Welcome to the Acadia Realty Trust earnings conference call. My name is Vanessa and I'll be your operator for today's call. (Operator Instructions) And I will now turn the call over to Amy Rancanello, vice president of capital markets and investments. You may begin.

Good afternoon and thank you for joining us, for the second quarter 2014 Acadia Realty Trust earnings conference call. Participating in today’s call will be Kenneth Bernstein, President and Chief Executive Officer; and Jon Grisham, Chief Financial Officer. 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, July 30, 2014 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. With that I will now turn the call over to Ken.

Thank you, Amy. Good afternoon, thanks for joining us. Today I will start with an overview of our second quarter results and then Jon will review our earning and operating metric. As a general overview, during the second quarter we made significant progress across both our core portfolio as well as our fund platform. It was another quarter of continued improvement in operating fundamentals for both our street retail as well as our suburban assets. That being said, the street retail portion of our portfolio continues to outperform both our expectations in terms of operating performance as well as capital market interest. First, a few key highlights from our core portfolio. During the second quarter our properties delivered strong same store NOI growth of 4.9% which this quarter was driven most notably by our Chicago street retail portfolio. As we discussed on previous calls, we expect that our street retail property should provide superior growth over any extended period of time compared to our suburban portfolio and that is going to be driven by approximately 100 basis points per year of contractual rent outperformance and then more frequent and hopefully more profitable mark to market opportunities. So far our second quarter and year to the results are consistent with that feat [ph]. Now in terms of our core portfolio acquisition activity, during and subsequent to the second quarter we completed acquisitions of 102 million of properties and put another 68 million under contract. As we previously discussed, we anticipate that the majority of our acquisition activity will be street retail focus and consistent with these goals during the second quarter we expanded our presence in Manhattan’s Soho submarket. As we previously discussed in April we acquired a property located on Spring Street, then at quarter end did we enter into…

Good afternoon. Operating and financial results were solid for the second quarter. We detailed these results in our press release yesterday and for this call I’d like to focus on a couple of key areas including our earnings expectations and core portfolio. So starting with the core portfolio, same-store net operating income was up 4.9% for the quarter and 4.6% year to date which is consistent with our 2014 guidance of 4% to 5%. And similar to our first quarter results this was experienced fairly broadly across the portfolio although somewhat stronger in our street and urban retail which currently makes up about a third of our same-store pool. Keep in mind that our 2013 and year-to-date 2014 acquisitions which totaled about 370 million are not currently included in the same store pool. And the NOI from these investments are significant representing about 20% of our total current core NOI. And once these are included in that pool it will take the street and urban component of our core NOI up to almost half of our total NOI. Occupancy was 96.6% at quarter end which was up 100 basis points over the first quarter. About half of this occupancy gain was at our Crossroads Center here in Westchester with DSW and PetSmart opening their stores in the former A&P space during the quarter. Current shop space occupancy now stands at about 92.2% and on a same-store basis second quarter ‘14 occupancy was 96.5% which is up about 300 basis points over second quarter ’13. A significant driver for this was our shop space occupancy which was up from 86.4% to 91.6% on a same store basis between ‘13 and ’14. Shifting to our structured finance portfolio, during the quarter we harvested existing investments and planted some new seeds as well.…

(Operator Instructions) And we have our first question from Christy McElroy with Citi.

Regarding your annual guidance range for acquisitions with what's under contract today, you are at about the midpoint currently. Ken, you mentioned you could potentially exceed the upper end of that range? What volume of assets are you underwriting today and what could be a more likely range that we should be thinking about for the year, $300 million to $350 million or $400 million?

I’d rather, you stick with the same numbers and then we get to beat it but I think it's somewhat semantics. There is a decent deal flow, we’re be fairly selective but it wouldn't surprise me as I said for us to be in excess of 300 and maybe another 50 million.

And then in regards to Lincoln Road, given the price that the buyer is willing to pay there of $3000 a foot, is that indicative of where pricing is now in that market and is that a market that you would continue to look at for future investment or by selling, are you effectively saying that you think it's too overheated for your taste currently?

So two things, one the deal hasn’t closed, so I am going to be a little bit cautious about a lot of different statements. But I would be very careful about looking too much at price per square foot, keep in mind we have second-floor space, there's some space right on Lincoln Road etc. And I think one could get confused either direction just by picking that price per square foot. I think that Miami in general and Lincoln Road specifically could do extremely well for the next five, 10 and 15 years, the historic cyclicality, or hyper cyclicality of Florida may truly shift and we may find that the next correction Florida does the same as I know works and maybe even better than other core markets, so there's nothing about Miami that causes me specific concern and then as it relates to Lincoln Road, Lincoln Road has positioned itself very nicely at the upper end there's some real competition as to where the high-end retailers are going to land between the design district and some of the other competing areas but for this more aspirational and middle market I think Lincoln Road is great. All of that being said we are in the business of and pretty good at evaluating when it’s a good time to buy asset, when it's a good time to sell asset. And this was an opportunity to make some pretty significant profits for us and our fund investors, so it made sense to do that. I wouldn't read too much into us saying Lincoln Road is overheated or Miami's overheated, I would look at the 10 year treasury and say wow rates are low and those cap rates are low but beyond that I wouldn't read much more into it.

Our next question is from Todd Thomas with KeyBanc Capital Markets.

Just a question for Jon regarding leverage. You mentioned it’s continued to tick down. I know you like to be conservative from a balance sheet perspective, but net debt to EBITDA at 3.6 times at the end of the quarter, that's significantly below your peers and most other REITs. What's the strategy with regard to the balance sheet? Are there any opportunities to lever up a bit from here and take advantage of today's interest rate environment?

So couple thoughts as it relates to that. Number one is given our size and given some of the things we do in the funds it makes sense to counterbalance that to some degree with conservatism on the balance sheet. So I think it makes sense for us to be a little more conservative than our peers to some degree. Secondly we do have some capacity to increase leverage. I think it makes sense for us to have some flexibility as it relates to that given that capital markets come and go and we have a very active acquisition pipeline and program and we want to ensure that we’re able to capitalize that throughout the cycle. So based on all of that it makes sense for us to be in a lower leverage position, it helps me sleep at night as well. But you may see that go up depending on where we are at in the cycle and what's going on but we will always maintain a conservative level and we will not take that up to a level that in any way puts us in harms way.

And then just looking at the leasing spreads in the core, a couple of big numbers again this quarter. I'm assuming both of the new lease deals were in the street retail portfolio. I guess two questions -- first the renewal bucket, the GoA there was fairly sizable. I was just wondering if you could breakout the renewal spreads between street and suburban. And then are there any other any near-term expirations in the street retail portfolio that we should expect to see in 2014?

So when you look at the breakout between renewal and new leases 97% of the leasing volume this quarter was renewal and within that renewal bucket 98% was suburban, so there was literally one or two street retail locations in that renewal bucket. So that’s 17% GAAP, 7% cash positive lease spread was essentially on our suburban portfolio and many of that -- many of those renewal were option exercises, so we feel very positive about that result for the quarter. In terms of the new leases, not a large amount of leases obviously, not a large amount of GLA 5000 ft.² but it was street retail locations and obviously the spreads on those where were significant in terms of 50% cash, 70% GAAP And we talked about this last quarter as well, it's obviously based on that level of volume anecdotal data but still that anecdotal data does speak to the embedded growth and the upside as it relates to street retail. Looking forward I think that second quarter was more volume than usual in terms of renewal leases and I would expect to see that moderate some for the balance of the year and then specifically looking at the street retail portfolio many of the assets that we have acquired over the last couple two three years there's not a lot of lease wall in the next year or two. So I would expect to see as much activity there short-term but long-term I think there is -- as we’ve seen anecdotally the potential for significant upside go forward.

Todd and I will just chime in on that last point, what we are seeing with street retail and I think you will see continued through our releasing effort is it’s going to be less about just simple lease maturity and more the fact that our retailers for a wide variety of reasons, mainly because it’s a competitive world out there, they’ve been more willing to shed assets before end of lease term, even when those leases are below market and as compared to the suburban side where we “have learned to partner” with our box retailers in the releasing of this, there is a better understanding that we are in the real estate business, our retailers are in the business of selling their merchandise and so we are seeing and have seen more recapture opportunities and that then hopefully will show up in spread as well.

Okay, that makes sense, that's helpful. But the two new lease deals, then -- just following up on that. Were they expected or were they recaptured prior to expiration?

They both for the most part were expected, one of them was – 120 West Broadway location, and these were not recaptures in this case.

Our next question comes from Jay Carlington with Green Street Advisors.

So just go back to Lincoln Road, was this something that was initially contemplated at the beginning of the year and maybe you can describe when you started kind of the negotiations of the process on this?

It was not contemplated at the beginning of the year, it has felt to us over the past three four months an acceleration in interest that overall we’re thrilled to see as it relates to specifically street retail, so somewhere around May I see -- we started a dialogue and firstly it was intriguing but not actionable and then as it improved several iterations became what I would define as preemptive and compelling. So it was really may when this heated up and while it’s true in Lincoln Road, in general what we are seeing -- and it's very exciting because keep in mind we've got plenty of equally good product both in our funds and certainly in our core, the recognition by our first and foremost our retailers because at the end of the day these are sooner or later going to be cash flowing assets, it’s the enthusiasm by retailers on a global basis to be on these various different high street, continues to be reinforced. And a few years ago the question was geese, Ken – is it scalable, geese Ken, will institutional capital ever really show up in this very fragmented business? There's no doubt about that now and it is achieving cap rates and valuations that I think it deserves based on the growth profile and it’s going to reward our stakeholder whether it's assets in our core, that we’re going on a long-term or assets that we’re redeveloping and selling in our fund. So long answer to -- happen quickly, let's hope it continues.

And I recognize you are kind of understandably hesitant about making a market call on Miami, so I'm just -- maybe are there -- given the movement the last couple of months, are there other markets or neighborhoods that you are seeing kind of an acceleration or interest that you are maybe considering harvesting some of the value there?

Well so we walk through – and it’s easy to think about it in our fund business because as they are, we are absolutely sooner or later going to monetize and to the extent that someone is willing to pay you today for what you expected to take another 3, 4 years of hard work, well, great, but whether you want to look in Brooklyn or Noho, or M Street in Georgetown these are all great markets and the capital markets now are hot, we recognize that as a negative, we got to work that much harder and be that much more careful on our new investment. But we have in our fund 3 pipeline, then fund 4, don't forget about the Citypoint in fund 2, we’ve got a lot of great assets that we think over the next 1, 3, 5 years are going to be able to create a fair amount of significant incremental value for our shareholders while we continue to execute on this dual platform that we’ve created.

Our next question is from Craig Schmidt with Bank of America.

Ken, cap rate is I think closer to historic lows at this point than the historic highs, and it has been keeping some REITs from being active in acquisitions. Is AKR's position or expectation that street retail will prove stickier with regards to cap rates and is that more of an issue of structural change than a cyclical change?

So the biggest question with all of this is where do interest rates go, where does the growth in street retail versus probably the lower growth suburban and box retail how does that play out, because when we look at this spread from the 10 year treasury or triple Bs relative to higher growth street retail it's not as though they are way out of the think that all things equal and you’re seeing Craig us put more dollars into street retail than into suburban, so we think all things equal street retail it still more compelling, when we talk about stickiness what we’re forecasting its two different things, what kind of interest rate growth occurs and then our ability to grow our rents as inflation or interest rates slip back into -- increases slip back into our system, from what we see now we think we will have more bites of Apple to grow those rents than in our suburban side. We think if interest rate increases are commensurate with GDP growth, commensurate with healthy inflation and that street retail will be a better place to be and thus what I think you refer to as stickier. But we need to be careful about it and so you're seeing us be fairly cautious about how we are growing, where we’re growing picking our spots carefully to make sure that we’re not predicting the future in ways that are above our pay grade.

And then the cap rate on Bayer [ph] I think I heard 9%.

Yes.

Is that people's concern about the Lowe's vacating where you see an opportunity?

It’s a little of both but just our high yield program seems to work best where there is something that renders a property less than – there is a ton of capital today but it's harder when one of the two anchors is relocating across the street which was the case here. So we've done that in the past half dozen deals or so where the anchors either had shorter term leases and we were then at post acquisition able to extend them, that was the case for instance with the Home Depot that we recently acquired, so there is an arbitrage due to the lack of finance ability and uncertainty that keeps the high leverage buyers away and also it keeps the probably the biggest competitors in that space which are the non-traded REIT, it also keeps them at bay a little bit. So the opportunity there is the leases below-market, but it ends in 2017 so we’re happy to get back but it's a significant piece of the cash flow and thus that was our angle into that deal and the way we then think about it is that we go from nine for a couple of years the levered return is obviously significantly higher than that and then there's one or two years of downtime especially in the fund structure – that’s easy for us to absorb as long as we can retain and fit to a acceptable yield afterwards and our team is very comfortable we can do that.

Our next question is from Paul Adornato with BMO Capital Markets.

From Lincoln Road to Flatbush Avenue, I'm very happy to see you guys kind of book end Flatbush Avenue. So was wondering if you could talk a little bit about the Bob's Discount Capital One property? You said that the deal was struck before the lease was signed. Did you guys have any part in the leasing of the property

Some, Capital One owned the asset, they were self building it, call it a self least back it’s probably giving too much to a relatively small transaction but they recognize that they didn't really want to self develop and then be overly exposed, so we gave them a forward commitment, work through the two leases and in exchange for that the pricing was favorable. And so we’re to own that side of Flatbush avenue and then as you know Paul even more excited by what’s going on Citypoint on that kind of Flatbush avs.

So maybe -- any insights that you could give us outside of Kings Plaza Mall? Obviously, there is re-merchandising going on inside? What's happening outside? Any more opportunities for you guys there?

Yeah I think so, Brooklyn is going through such a fascinating transformation that there are several markets we’re looking at and compared to the other boroughs that are still doing well but the transformation in Brooklyn is certainly much more than we expected, so where we can see and a lot of this is driven by a lot of very positive new housing stock coming to the market, providing a diverse opportunity and change and so with that there are going to be continued changes in terms of which retailers want to be in the difference spot in Brooklyn and I think you'll see us continue to be active there.

Our next question is from Jim Sullivan with Cowen.

Thank you. Good afternoon. Ken, just following up on Lincoln Road and the transaction and what it implies or suggests about how you want to build the Company going forward. It is kind of -- obviously very, very impressive IRR, congratulations on that. In your presentations, you've talked about being able to put together what you'd call, I think, a meaningful concentration of street retail assets. And there will be opportunities, I guess, in the future to sell more of the value creation that you've been able to achieve in these different funds. And I'm curious how you assess the prospects of either doing more Lincoln Road-type roundtrips, if you will, selling assets at very impressive IRRs, which provides a great track record for your fund business as opposed to sustaining the concentration of assets that you have. In other words, is there an ongoing platform value that would accrue to the Company and maybe the share price multiple, if you were to continue to assemble and grow the street retail across the country as a very large platform? You made reference to some of the commentary from people about whether you could put together a meaningful concentration. You've obviously begun to do that. Is there some greater value to be achieved by being one of the largest players or the largest player in that business in your mind? Is that currently and does that potentially trump, if you will, what you've characterized as preemptive bid?

I guess the second part of that question -- and don't know if you have an answer -- but in terms of the value creation that was achieved on Lincoln Road, there was obviously very significant movement in the market in terms of the rent per foot, as you outlined in your presentations. There was also, as you mentioned in your prepared comments, significant value added by your -- by Terranova, I guess, I think you cited, in terms of the leasing activity. And I wonder if you can kind of breakdown in terms of the value creation how much of it was attributable to those two factors as opposed to what would've been attributable to cap rate compression?

I can't describe math to it, partially because some of its objective, but let's point out a few obvious or a few thing. Rents have close to double since our initial acquisition. Lincoln Road and leases by nature and this is true. In street retail, in general, have much better mark-to-market capability so that even if the lease has not been signed as long as you're comfortable that the market which was 150 is now 300, you can look through and say in one, three, five, at most seven years you’re getting to those numbers. Now if you then believe that rents are 300 today and going to 400, you can get comfortable that your yields will grow correspondingly. So part of this is there is pretty good transparency and the ability to get to those mark-to-market rent, not overnight and if not like every re-tenant thing is going to get done at the same rent because not all space is created equal, but an owner on Lincoln Road can both lease or finance or sell with a comfort that within a finite period of time it will mark to market. As a result of the rental increase, which was pretty darn significant whether you got it today or you're going to get it in 3, 5, 10 years combined with the fact that cap rates absolutely have compressed and the fact that we have now, I believe, gotten close enough to showing where the second-floor space could lease where a bunch of the other spaces may re-tenant, I think that a buyer of high quality institutional capability could look through and say if we’re a long-term owner, if we believe in these positive trends, here's to get the cap rate that we’re buying today. It’s just not relevant here as where we can be in three years, here as where we can be in seven years, here as where we can be in 10 or 15 years. And I think that's how the thought process plays out.

Great, okay. Thanks, Ken.

Sure,

Thank you. Our next question is from Rich Moore with RBC Capital Markets.

Hi, good afternoon guys. Are you guys actively marketing the stabilized portion of Fund III so that we might think of those promotes may be coming sooner rather than later?

We were, but on Jon's presentation it certainly found like you’re gearing for it, Jon. Now, Rich, the definition of actively marketed place out a bunch is different ways. Once an asset is stabilized and we think that the market is receptive, we will sell those assets. So within Fund III, I walked through a handful of the stabilized assets ranging from Portland Town Center to the Two Deals in Chicago and my expectations will be that we monetize these assets over the next one, three and then it’s related to the development deals by one, three, five years. So our hope and expectation would be that we can transact in the next 6 to 12 months on some of these and thus that's how the 2015 promote would kick in. If for whatever reason we’re not happy with the valuations we’re seeing and that happens periodically and then we wouldn't transact. So you do not see itself anything in 2009, ’10, I don’t think 11 and then then as the markets came back you saw monetize the majority of our Fund III global financial crisis assets. So we sell storage profitably a bunch of other assets and now we’re on a really good position today as it relates to Fund III.

Okay, good, I got you. And Jon, I hope I didn't get you in trouble with that. (laughter)

Not too bad.

Let me ask you guys. On the street retail, is your stance still or maybe -- I can't remember if you formalized this -- but is your stance that you won't buy any of those street retail -- on this case, obviously the Lincoln Road, but you wouldn't bring any of those into the core, right, if they were in the fund previously?

It's not an easy process, Rich to do with it. So our stance is not, never. Our stance is we're going to make sure we get that execution for our fund investors period, end of story, and what we have found is while the REIT could be a buyer, there are.. We have special committee set up to do that almost without exception every time we look at it. If there has been an outside buyer whose cost of capital is lower and we need to be respectful of that and move on.

Okay, good, got you. Then our friends at General Growth have been suddenly very active in the street retail scene. And I'm wondering if you guys look at any of those kind of assets -- they were looking more at the Fifth Avenue kind of stuff. Is that the kind of thing you guys would look at as well? Doesn't seem that you have typically done that?

I think the role of VP is extremely talented, this is within his core competencies and the market had the 300 million to we’re now seeing 700, 800 million plus trade is one that I think we should all look at. I think that they are spending time in street retail is absolutely a net positive for our industry and net positive for Acadia and there is an overlap, we did look at some of those assets, obviously we didn't win, at some side you look at it say geese maybe too big for Acadia to take down in one lump sum, okay in other cases we will fiercely compete, and let’s hope we win our fair share. But whether or not we overlap or not the fact that there will be more high quality smart high integrity institutional quality owners and street retail will be a net positive because one of the big problems in street retail has been a historic reputation of it being so fragmented and of such questionable landlords in their ability to deliver the space on time quality etc. So we’re seeing a very nice shit, there is going to be plenty of assets available for Acadia, you could just walk up and down the street in Soho or Madison Avenue or a half a dozen other these key markets and you easily get to $25 billion of assets. So I am not particularly concerned about the entrance of any one or two new owners but where it is a high quality one like that I think it’s great.

Our next question is from Ross Nussbaum with UBS.

Two questions. The first is on your comments on the dividend. I just want to make sure I'm understanding things correctly. So first question is why wouldn't you be able to 1031 some of these gains to potentially avoid being quote forced to raise the dividend? So let's start with that one.

So we call these in our funds and and it really doesn't lend itself to 1031 transactions, these are assets that we need to monetize from return capital. So to the extent that it is a promote it is not directly tied to a specific real estate piece, it’s capital gain, that's good in terms of the context of it but it still would require a distribution which as a shareholder I will you selling asset at huge profit and distributing appropriately is hardly the end of the world.

So question number two is as you think about where the dividends may be going over the next year or two or three, and Ken, knowing that at your heart, you are reasonable guy, it would seem to me that the recurring dividend perhaps would be tied to your recurring core wholly owned portfolio and that there may be special dividends perhaps paid out over the next one, two, three, four years, distributing those gains, but we shouldn't necessarily think about that as 100% recurring? Is that a reasonable way think about it?

Yeah and I think you meant reasonable in a complementary way, so I will certainly take it way. By the way Ross we run into that in the past as it relates to FFO as well which is promote income and it’s adding $.05-$.10 a year well that’s great, we will take it. if it’s adding to our dividend fine but we all need to recognize and we will bend over backwards to articulate here's our normalized dividend or our normalized FFO and here's the other bucket that is going to show up for a while, so we should all enjoy it. But it’s going to show up for a while and not be infinite life in nature and we need to recognize that as well, so that there's no disappointment or we certainly don’t want to read five years from now Acadia forced into a dividend cut, we will do our best to provide that transparency.

And then the next question I had is -- and I might have missed this but I don't think I did -- I didn't hear the words Fund V come out of your mouth on this call. And you may remember, you and I had a conversation in Vegas, where I communicated my view that I would prefer not to see a Fund V, that I would like to see you do these deals on your own. And if you happen to be a partner then, go find one but at least have the flexibility to start doing these on your own. Can you talk a little bit about what the future holds on that front?

It is early to contemplate a Fun IV as we are the midst of fund four, it is early to contemplate not a fund five because let's remember how nice it is to collect these regular promote payments before we say Jesus it’s not such a good business, we will have this discussion in a year or so, we will have much better visibility as to what fund three and fund four and don't forget fund two, what all of these start looking like this is a very good business. That being said, as we get larger I could see us coming to the conclusion and that calling them dual platforms may not make sense and there may be other alternatives, we will revisit that down the road.

Our next question is from Michael Mueller with JPMorgan.

I was just wondering, when we're thinking about Broughton Street, what the scope of the development work to be done there is, if you could just kind of walk through it? Is it basically funding TIs for new tenants or is it something more substantial?

There is some new development opportunity, there might but for the most part it's redoing some fabulous historic buildings, some over time either deteriorated or didn't keep up with more recent tenant technologies, so it’s not just the simple re-tenanting as these are in the lines of gut rehab, one or two of the parcels will be new development but for the most part these are existing buildings. I urge you to go down and see it’s a fabulous street and I would think over the next 3 to 5 years it will look substantially different but it won’t be new development.

Thank you. We have no further questions at this time. I will now turn the call over to Ken Bernstein for closing remarks.

Great, thanks everybody for taking the time. Enjoy the rest of your summer and we'll see in the fall.