Good day, ladies and gentlemen. And welcome to the Q2 2017 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to turn the conference over to your host, Ms. Gabrielle Guzman. Ma'am you may begin.

Good afternoon and thank you for joining us for the second quarter 2017 Acadia Realty Trust earnings conference call. My name is Gabrielle Guzman and I am a summer intern in our acquisitions 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, July 26, 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 Web site for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. President and Chief Executive Officer, Ken Bernstein, will being today's management remarks with a market overview and discussion of the Company's core portfolio, followed by Amy Racanello, Senior Vice President of Capital Markets and Investments, who will discuss the Company's fund platform. Then Chief Financial Officer, John Gottfried will conclude today's prepared remarks with the review of the Company's earnings, operating results and balance sheet. Now, it is my pleasure to turn over the call to Ken.

Thank you, Gabby. You did a great job. Thanks for joining us this summer. Good afternoon everyone. First, I'd like to discuss some of the macro trends we’re seeing. Then I'll discuss some of the key drivers of our business, both for the next several quarters and more importantly, over the next several years. I'll then turn the call over to Amy to update our Fund investments and John, who will discuss our portfolio performance as well as our balance sheet metrics. Since the last call, we've seen the retail industry continue to work through a host of transitions as it adapts to the reality to the 21st century retailing. These transitions are playing out in a fascinating, sometimes painful but often encouraging manner. And while these shifts are causing a great deal of noise and volatility at the retailer level, so far we continue to see solid fundamentals at the real-estate level and more importantly, real potentials for future growth. Here are few observations, first in terms of real-estate operating fundamentals. We see a continuing separation between have and have not locations in an omni-channel world where retailers are doing more with less in rightsizing their fleets. Retailers are choosing to retain their highest quality locations and then setting some of their secondary locations. And while rent and occupancy costs always have been always will be an issue, as we speak with our retailers, location quality seems to consistently trump low occupancy cost. And retailers, in select instances, are also using the current market environment to upgrade the quality of their locations. A good example of this is in connection with our redevelopment of a portion of our Clark & Diversey corridor in Lincoln Park, Chicago where TJ Maxx is relocating to the second level of our newly constructed…

Thanks, Ken. Today, I will review the steady and important progress that we’ve continued to make on our Fund platforms V, VI, VII and VIII. Beginning with acquisitions, as we discussed on several calls, our funds have been pursuing a barbell strategy, acquiring both high quality value-add properties and high yield or other opportunistic investments. On the high yield front, as Ken mentioned, cap rates for solid performing centers in second tier markets have backed up 50 basis points to 150 basis points. With the more aggressive capital providers focused elsewhere, there are fewer bidders, but there is still a lot of product. From our perspective, these can be profitable finite-wise fund investments. It all depends on our entry cap rates, borrowing costs and yield sustainability. On the debt side, today, sponsorship really matters. Over the past six months for new high yield acquisitions, we have been able to borrow two-thirds of our purchase price at spreads of between 160 basis points and 225 basis points. Factoring in the cost of five year swaps, our all-in financing cost has been roughly 4%. If we can buy profitable stores in good locations at 7.5% to 8.5% cap rates and using leverage generate mid-teens current return throughout our whole period then we should. To that point, during the second quarter, Fund V acquired its first investment, Plaza Santa Fe, in New Mexico for $35 million. This 230,000 square-foot shopping center anchored by TJ Maxx, Ross and PetSmart is fully leased and consistent with our high yield thesis. Year-to-date, our fund platform has acquired or entered into contracts to acquire $115 million of properties. And looking ahead, on a leverage basis, we still have about $1.5 billion of Fund V dry power available to deploy. Turning now dispositions, in June, Fund IV in…

Great. And thank you, Amy. Good afternoon, everyone. I will first start off by reviewing our second quarter results, followed by an outlook for the balance of the year. I will then take a deeper diver into our projected five year portfolio growth that Ken discussed earlier. We had a solid quarter with FFO coming in slightly above our expectations at $0.38 per share. This represents growth of nearly 9% over the comparable prior year quarter after adjusting for our Promote, and was largely fuelled by the continued accretion of our 2016 acquisitions. As occupancy is a key driver of our earnings, as well as our other quarterly metrics, I wanted to start off by talking about how the recapture space has impacted the most recent quarter, as well as our expectations over the balance of the year. The anticipated occupancy recapture has and will continue to create downward pressure in short-term. However, as we have discussed on our prior calls, it enables us to crate meaningful long-term value as we bring these expiring leases to market and what we believe are high demand locations in our key gateway markets, New York, Chicago, San Francisco, Boston and Washington DC. Throughout the full year 2017, we anticipate recapturing approximately 170 basis points of occupancy. This translates to roughly 100,000 square-feet and an expected full year NOI impact of approximately $4 million. Through June 30th, we have recaptured approximately 75% of this occupancy, which is equated to an NOI impact of roughly $1.5 million or 40% of the total anticipated impact in the first half of this year. We are expecting our occupancy to level off around 94.5% at year end before trending back up late in 2017 and into 2018, as we bring these expiring leases to market. Based upon these…

Thank you [Operator Instructions]. Our first question comes from Todd Thomas of KeyBanc Capital. Your line is open.

Ken, I was wondering if you could shed some lighter around recent leasing activity, maybe with an emphasis in New York where vacancy and availability is still elevated. I'm just curious whether the momentum that you cited last quarter has continued with the rent showing signs of stabilization, or if you think that there could be some more downside to rents as space is absorbed?

It varies space-by-space street-by-street, so I can't give one simple answer as to the supply chain and demand for New York City, overall. What our retailers are telling us what we are seeing is for certain retailers that are going through a very difficult time, they are having to downsize and frankly doesn’t matter how good the location is, how cheap the rent is, they’re probably not going to show up until they get their act together. But counter balancing that and what we are starting to see Todd, are either new retailers, the screen to stores or other national and global retailers, who want to reinforce their brand and then a handful of our traditional retailers that are in our top 10 and 20 list who are going back and playing-offense. Retailers have always been focused on rent so to the extent that supply and demand means that there may be further reductions from where the rents were a year-ago, I don’t know it's kind of hard to gage. But the good news and what's encouraging is watching retailers upgrade their locations in SoHo; for instance, where you are going to see some movement where retailers of secondary locations and are now going to more primary; where we’re seeing other retailers enter, because they are recognizing how important these streets are. And so I do you think we are at a interesting inflection point and we’ll see how it plays out over the next several quarters.

And John, in terms of the five year plan and the growth objectives that you laid-out for 2018, specifically in terms of the 5% to 7% same-store NOI growth forecast. Where you are today? How comfortable are you in hitting that target? And how much of a cushion is baked into that 5% to 7% range for unexpected move outs that might occur?

So I think, Todd, as I talked about in my remarks, good chunk of the space we have just gotten back. So I think now we’re going to be starting our re-leasing efforts. These are in strong locations. We still feel very good about what -- and we said in the first quarter, I mentioned we've accomplished half of what we needed to accomplish already. And I think the second half of the year is really going to drive whether or not we head these, but still feel comfortable with what we've guided towards 2018.

And let me just add the obvious, Todd, which is over the next five years which is what we really care about. I think there's a lot of cushion in there. I think the quality of our portfolio, the vintage of the leases, the diversification, both geographically and in terms of tenants, means that sooner or later we are going to a recession. And I think our portfolio is well insulated from that perspective. And then the flip side is as things get better sooner or later they will and I think we're seeing signs of that. I think we have good upside potential as well. So as you think about it over five years, I'm very confident to state the obvious any given month, any given quarter, impact short term and that we'll figure out which month certain leases get signed. But our redevelopment on Russian malls and our redevelopment in Clark & Diversey are adding square footage in San Francisco and a host of other projects that we're working on. And those are pretty well based and thus they will layer in over the next one, three and only the K-Mart that Sean referenced is kind of out there into year five.

And just then lastly, just shifting over to City Point, you moved that asset into operations this quarter. I see about $8.9 million of annualized base rent. What's the corresponding cost basis or I guess the expected total cost of that project relative to that base rent? And what kind of NOI margin is reasonable to assume for an asset like City Point so we can just start to maybe better understand the yield and yield potential of the asset?

Amy, why don't you shed some light on all of that?

So the cost would be similar to what we reported last quarter in terms of total project costs, that that rent that's in the schedule is only a portion of the rent and it's also the portion associated with our anchors on the upper level. City Point is interesting project where we've talked about on several calls, the street level of that project is disproportionately important in terms of overall base rent about 60% of the overall NOI will end up coming from the street level. So I wouldn't simply prorate that rent compared to the occupancy rate. And as we execute on some of these street level leases that I mentioned in the prepared remarks, we’ll continue to provide further updates.

How much of the annualized base rent that we see today is from street level tenants?

I believe none of it is.

Thank you. Our next question comes from Christine McElroy of Citi. Your line is open.

So Ken, just following up on your Amazon Whole Foods comment, you talked about grocers needing to step up their game. Can you maybe provide a little bit more color on what you think that means from a real estate perspective? And you said weather is concern it should play out over a number of years. Where do you see the greatest areas of concern? I found it interesting that John you were emphasizing the minimal exposure to traditional grocer anchored centers. So I just wanted to get a little bit more color on your thoughts?

We like grocery anchored centers and we have always have them as part of our mix, both in our core and in our fund. What we never particularly like and part of that is being here in the North East. There’s some segments of the countries that had been particularly Darwinian to supermarkets. And so we learned firsthand over the last 25 years that when you had a, what seems like driving Grand Union and then you had a, what was they can Grand Union is that the value differential and the risks were somewhat asymmetrical to the downside. So for those of us who have experienced that, you need to recognize and if you spend time talking to the retailers themselves and I spend a lot of time talking to a lot of very strong great grocers out there who have been keenly focused on the competitive nature. First, it was against Walmart, which was viewed as an existential go broke glass risk and now there are others as well. They have to up their game in a very difficult environment or go away. And so we, as landlords, needs to recognize that means that in some markets where there was room for three or four grocers, where there is room for AMP, Pathmark, grand union as well as ShopRite and Stop & Shop once upon a time, now there may be fewer. And that’s fine if you own the right real estate then you can repurpose that, because the square footage that once was a driving supermarket is now half the size and then things reverse. So Trader Joe’s, interestingly, is now as important a co-tenant to many of our junior anchors as the traditional supermarket. And multiple anchors give us a lot more flexibility than just having…

My second question is just with regards to street retail, you talked about Manhattan. But you also have some exposures on Greenwich Avenue and Main Street and West Port. It seems like there has been some retailers closing stores in the market, just from a street perspective. Wondering if you could give us a sense for what's going on there and how retailers are viewing flagships in these types of suburban street retail market?

Yes, it's interesting and it’s evolving. Many of the traditional retailers that have or certainly on the apparel side that has found themselves going through a tough transition, then they need to make hard decisions whether it’s on Greenwich Avenue, Westport, North Michigan Avenue, or in malls or elsewhere. The good news is a bunch of retailers are recognizing they need to right-size their fleet, get their act together and then they will be able to protect those key assets. Others are just going away. So some of the closures you're seeing are retailers that are just meaningfully shrinking their fleet or going away. Good news is overtime and we're seeing this first in some of the more hip areas that's not to say Westport's not hip, but Hallstead Armitage where we have Warby Parker, we have Benobo's, we're close to signing another lease with a formerly online only. Retailers are stepping up, they're stepping up at fair rents and they're creating a level of excitement. And they're recognizing that these key streets are a way to connect with their shopper to get their brand out there. There's every reason to expect you'll see that transition, you'll see that evolution in some of these other markets Greenwich Avenue, Westport, as well as elsewhere in the country.

Thank you [Operator Instructions]. Our next question comes from Craig Schmidt of Bank of America. Your line is open.

Thank you. I expect that you're seeing a lot of potential product in the high yield of some section of your barbell. I just wondered if you could touch on what are some of the key characteristics you use to screen out the less worthy candidates.

So what we are doing, and I think it makes sense in what you're seeing as a trend towards. In many instances, its public companies or other holders who are no longer desirous of lower growth but stable assets in their ownership. And so where we can buy and it may have zero same store NOI growth for the next five years, it may have no positive lease spreads. But where we can buy it at an attractive yield what we’re screening for then Craig is, okay, we get that there's no growth, what's the downside look like. And for that, we look at rent to sales ratios, we look at rent to market, we look at supply within a given market. And if we can acquire those assets at a sufficient discount to replacement cost such that we have a competitive advantage over a theoretical new development, but more often than not new development is not a risk; where those tenants are currently profitable; where those tenants and those locations feel as though they're buyable. And then it comes down to co-tenancy, and I’ll get to that in a second. But then we can look at a cash flow stream, we can finance it 2:1, make our mid-teens returns, make total sense for these perhaps not to be in the public market. So I get why and it should be privatized but using fund level leverage for finite ownership that makes sense. Back to co-tenancy, we did screening issue we’re dealing with is notwithstanding everything I said. It is fair to expect a certain number of box retailers to be disintermediated over the next five years. And so it will be naïve of us to think just because the rent to market is good that we’re not in a loose certain retailers who may go away, hard to predict win. But what we need to know is when we look at a given shopping center, if one of the boxes was to go away, what does it do to the balance of the center. If the co-tenancy provision is finite, meaning for the period of time that retailer start certain tenants have a choice of paying partial rents or leaving, but it's a finite period of time we can deal with that we can underwrite that. Where we’re running into trouble is if it's a more permanent impairment on the asset and that's the main key stream that's going through that keeping deal flow a little bit lower than we'd like, but there is enough assets out there that I think things will start to ramp-up. So between rent to sales, rent to market, price relative to replacement cost and then co-tenancy provisions that cover the big chunk of it.

And then maybe just whether or not you’re your active or less active on the core and acquisitions. What is that dependent on is that dependent on price or something else?

The stars have to align. It's relatively straight forward and that's good news and it doesn’t require meaning to see around corners and we like to make it sound perhaps more of that than it is. We have a great portfolio, and as John articulated, we expect 4% growth from it. If we see another asset, whether it's on Price Street in SoHo, M-Street in George Town, North Michigan Avenue, Newbury Street, we have a lot of data on rents, growth, potential and as well what is our implied ownership cost. If adding another asset on M-Street is accretive to NAV based on our current stock price then it's incumbent on us, provided that we like that asset. It's incumbent on us to add it. If it's not accretive, either because the seller wants too much money or the stock market is not there, boy it's really hard to pound the table for adding assets that are dilutive to net asset value. We haven’t had to do it, partially because we have the fund platform is a release spell for that kind of animal sprit, but also because our goal is to create long-term net asset value. And the only way I can see how we do that is add assets that are accretive to it. So that's the thought process. What we have found, as I said over the last five years, there is plenty times where it doesn’t make sense and you shutdown the match funding mechanism, the stars that don’t align and then there is more often than not the stars do. And as long as we stay disciplined, we can create that value.

And then I just have a quick question for John. What’s your expectation for the annual interest income?

So I said, it's going to be, the annual will be -- for remaining quarters, it'll be $4.5 million to $5 million.

So between the two quarters...

Yes, between third quarter and fourth quarter, between $4.5 million and $5 million.

Thank you. Our next question comes from Vince Tibone of Green Street Advisors. Your line is open.

You mentioned lenders have become more cautious. Can you elaborate on the secure financing environment, especially for higher yielding assets? And then what are the key qualitative criteria lenders look at to determine whether an asset is financeable or not?

So I think and Amy mentioned this and sponsorship really matters. So I think that we have a deep pool of lenders that when we have -- again that go through the multiple screens that Ken just talked through that there's a big roaster of lenders that are willing to put out money to given our sponsorship. The caution is going to come around is it's going to be in terms of the length of the lease. So they’re going to look at what are -- how much duration is left on an individual lease, who are the tenants, et cetera. We're seeing some of the buyers having less ability to -- some of our competition, less ability to give, they able to get that financing that we're able to give it to. So we do -- just conversations we have with lenders, there's a tone of others still willing to lend. There's a tone of caution that the credit committees are asking more questions just generally about the retail and the strength of s tenant. But we have -- that's been -- that's what’s made the strategy for us make sense is our ability to have a strong lending pool that has come through on. What is just the select assets that we've been able to find to fit this model.

And then one more on bidding Ken, you indicated that traditional buyers have been sidelined. Is that due to the sponsorship aspect you touched on, or do you think institutional demand for retail is just weaker than it has many or three, six months ago?

It's a combination. So first of all, on the public side, the traditional bidders would include a number of REITs that are not particularly active right now in those assets. Then in private REIT world, there's a couple private lease ramping up, but they've not been particularly active and then some of the previous household names have been sidelined. So you're not seeing a lot on the private REIT side. And then in general as much as we all would like to ignore the headlines, no one likes to go into investment committee, whether you're public or private, a lender or an equity investor on the same day the CNBC is doing a piece on retail Armageddon or retail apocalypse, et cetera, it bleeds through and creates a tone of caution that has caused people to be perhaps more conservative than I think is appropriate. But we'll see how that plays out.

Thank you. Our next question comes from Floris van Dijkum of Boenning. Your line is open.

Good afternoon. This is Lizzie Li calling in for Floris. Thank you so much for the time today. Amy, you mentioned that the cap rates for solid performance secondary market properties have backed up 50 to 100 basis points. Could you just share some observations on the bid/ask spread that you've been seeing for the properties that you're looking to buy, especially for Fund V?

Sure. And let me chime in first. Unlike for high quality core for the reasons that I was just mentioning about a host of the traditional bidder who brokers were going through over the last couple of years. What the brokerage community has told us is a bunch of those traditional bidders aren’t showing up. And as a result, those seven caps now are looking more like 7.5 to 8.5 thus the 50 to 150 basis points. For some sellers and I totally get this, they’re saying, you know what, I'm just not in the sale. For others who are and I get it as well, making the decision that they want to upgrade the quality of their portfolio, upgrade the metrics, if they’re public and we all live by a series of metrics, some are very good and others less so. But we live by them and if they want to shed assets based on a host of those factors, they’re sellers, they can afford to be sellers and they will sell at where the market is clears. The benefit we have then is for those assets that are going to clear to the highest bidders, we have certainty of execution. Our deals are not conditioned on financing and we have the money in our funds. We're at some of the entrepreneur who historically would show up, can't put that financing together and if you decided you want to sell and you want to get out and you’re tired of the retail Armageddon headlines then now it’s a good time to transact. And so that’s the evolution that’s playing out. Where this goes from here, we shall see.

And then follow up, if I may. You guys have mentioned that a temporary occupancy dip due to space recapture. Where do you see some additional vacancy in the portfolio could come from and what expectations would you have for those leasing spreads?

So I think as we said on the call, we're expecting in aggregate roughly 170 basis point of occupancy, occupancy lots, which were about in terms of just aggregate space 75% of the way through that. So I think a good chunk of it we've already experienced. So I think in terms of where we look at it going forward not a option, although from an NOI impact, it is a bit disproportional give we capture a bunch that late in the second quarter. In terms of spreads, we're not ready to publish what those will be given we’re just in the market on the space. But as I talked about before, we expect to profitability release these as we bring on the market.

And the only thing I would add to that, as John mentioned in our five year forecast, we assume somewhere in the next five years we get back our below market K-Mart. In Westchester, that would impact if we were fortunate enough to get it back next week, it would impact this year's occupancy disproportionately, and I’ll be celebrating if that happens.

Thank you. I'm showing no further question, at this time. I would like to turn the call back over to Ken Bernstein for any closing remarks.

Thank you all for joining in today. Please enjoy your summer, and we’ll speak to you soon.