Good day, ladies and gentlemen, and welcome to Acadia Realty Trust’s Third Quarter of 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions]. I would now like to turn the conference over to Nishant Sheth. Please go ahead.

Good afternoon. And thank you for joining us for the third quarter 2018 Acadia Realty Trust earnings conference call. My name is Nishant Sheth, and I am a Senior Analyst in our Capital Markets department. Before we begin, please be aware that statements made during this 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 25, 2018, 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. Now, it’s my pleasure to turn over the call to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.

Thanks, Nishant. Good afternoon. As you saw in our release, we had a solid quarter where most importantly we’re seeing continued momentum in leasing fundamentals, especially in our higher barrier-to-entry street and urban assets. So today I’ll discuss some of the relevant leasing and retailing trends we are seeing and how we’ve positioned ourselves to benefit from them. Then John will drop further into our operating metrics and balance sheet spread. And finally, Amy will discuss the progress we're making in our Funds platform. In terms of our core portfolio and retail leasing environment, we’re seeing further confirmation of the separation between the haves and have-nots, both amongst retailers as well as retail real estate. As it relates to the retailers in the have category, sales growth has been significantly more robust than had been either here or forecasted as recently as year ago. We’ve seen this in retailer categories ranging from discount department stores to all-price retailers, from specialty grocers to new up-and-coming screens-to-stores retailers. We’re seeing this from tenants ranging from Target to T.J. Maxx, from Aritzia to Allbirds. What we are consistently hearing from all of these retailers is that great real estate is going to be a key component and a critical area of differentiation to their growth, especially in an omni-channel world. So if retailers in the have category can post same-store growth of 3%, 4%, 5%, in some instances even higher, it’s worth asking, what might rental growth look like in the future for locations that can drive this level of profitable growth? What we’re hearing so far from many of our retailers is that we’re thankfully passed the concern of perpetually declining sales in store profitability and we’re now heading back to the age-old battle of supply and demand. In other words, retailers…

Thank you, Ken. And good afternoon. I will spend a few minutes talking about an overview of our third quarter performance and key metrics, followed by an update on our 2018 guidance and then closing with our balance sheet. Starting with our same-store NOI, as Ken discussed, our third quarter same-store NOI was strong with results that exceeded our expectations. Our growth of 3.4% was driven by the profitable lease-up in our street portfolio along with lower-than-anticipated credit loss. During the past quarter, our leasing team has continued to make strong progress on two key objectives. First off, notwithstanding the typical summer slowdown in leasing velocity, we are now over 85% leased against our 2018 goal. As ken mentioned, we continue to see to haves showing up to fill our remaining inventory with the most recent leases executed in New York, Chicago and Washington D.C. Secondly, our team has made great progress over the past few months on blocking and tackling that is required to get our tenants open and paying rent, which they successfully accomplished on several key street locations again in New York City, Chicago, and Washington D.C. In terms of lease economics, we are continuing to execute leases at rates in line with and increasingly above our initial plan. In fact we are starting to feel an increased level of optimism about exceeding our $8 million leasing goal. We have some of our best street locations remaining in inventory, including SoHo and Madison Avenue in New York as well as a few spaces in the Gulf Coast of Chicago. As outlined in our release, we are seeing this growth continuing with an expectation of 3% to 5% for the final quarter of the year. More importantly, as we look out the next several years, we see this…

Thanks, John. Today, I’ll review the steady and important progress that we continue to make on our Fund platform’s buy-fix-sell mandate. Beginning with acquisitions, as discussed on several calls, our funds have been pursuing a barbell strategy, acquiring both high-quality value-add properties and higher yielding or other opportunistic investments. To-date we have allocated nearly 30% of Fund V’s capital commitments. So far, all the Funds investments have been higher yielding or a hybrid of the two strategies. Year-to-date, we have completed $105 million of acquisitions. This includes a previously discussed $59 million acquisition in the Sacramento MSA during the third quarter. We also have another high yield investment under contract and this acquisition would bring our total 2018 volume to approximately $150 million. Today we still have $1.1 billion of drypowder available in Fund V to deploy through the summer of 2021. Although our Fund V acquisition volume has been greater than we expected, we’re clipping a mid-teens leverage return on our existing investments which we find compelling as long as we remain selective. After all, our high yield thesis is now predicated on strong NOI growth but it does require NOI stability. As an added benefit, we’ve generally been able to buy these assets at a discount to replacement cost. In fact, we’ve acquired our Fund V investments at a weighted price per square foot of approximately $150. In comparison, to build a suburban shopping center it costs approximately $200 to $250 per square foot on average if someone gives you the land for free. Since the beginning of the year, we’ve seen material improvement in retailer interest in higher quality real estate. As previously discussed, in July Fund IV executed a lease with lululemon at 938 West North Avenue in Lincoln Park, Chicago. Lululemon has leased 26,000 square…

[Operator Instructions]. Our first question comes from Christy McElroy with Citi. Your line is now open.

John, just looking at same-store NOI growth sort of trajectory heading into 2019, I'm just trying to put all the different pieces together that you talked about in your opening remarks. Q4 you are looking at 3% to 5%. You’ve got the -- you will have the full impact of the leasing that you have done in 2018 coming on. You also talked about 100 basis points potential impact from Kmart and Mattress Firm and then another additional impact from lease expiration downtime. If I put all that together, what are we looking at in terms of sort of total impact? Are you willing to offer a glimpse into how you are thinking about growth into next year?

Sure, and we are in the middle of doing our budgeting currently as we speak locking in 2019. What I'll say is, as we look out over the next several years, the 4% still feels incredibly really good. There is some other things offsetting the points you raised there below. We have Clark and Diversey that you will see has opened this year. And every year we have lease rollover that comes and goes. So don’t have a specific number for 2019 but continue to feel that what we have done this to-date is going to be indicative of getting back to a more sense of normalcy than we experienced in past couple of quarters. So don’t have a precise number but would say that we are in -- we are set up good for '19.

Okay. And then Ken and Amy, you both made some comments about sort of being more selective on the Fund V investments. Is the issue that sort of cap rates are high enough to get your targeted levered IRR, are you just seeing sort of too much of risk in the assets there? And then I guess does the Sears filing sort of act as a catalyst to open things up and potentially add some more clarity to some of these potential investments?

Let me take the first cut at it and then Amy jump in as well. I would say we have found ourselves being selective the whole way through. So it’s not necessarily be more selective but more selective than we saw a couple of years ago when we saw cap rates back up and it looked to us as if there would be a significant amount of volume that would meet these needs. It is -- the volume has been less for a couple of reasons. Well, one is, this is a levered return play and rates have gone up some. So while cap rates have stayed in the 7.5 to 8.5 range, the levered yields have come down a bit, so we have to be cognizant of that. More significantly and to your question and point is, we have found it harder and we are having to be more selective to find stable cash flow. We don't need a lot of growth but we either need stability, meaning if we are buying a 7.5 or 8 or an 8.25 depending on the specifics of that deal, if we are levering it 2 to 1 which is what we usually do, we need to make sure that that cash flow is there or replaceable. And for reasons that would take too much time on an earnings call, but issues of co-tenancy, rent to sales, rent to market, there’s too many deals we have to pass on. That being said to your point of Kmart, Sears, one of the fact that now there is enough price transparency and retailer transparency, we’re seeing volume pickup. We have found sellers to be realistic. And it’s just a matter of calling through the relatively large volume that our team looks at and bringing up which ones have stability. So I remain optimistic about the business. It just may not be the multibillion dollar of acquisitions that we once thought.

Thank you. Our next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is now open.

First question I guess sticking with investments a little bit. Ken 2018, you mentioned, it is obviously a little bit of slower year in the Core and in the Funds business for investments. What are you seeing as the year wraps up a little bit, sort of what signpost are you looking for or what should we look for really before we start to see Acadia get a little bit more active in this environment?

Yes. And too often Todd and by the time I know it’s three days before we’re actually moving on something, so it's not as though there's months and months of advance notice. Let’s start with the Core because -- and I think most people understand that but there’s very different capital structures to our Core investment and the Funds. On the Core side, in order for us to be able to compete in the markets that we are most excited about which are the key gateway markets of D.C., New York, Boston, Chicago, San Francisco, maybe one or two others, in order for us to compete with cash buyers we have to have a currency that enables us to at least get to par, and we’re not there yet. We’re getting closer but we’re not there yet. Thankfully, or of some comfort should be the fact that sellers have not yet gotten there in any significant way. So there's not a lot of transactions that I could point to and say if we had the cash we would've done it. And in fact if it was really compelling you would have seen us do it because we do have cash in the Funds, but I’ll get to the Funds in a second. The reason that there has been a lag in these key gateway markets is rents grew too fast, they fell significantly and sellers were hesitant to mark-to-market acknowledge where rents are today. 2018 has been a turning point because there’s now enough leasing activity that sellers can get comfortable with where stabilization might look. And I actually am getting pretty bullish on the fact that 2018 very well may be a low point and now going forward, we could start seeing some growth. So with sellers more realistic…

Okay, that’s helpful. John, a couple of questions for you. The $3 million of annualized NOI from that $8 million NOI opportunity that you have talked about, you expect the $3 million to be realized in '18, the balance of it in '19 and beyond. How much of that NOI on an annualized basis was recognized during the third quarter?

It’s hard to give the precise number but I think it's coming partially throughout the year, so it wasn’t all crashing through in the quarter. So I would have to get back to you on the specific number. I would point you if you look at just as a data point, our same-store occupancy, Q3 '18 to Q3 '17, it was pretty flat. So I think some of there is -- a good portion of that is just the rental growth, $1.5 million incremental value from the $8 million we’ve leased. So it’s blended in throughout year on a lease-by-lease basis. But don't have the exact number of it on my hand.

And then the 100 basis points of potential impact of same-store NOI growth from the Mattress Firms, and Sears or Kmart, is that the impact of the same-store if you recapture all of the spaces?

No, so I think it’s -- as I mentioned in my remarks, it’s incredibly fluid and none of our Mattress Firms were on the initial 200 list that went out but as the process unwinds there's various negotiations that I have assumed a portion of that we do get back. So that is truly an estimate given that it’s still as we speak in process of navigating. So when I throw out the 100 basis points impact, that’s based off of the up to the minute information I have today.

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

When we look at the store location choices on the first wave of the emerging Internet retailers, it was clear that they had a much higher level of high street and urban locations in their location strategy. Do you know the next wave of emerging retailers shares that same perspective?

For the most part, yes, Craig. There will be exceptions and some retailers who want to have stores in every important market in the country could very likely end up in other alternatives. And you’re reading some about that and there are conversations with retailers that they will test other styles of real estate whether it’s lifestyle centers or malls. But for the most part what retailer in the digitally native or screens-to-stores category looking for is how to enhance their direct-to-consumer DTC relationship and that doesn’t mean most likely that they need to have stores everywhere. And they’ve gone from a point of view of a couple years ago where they said we never need to have a store to recognizing how important stores are. But it’s only going to be one component of how they’re going to drive growth and what these retailers have recognized is that their cost per acquisition of a customer is significantly reduced when they have a certain number of stores. So I do think and what our retailers are telling us is they want to be on M Street and Georgetown, they’re clustering with us in Lincoln Park, Chicago and Armitage Avenue, but that’s not to say in other markets where it may not be a city that there won’t be other means for them of having stores, Warby Parker, who was an early mover seems to be opening a lot of stores in a variety of cases and there’s retailers who say we only want and envision 10 to 20 stores for the next several years. Either way what they are telling us is the most profitable locations are those where there’s dense foot traffic, where there’s a high conversion rate and where there’s a halo effect that really can drive their online sales as well and that tends to cause them to want to be in the kind of locations we own.

And then just what are you hearing from let’s say the more traditional established retailers, are they opening more of their open to buys to high street urban locations or are they sticking with the previous strategies?

We may never hear the term open to buy again or not for many years, but we are looking what Target is doing, I think they’re opening another four stores in Manhattan, and their level of confidence as to their execution and their success so far is very impressive and speaks to the more dense, more urban street and mixed-use locations that we own. And so we’re excited about that. T.J. Maxx opening on our Clark and Diversey, strong veteran retailer, who’s done quite well in suburbia and is stepping up to key locations. And then in the food supermarket segments which is changing dramatically and will change dramatically over the next five or 10 years, we’re seeing similar responses from those retailers. So in general every retailer needs to, wants to, get close to, were closer to, where the consumer is, most of them are enhancing their in-store sales with some type of online connection and that seems to cause them to gravitate towards those kinds of locations.

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

Since the acquisition the market seems a little more challenging. Is there a scenario where Acadia could do capital work within the structured finance business in the near term?

We have a fairly wide mandate within our Funds business and have bought, distressed that, and other types of structured finance. What we don’t do -- so well, Vince, tell me what is your definition of structured finance?

I mean kind of the similar stuff we were doing before, maybe a little mezzanine, secured debt or just really higher-yielding debt instruments?

Absolutely. The one thing we wouldn't do is, as we are set up now, trade REIT stocks and one thing we certainly couldn't do is buy our own stock, just so that there was no confusion around that. But otherwise, within our core competency, so if the real estate is in an asset class and style that we are comfortable with, we have done a variety of transactions. A part of the group that bought Mervyns and Albertsons, both were very successful transactions in a more structured finance way and absolutely would continue to consider that.

And then can you maybe discuss trends in the financing market more broadly, both for the higher quality urban and street type assets and then the Fund -- the high yield Fund type centers?

Sure, so as LIBOR was shooting up, it certainly caused us some levels of concern on the high-yield play because a big chunk of our thesis was borrowing at, let's say, 300 to 400 basis points inside of the cap rate. If you could borrow at 4, you can buy at 7 to 8 and then if you are having to borrow closer to 5, either cap rates had to give up or spreads had to come in. In fact it was latter. So what we have seen for the most part, especially for stable cash flow is that financing spreads have tightened over the last year. There's a fair amount of debt in the markets and lenders are being fairly aggressive. As you move to higher risk or lower yield, then perhaps spreads have not tightened as much or lenders are being careful. So to be more specific I still think it’s difficult financing a secondary shopping center that has a lot of moving piece. And I'm not sure spreads really come in demonstrably out of that. And if you are buying an asset at a 3 cap to be a great location but you are going to have coverage issues. So with those two polar things aside, spreads have come-in in the financing markets, feel healthy, feel robust, I don't want to say late cycle, but everyone is actively participating in putting dollars to work.

That’s helpful color. I mean so the increase in the all-in rate resulted in a more retrade activity in your point of view?

I don’t think so, if anything what we're seeing and we welcome it. There are probably more legitimate entrants coming back into buying secondary shopping centers than a year or two ago. So I would say if people are retrading, they are doing so at their own risk of losing the deal because it's not as though there's only one bidder on deals these days.

Our next question comes from Michael Mueller with JP Morgan. Your line is now open.

My question was actually on the structured investments that was just asked and I tried to get out of the queue, so I'm good, thanks.

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

Just a couple of follow-ups here. First, back to the Kmarts, I was wondering if you could just provide a little more detail there, an update in general? I think you mentioned three in the Core portfolio so Westchester which is Crossroads and maybe you could talk a little bit more about the other two spaces and maybe discuss where rents are versus market or how you're thinking about re-tenanting opportunities and maybe capital spend on those three spaces to the extent you get them back?

Sure, so let me go first on the exciting part which is, and I think Todd I may have even been joking with you is, my fantasy is when we get this back we can do our quarterly earnings call from Crossroads in Westchester because we have been waiting a couple of decades to get this store back. When we do, the rent will double, triple, quadruple depending on who we split it for, whether we split it, what it looks like but you're talking about jogging distance from Scarsdale and while this was always one of and remains one of Kmart’s best stores, time has passed it by and we look forward to that redevelopment. We need to be prepared that this may be one of the last stores to go. We need to be prepared to be active in terms of if we have to bid for it or whatever else we have to do given the relatively short remaining lease and option terms or fairly be very confident that we are the best and highest user for that. And I look forward to seeing what Chris Conlon and his team come up with in terms of what you can do in that 100,000 square foot footprint which has a variety of uses above and beyond just ground floor retail. So that’s pretty exciting. But then, John, between now and then, we have three Kmarts and the potential exposure from that?

Yes. So Todd the other two are in our suburban portfolios. So we have Mark -- both in PA, Mark Plaza and Route 6, similar size to our Crossroads in the 100,000 square foot space in terms of rents we’ve that lined in our supplemental as well but between $2 to $5 a foot for those end markets. So working through various development plans on those. But from a total exposure on both of those remaining pieces, that’s about a penny of both of those went out. One of those, Route 6 is one that the Bankruptcy Court has affirmed. So one of those Route 6 and PA is probably going out.

Got it. And then just one more here. I wanted to maybe take another kind of Christy's question about ‘19 maybe ask in a slightly different way. But if we look through the street in urban retail portfolio, right, the high rents paying properties that you own, some of those properties, a lot of them you acquired in ‘12, ‘13, ‘14 the two North Michigan Avenue assets 664 and 840, the West Diversey assets, a bunch of the New York assets. And I believe there were some lease expirations five, six or seven years out from when a lot of those properties were acquired. Are there any expirations or sort of known move outs that you know about that maybe could impact 2019 at this point?

Yes. So in my remarks, Todd, I did point to we do have a handful of known move outs and biggest one is, we are not in a position to name names but it’s on-state in State of Washington and in Chicago that is the lease is maturing. We have a very good backfill on that. So in terms of biggest on the street, that's one that that we do have. So there will be a period of downtime as we tenant that given the size of the space, but I would say that that’s our largest.

And overall I think what you heard John saying although again, who wants to be pinned down at anything. We feel very good about this 4% trajectory over the next several years and I think 2019 falls into that category. If we choose to call it 3 to 5, so be it. And that gives us the latitude because in any given quarter there could be movement but I don’t expect to be talking about any significant departures from our current thesis as it stands right now. A couple of moving pieces is -- and John hinted that one, but we feel good about the replacements on those and we feel good about the trajectory prospectively.

Thank you. As there are no further questions in queue, I would like to turn the conference back over to Ken Bernstein for closing remarks.

Great. Thanks everyone for joining us. And we look forward to speaking with you next quarter.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may now disconnect. Have a wonderful day.