Good day, ladies and gentlemen and welcome to the Q4 2016 Acadia Realty Trust Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Ms. Dianna Murphy, you may begin.

Good afternoon and thank you for joining us for the fourth quarter 2016 Acadia Realty Trust Earnings Conference Call. My name is Dianna Murphy and I am a Regional Property Manager in our Property Management department. Before we begin, please be aware that statements made during the call that are not historical maybe 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, February 15, 2017 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. [Operator Instructions] At this time, it is my pleasure to introduce Acadia’s President and Chief Executive Officer, Ken Bernstein.

Thank you, Diana and great job. Good afternoon. Last year, we had a busy and productive quarter both on the investment front where we completed over $1 billion of transactions as well as with respect to our existing assets, where leasing and redevelopment activity continues to create an important long-term growth. So today, I will start with a discussion of the key drivers of our business and an overview of our current market conditions. Then I will hand the call over to Amy who will discuss the progress that we have made in our fund platform. And then finally, John will conclude with a discussion of our operating results, our guidance, as well as our balance sheet metrics. First, with respect to our core portfolio, 6 years ago, we announced that we were refocusing our core acquisition activities towards building a differentiated and forward-looking portfolio with a meaningful concentration of assets in our nation’s most dynamic, urban and street retail corridors. Since then and consistent with this focus, we have more than tripled the size of our core portfolio, but more importantly than this growth is the quality of the properties that we have acquired. Today, more than 85% of our core portfolio is in five key gateway markets: New York, Chicago, San Francisco, D.C. and Boston. And this has been in response to the changes both in retailer demand as retailers are adapting their business to the ongoing evolution of omni-channel retailing as well as the many different consumer trends. All-in-all, these changes are resulting in a growing separation between the have and have-not locations in retail real estate and it’s pretty clear to us that retailers will continue shedding more generic locations and continue to focus on mission-critical locations. And while this shift is continuing to play out,…

Thanks Ken. Today, I will review the steady and important progress that we continued to make on our fund platform’s buy-fix-sell mandate. Beginning with acquisitions, in light of cross currents in both the capital markets and the retailing industry, we continued to employ a barbell approach to investing our fund commitments. On one hand, we are selectively acquiring high yielding, stable shopping centers in non-primary markets, but we can do so at attractive pricing. As Ken mentioned, we have seen cap rates for these types of assets increase by at least 50 basis points over the past 6 months to 12 months. On the other hand, we continued to pursue opportunities to acquire well located assets in key markets where our team can add value through lease-up and redevelopment. Although cap rates seem to be holding for high quality assets with stable cash flow, as Ken mentioned, there seem to be fewer bidders for high quality assets with significant moving pieces. And for sellers, certainty of execution is becoming of increased importance. Since our fund capital is fully discretionary, our fund platform is a beneficiary of this shift. During 2016, Fund IV acquired or entered into contracts to acquire almost $300 million of investments, of which approximately $260 million has closed. Both strategies, high yield opportunistic and high quality value add are represented among these transactions. On the high yield side, during the fourth quarter, Fund IV completed the acquisition of the Northeast Grocery Portfolio for $92 million. This 1.2 million square foot portfolio includes eight grocery anchored properties located in Maine, Pennsylvania and New York. The fund acquired the fee interest in seven properties and made a $9 million loan on the eighth. The current lease rate is roughly 90%. And with minimal lease-up and rational leverage, this investment…

Great. Thank you, Amy and good afternoon. As you have just heard from Ken and Amy, we had a strong finish in 2016 and more importantly, we have positioned ourselves with an outstanding platform to generate a combination of significant value and earnings growth as we move into 2017 and beyond. I would like to first start off by talking about our fourth quarter 2016 earnings. Our FFO before transaction costs came in as we expected at $0.40 per share, which includes $3.4 million or $0.04 per share from our net promote and Fund III. Additionally, during the fourth quarter, we successfully closed on the previously announced 555 9th Street acquisition in San Francisco for approximately $140 million. Consistent with our disciplined approach of match-funding, all of our 2016 acquisitions were fully funded on a leverage-neutral basis with no equity issued during the fourth quarter. As I will discuss shortly with our 2017 guidance, we are projecting that our $630 million of 2016 acquisitions will be highly accretive generating accretion of approximately $0.06 during 2017, followed by an incremental $0.02 to $0.03 of additional growth over the next several years when factoring the NOI growth we believe is embedded in these assets. The aggregate accretion of $0.08 to $0.09 that we expect to derive from this portfolio provides us with a strong per share growth in excess of 5% of our 2016 core FFO. Now moving on to our same-store NOI, our same-store NOI came in at 3.7% for the quarter and 3.4% year-to-date. Our strong growth in 2016 was once again driven by our street portfolio, which outperformed our suburban assets by over 300 basis points. As we have guided throughout the year, we are expecting to successfully recapture nearly 300 basis points of below market street occupancy in…

[Operator Instructions] And our first question comes from the line of Christine McElroy with Citi. Your line is now open.

Hi, good afternoon everyone. Ken, you talked about an expected CAGR of 7% through retenanting and redevelopment. Given the turnover in your portfolio in recent years, especially in regard to the street retail assets, how should we think about the cash growth rate versus the GAAP growth rate and any impact on FAS 141 as you harvest many of these below market leases?

So, let me first clarify, I think what I – well, I know what I said and meant to say, overall CAGR, 5% to 6% broken into two components, one of which was 7% and 5% to 6% feels pretty darn good. I will defer to John on the FASB piece of this, but from an NAV perspective, which is fundamentally what we are focused on is, if we can grow this rent by $11 million without significant expense to do that, that is the value creation proposition. It does more or less blend out to that 5% to 6% range. But John, in terms of....

Hi, Christie. So on the GAAP sides I think these are not acquired leases. So these would be – we wouldn’t have an above or below market lease adjustment that we typically have in an acquisition, but there will be straight line rent which will only increase the 5% to 6% or 5% to 7% that Ken just walked through. So it does not include the straight line impact, which will provide additional FFO opportunities.

Okay, got it. And then Ken, you mentioned the planned densification of City Center in San Francisco. Can you give a little bit more color on the plan there? I think it’s just under $8 million of base rent. How much disruption could that cause?

We are still in discussion, so I am going to be a little tentative. But if you have looked at the aerial shots we have on our website or visited, you will see there is an abundance of parking in an area that is densifying in a community that recognizes the importance and growing importance of mass transportation and in fact are encouraging us to densify the asset. So, our expectation would be to convert some portion and still in discussions, so I don’t want to, but a meaningful enough portion that it will help drive the value at that asset and overall. In the next couple of quarters, we will give you a lot better information on that one.

Okay, thank you.

Sure.

And our next question comes from the line of Craig Schmidt with Bank of America. Your line is now open. Craig, your line is now open.

Why don’t we move on to the next question and hopefully Craig will re-queue in?

And our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is now open.

Hi, good afternoon. John, if I heard you right, you mentioned that same-store NOI growth is expected to be in the 5% to 7% range in 2018 following 0% to 2% in ‘17. What gives you confidence that there won’t be additional disruption from ongoing re-tenanting in the years ahead? Is it just expected to smooth out or you don’t anticipate as much space being recaptured in any given year? And then also the 40% rent spreads, was that just for 2017 or is that what you are expecting over the next few years? And is that a cash or GAAP spread that you are talking about?

Great. So, Todd, first on the 40%, so that’s going to be over the next several years and that will be cash. So that will be – and that also includes many of the activities that Ken walked through. So, it’s not only in ‘17, this is in ‘17, ‘18 and even beyond that through the big street – street assets that we think will be coming to market. And then on the question of the 5% to 7%, as I said, we do project certain things and using our lens today as what we think will happen in ‘17. So, of course, things could be worse than we expected, but we are looking in today’s lenses as we project and we look at leasing velocity and other assumptions that are – that we are making when determining when we put tenants in and what rents that we do bring them in at.

Let me add some color to that as well. So Todd, just to be clear, I talked about our expansion of lululemon, a new lease that we did on M Street, the expected new leases that we are going to do on Prince Street. And those blended to 40% over the next 1 or 2 years or blended to about 40% and which I think are pretty good indications that notwithstanding a lot of noise in the marketplace as long as we are careful about the deals that we buy and the rents there that we should be able to achieve thesis consistent results. Our part of our thesis has been, hey, if we can get back below market leases, we believe it is in our shareholders’ long-term interest to take down some of that space, increase our vacancy in the short run as long as it’s creating long-term value. And so there is that possibility over time. That being said, the vast majority of our leases are high-quality, with longer dated leases. So, the volatility overall should be consistent with our past experience and I am fairly too very confident that we will continue to have opportunities to harvest, that we will be able to in a relatively low growth environment that we are in right now, have see our street and urban outperform our suburban. And then if the economy gets better and continues to strengthen, those opportunities should be even more outsized.

Okay. And then Ken, as the shifts in retail take place here and you mentioned the changes taking place between the haves and the have-nots in terms of location and quality, when you look at things, is that being appreciated appropriately in your view when you talk to private investors and lenders today and others in the industry? And if not, what’s being overlooked as all of this plays out?

And Todd, it can’t, in 2017, be fully appreciated, because there is so much change going on. You will recall, you hosted a panel where I was the bricks and mortar real estate guy with a bunch of previously online only retailers moving to bricks and mortar and they are two very different worlds. There is a changing of the guard occurring right now. And the historical conversations of our rent to sales ratios and occupancy costs are shifting to CPA, cost per acquisition, which means how do these new retailers think about acquiring customers? With so much change going on and with so many retailers having to either reinvent or frankly get this intermediated, it’s impossible I think for the broader market to fully appreciate these changes. What we are seeing, what our retailers are telling us and by the way, that’s probably the most important of the conversations we have, we can all talk amongst ourselves, but it’s really about our retailers and what is working and they are being crystal clear that they need to gain and regain control of their brand. They need to present a value proposition to the shopper that is different than it used to be, because simply going into a store where you are confused as to whether you are paying full-priced or off-price, where you can buy mobile as easily as in the store. And if you buy mobile, you don’t pay sales tax and your shipping is free. And that’s a very confusing time period. What our retailers are saying now is they need to have strong bricks and mortar location that are brand relevant. We think that the street retail on the urban locations are the most likely beneficiaries of that, because the retailer can control their brand, they can control their pricing, they can make a more unique shopping experience and use that as a part of their overall omni-channel strategy. So we are seeing it with Warby Parker who we signed early in Chicago as well as Bonobos and there’s dozens of others coming on that side. And then our traditional retailers, we just signed T.J. Maxx in Lincoln Park. T.J. gets it, they know what their value proposition is to their customer and they are showing up in these right urban markets as well. So again, I could go on for the rest of this earnings call. It is a very confusing time. I expect it to remain confusing. But as long as we listen carefully to our retailers, see what’s working and see what’s not working, we are confident that we can navigate through that.

Okay, thank you.

Sure.

[Operator Instructions] And our next question comes from the line of Michael Mueller with JPMorgan. Your line is now open.

Yes, hi. Couple of questions. First, John, when you are talking about taking back 300 basis points of street occupancy, can you talk a little bit about how much of that you will pick back up in terms of leasing right away? Because I know there was a comment about you are not going to – if you are going to take a few years and some of it will end up in redevelopment. So like how much of that 300 will you get back in just normal course leasing versus something that will go into like a bigger project?

Yes. Mike, so I would say that the vast majority of it is going to be normal re-leasing. So these expire, as I mentioned in my talking points, a fair portion throughout in the first half of ‘17. So, they will be re-leased later ‘17 or early ‘18. So, of the 300 basis points, we can recapture that with a return and ‘18 is the expectation.

Got it. Okay. And in terms of leasing spreads like cash spreads on a blended basis were 8% or 9% in 2016. Just given I guess all the call commentary so far about the street leasing and the big mark-to-markets, as we look out to ‘17, ‘18, do you expect any notable changes in that bottom line spread – of the bottom line blended spreads?

Yes, I mean, I will let Ken weigh in as well. But I think we do expect really strong leasing spreads. Some of the spreads that are coming through are at least one, possibly two of our SoHo assets, which as Ken mentioned, could be in the 70% range of spreads there. So, we do expect as we are getting a high volume of street leases coming back in. We do have that. But keep in mind, that’s blended with suburban renewals and others that are not going to have those types of spreads. So, I would say over the course of next several quarters and years, you will see, I believe, a change as we are getting. When we started our street acquisition activity, just a few years ago, we are getting these leases back and doing what we said we are going to do in bringing these to market.

Yes. And the 8% just to chime in, the 8% was our overall portfolio, which as John just mentioned includes the suburban where the spreads were a little less dynamic. The new lease street spreads, Michael, were pretty darn strong and absolutely thesis consistent. And I know we threw a lot of numbers out to all of you. But 2016, street retail same-store NOI, as John mentioned, was about 300 basis points stronger than our suburban. So again, as long as we can continue to achieve that kind of growth, some of it shows up in our same-store, some of it does not, but as long as we can achieve it, then that thesis is consistent and that’s what our mission is.

Okay. And one last quick one just on the guidance drivers, you lay out the acquisitions for the core and the JVs, but what about – or for the funds, excuse me, but on the disposition front, I mean, what should we think of there? I know you are not going to have promote income coming in this year, but which we think of in terms of asset sales?

So, on the core side, we are not projecting any meaningful dispositions and Amy, you want to talk through on the fund side?

Sure. On the fund side, across the fund platform, we’ll continue to evaluate when assets are stable. Assuming market conditions remain as they are, we will continue to responsibly sell those. So, you could expect that there maybe asset sales, either in Fund III or in Fund IV over the next 12 months. And Fund IV, just given that we are still early in that process, you wouldn’t expect to see any promote income from those in ‘17.

No promote income, Mike, but I would expect that you would see continued monetizations, Fund IV and otherwise as we stabilize buy fix sell and that business model has worked incredibly well and very profitably.

Okay. And is there an equity raise assumption in guidance?

So Fund V, fully done last year. Thank you, Amy. And so we are done for several years on that side. We have $1.5 billion of buying power without having to go to the equity markets. And I think John was very clear as it relates to the public side, we match funded, did not raise any capital, ATM or otherwise, for painfully obvious reasons in the fourth quarter. And there is nothing about this quarter that feels any different. So, we have a lot of avenues for continuing to grow externally. And by the way, external growth, especially external core growth is just one of the arrows in our quiver. We have got a lot of embedded growth. We have got a lot of other things to do if the public markets do not cooperate.

Got it. Okay, thank you.

And our next question comes from the line of Floris van Dijkum with Boenning. Your line is now open.

Great, thank you. So guys, I am just – I know that people oftentimes focus on same-store because that gives you a good underlying CAGR. But as I look at your absolute NOI growth maybe if you can touch upon some of your absolute NOI growth, because it seems like you still have pretty above average NOI growth even in ‘17 despite of what people are talking about and obviously that should accelerate in 2018. Am I missing something here?

John?

Yes, I think, Floris, that’s right. I think just in the way that the same-store if you look at, we brought on $630 million worth of assets throughout ‘16 that does not – a good portion of that doesn’t show up – that growth is not going to show up in ‘17 just the way the mechanics of the same-store works. So I think just from that factor alone, it’s – we certainly agree with you.

The same-store NOI is not a perfect metric. None of, unfortunately, the metrics that we get to talk about are perfect. Our focus is how do we grow the NOI, how do we show it to all of you with appropriate transparency that reflects the actual pool we own? And at times, it doesn’t because of the acquisitions. As John just mentioned or for other reasons, and where that’s the case, we will do our best to add additional transparency.

Great. And maybe a follow-up question on the assets that you talked about, Ken, the big drivers, so the 7 assets that will move growth going forward. Number one, I guess you have signed obviously the lululemon deal, it sounds like, but have you signed or have you got tenants lined up for the Prince Street and the M Street as well as the Lincoln Park property that you mentioned? And maybe you can talk about the cost involved in potentially combining some of these boxes. Presumably it doesn’t – it’s going to cost some money to get this space ready for the potential new tenants?

Right. So first of all, leases have been signed. The lululemon lease at Rush Street, on M Street, that lease has been signed. I am not saying who the tenant is just yet so that you all will listen in on the next earnings call. Clark & Diversey, T.J. Maxx is signed, which is the anchor upstairs second level and then one of the street levels, Blue Mercury has been signed. And then the only ones that have not been signed are Prince Street where we are just in the process of getting back one of the stores and still negotiating to see if we can get back the other. The costs, and John chime in, Clark & Diversey is the only one that has material cost. The others are closer to just your typical re-leasing costs where then the tenants are in street retail and this is custom where the tenants are paying the majority of those costs, so the only one that – in that whole component is Clark & Diversey and even that’s not particularly material.

Great, thanks. Sure.

And our next question comes from the line of Craig Schmidt with Bank of America. Your line is now open.

Yes, thank you. On the opportunistic suburban shopping center acquisitions, how long generally do you need to get through the buy fix and sell cycle?

Short is 2 years. And usually, if it’s 2 years, it’s because we did some of the fixing and then someone else is willing to take it over from there and just offer us a price that warrants us doing that in Lincoln Road for instance. We were only halfway through lease up when it was time for us to exit. And in general, we shoot for none of the investments taking longer than, let’s say, 5 years, because that’s one cycle more or less the way we think about things and we try not to do assets that take longer than that. We have detoured periodically, but that’s not our goal.

And are you seeing the value and necessity focused tenants more interested in your street retail assets in the past or about the same?

We may end up getting to the point, Craig, where some of the traditional labels that we grew up using of value necessity versus experiential versus fashion. And some of that’s going to blur. And I think the good news is what retailers are going to recognize is that location matters, first and foremost. So when you see what we would traditionally view as necessity based, meaning food, is converging within some instances, exercise, with some instances, other components, I do think we need to be prepared to adapt for that. We are seeing continued interest from several of the newer necessity base, call that Trader Joe’s. We are seeing continued interest from value which could either be fast fashion or the T.J. Maxxes of the world. But then there is these up-and-coming retailers and don’t count them out, because Warby Parker is here to say, Bonobos and a host of others are making some very interesting value propositions to the shopper are very exciting. I am very pleased what I’m seeing lululemon do and there is a host of others. So it’s going to be about location, it’s going to be about these retailers picking the right type of store for them to present their brand where they can control their brand adequately. You are seeing Apple do it. So, I don’t think it will be as simple as saying food and drug is safe and fashion is not safe. I think it’s going to be more and more about location and being very flexible, which is our focus.

Okay, thank you.

And I am showing no further questions at this time. I would now like to turn the call back over to Ken Bernstein for closing remarks.

Great. Thank you all for listening and we look forward to speaking with you at our next quarterly call.