our external growth. In July, Fund 5 acquired Cypress Creek in Tampa, Florida for just under $50 million, consistent with our other Fund 5 investments, going in yield within the low eights, and we expect levered mid-teens IRR on this transaction. This center is well-leased with anchors including Burlington Coke Factory, Total Wine, HomeGoods, and over time there's ability to add value through releasing opportunities as well. The team remains... active with several deals under review, and we will be successful in deploying the remaining of capital in Fund 5, even in this quiet market. More importantly, to the extent that additional opportunities arise, we're in a position to leverage our institutional relationships for continued growth. So to conclude, we recognize that macro news headlines continue to create uncertainty and concern for commercial real estate in general. Nevertheless, our leasing fundamentals remain strong, and our internal growth is exceeding our expectations. And even though this strong growth has been showing up for a couple years now, we still have several years of tailwinds on internal growth in front of us. Along with this strong internal growth, the uncertainty in the capital markets is beginning to create interesting investment opportunities that will enable us to add external earnings growth to our strong internal growth. And 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.