Acadia Realty Trust

Good day and thank you for standing by. Welcome to the Q3 2023 Acadia Realty Trust earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today. John Damolis, please go ahead.

Good morning and thank you for joining us for the third quarter 2023 Acadia Realty Trust earnings conference call. My name is John Demoulos and I am an analyst in our finance 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, October 31, 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 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, John. Great job. Welcome, everyone. Happy Halloween. I'll give a few comments, then I'll turn the call over to AJ Levine, who heads up our leasing and development division, then to John. And after that, John Stewart, AJ, and I will take questions. As you can see in our earnings release, we had another solid quarter driven by strong same store growth of nearly 6%. And this growth is hitting our bottom line earnings as well. I'll let AJ discuss the leasing environment and our achievements last quarter, but our goal. of creating superior top line growth, and having that growth translate into bottom line earnings growth remains on track. On previous calls, I've walked through in detail the drivers of improving tenant demand, so I'll try not to repeat myself today, other than to say that even with current macroeconomic concerns, the consumer remains fairly resilient, and more importantly, while retailers' quarterly results may vary, tenants are looking past this short-term uncertainty and are continuing to execute on their multi-year growth goals. And now that we are a couple years past the lockdowns of 2020, it's worth taking a moment to look at how the retail real estate recovery is playing out. Some of what we're seeing in our results is well understood and broadly discussed, but other components, are only recently beginning to be appreciated. The suburban segment of our portfolio was the first to bounce back from the early days of COVID. The resilience in this segment is pretty well understood. Going forward, we expect market rent growth to continue at a similar rate to economic growth. And the key issue here will be increasing capital expenditures and operating expenses, which is reducing net effective rent growth. And in terms of street retail, first we saw a rebound in that portion focused on the local neighborhoods ranging from Greenwich Avenue in Connecticut to Armitage Avenue in Chicago. For this segment and for a variety of reasons, market rents recovered to pre-COVID levels pretty quickly and have grown in excess of 20% and in some cases as high as 30% since then. Also, since CapEx as a percentage of rent is significantly smaller, net effective rent growth has been strong as well. The supply demand balance is again favorable to landlords, tenant rent to sales ratios are healthy, and we should be able to see net effective growth here also at or above the contractual growth rate of 3%. The issue here is that tourism is generally not a driver of sales The neighborhood segment and increased return to office might be a bit of a headwind. Then what is probably most surprising and generally not yet appreciated is the recovery of major market street retail, whether SoHo in New York or a Melrose Place in LA or many of the other corridors in our portfolio. Given that over half of our street retail falls into this segment, it's a recovery we are watching carefully. A couple years ago, it was unclear how key streets were going to respond to hybrid work, to subdued international tourism, and to a shift by many families to the suburbs or Sunbelt cities. We have more clarity now. Hybrid work is not a headwind for these corridors. The recovery of international tourism is only beginning to show up. The pace of urban out-migration has slowed. and in some cases reversed. And most importantly, retailers are more focused today than ever on controlling their customer experience in an omnichannel world by having their own physical stores. Retail rents for key corridors first recovered to 2019 levels between one and two years ago, and we thought they might level off from there. We were wrong, as evidenced By some of our recent leasing accomplishments in Key Streets, market rents are now 20% to 40% above 2019 rents. This means that on a net effective basis, market rents since 2019 have grown in these streets more than in any other component of our portfolio. Our recent Broadway Prince Street lease in SoHo is an example. where the recent spread of 45%, after only two years, is a good approximation of market recovery there since 2019. But we're also seeing meaningful growth in Melrose Place, the Gold Coast of Chicago, M Street in Georgetown. And as opposed to other segments of our portfolio, these markets are in earlier stages of recovery and based both on tenant demand and tenant health market rents for this segment seem to have more room to run beyond this current rebound. And along with strong contractual growth, we should be able to recognize this NOI growth sooner as well since we have more mark-to-market opportunities in this segment. Now to be clear, not all markets in our portfolio have yet recovered. Markets that have lagged some are downtown San Francisco, North Michigan Avenue in Chicago, in Madison Avenue here in New York. But in recent months, Madison Avenue is quickly recovering, and I'd expect other markets to follow as well. Now, I appreciate that it is still hard for some to reconcile this tenant demand and performance with the perceptions around return to office or urban flight. Additionally, we recognize that this growth may not be fully appreciated until we are past some of the macro concerns around a looming recession and elevated interest rates. But as we continue to post these gains, they become harder to ignore. Thus, as it relates to internal growth, we are on track for our multi-year growth goals. And while we expect a slowdown in the economy will eventually create a reduction in tenant demand, we're not seeing it yet. Turning now to the capital markets. Well, the good news as it relates to the consumer, the job market, and our leasing performance is the bad news or headwinds in the Fed's focus on reducing inflation. Furthermore, the inverted yield curve and elevated interest rates are not just impacting borrowing costs, but also creating uncertainty as to real estate values. Thankfully, as it relates to Acadia and as John will discuss, We have nicely hedged our interest rate exposure for our core portfolio, and our maturity schedule for the next couple of years is also in good shape. The real question is the impact on the value of high-quality cash-flowing real estate, and the markets are fairly divided on this issue. While no one believes we are quickly returning to the era of free money, sellers want buyers to assume that the 10-year Treasury recovers to its recent 3.5% rate or lower, and that the economy has a very soft landing. And buyers want to transact on the assumption that the 10-year treasury is at 5% forever and that the landing is hard. And thus, we have a wide bid-ask spread and limited transaction activity. And while this debate continues, the inverted yield curve is also causing too many investors to remain focused on short-term investments and debt-like instruments rather than taking duration and equity risk. This pricing impasse will likely end over the next few quarters. We're beginning to see some distress and turnaround opportunities emerge, and we'll make sure we position ourselves to participate in them. We'll be respectful not to add unnecessary complexity, not to lever our balance sheet, and not to grow for growth's sake. But given our institutional capital relationships and our ability to identify opportunities even when our stock price is not advantageous, such was the case in Lincoln Road in Miami after the GFC, or our participation in the privatization of Albertson Supermarkets, or the dozen other transactions that we participated in, we will come up with ways to see that our shareholders benefit as external growth opportunities arise. And 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, they can meaningfully add to our external growth. As it relates to Fund 5 investments, we have an asset under agreement which fits our target profile and investment returns, and we will round out the balance of Fund 5 with that. For future investments of this style, we're going to continue to rely on our institutional relationships to add to that platform. Given our 20-year track record of raising and managing third party capital for the benefit of both the institutional clients as well as the public shareholders, the key is first and foremost finding the right opportunities. And as time marches on, we suspect those opportunities will show up. So to conclude, it was another quarter of validation of our thesis. Solid top line growth, hitting our bottom line. As you will hear from AJ, Our leasing activity is robust, and as you will hear from John, our multi-year above-trend NOI growth plan is intact. And with that, I'd like to thank the team for their hard work this last quarter, and I'll turn the call over to AJ Levine.