Good day, ladies and gentlemen, and welcome to the Acadia Trust Q1 2019 Earnings Conference Call. At this time all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Angie Cho. You may begin.

Good afternoon, and thank you for joining us for the First Quarter 2019 Acadia Realty Trust Earnings Conference Call. My name is Angie Cho, and I'm an analyst in our development 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 included, 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, April 25, 2019, 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 is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.

Thanks, Angie. Good afternoon. I'm going to start with a brief overview of some of the trends we're seeing and the drivers of our business, then John will discuss our first quarter results and our forecast. In terms of the broader economy, over the past several months, we've seen a pivoting from a year ago, when we were pondering global synchronized growth and rising interest rates and now more recently where we've seen a deceleration of global growth and a pausing by the Fed. The current economic environment in the U.S. sets up pretty favorably for portfolios like ours. But during these periods of transition, we find it worthwhile to look a bit more closely at our retailers performance and their prospective activities for them and any signs of an economic slowdown. As John will discuss further, so far based on our default rates, our credit loss, our new lease activity, we don't see signs of retailers pulling back due to any recent shifts in the economy. So, if there is a looming recession, it's not yet showing up in our retailer activity. It's also important to keep in mind, irrespective of the state of the current economy, retailing and retail real estate is still working through a multiyear highly disrupted evolution. And this evolution will likely play out with only the slightest correlation to the economy, meaning weak retailers are going to continue to go away irrespective of how strong the consumer is feeling. And strong retailers, especially those with strong locations and omnichannel platforms, well, they're likely to even get stronger even if the economy cools. This separation of the haves and have-nots both in retailers and retail real estate, it's accelerating. And we're seeing it reflected in the strong performance of our Core portfolio, especially our street…

Thank you, Ken, and good afternoon, everyone. I will start off with an overview of our first quarter performance and an update on our 2019 guidance, and then closing with our balance sheet and the financial impact of our most recent Core acquisitions. Starting with same-store NOI, as Ken discussed, our first quarter same-store NOI came in strong and ahead of our expectations at 4.6%. This strength was driven by contractual rental growth, along with better-than-expected credit loss and our quarterly results included roughly 100 basis points from the profitable net lease-up that we accomplished in 2018. While we are very encouraged by the strong quarterly results, it's a bit too premature in the year to reduce our budget in credit loss and thus, are holding our annual same-store guidance at 3% to 4% growth. However, should this positive credit loss trend continue throughout the year, we'd expect to land at the higher end of our range. And conversely, if the economy would just slow further, we believe that our portfolio is very well positioned. We have a nice balance of recession-resistant retailers, including Target, Whole Foods, Trader Joe's, T.J. Maxx, along with others that make a significant portion of our portfolio. Now drilling into our growth a bit further. As we have highlighted on our past call, our street and urban portfolio was projected to significantly outperform our suburban assets in the upcoming year. And in fact during the first quarter, we saw this play out. With our street and urban portfolio outperforming our suburban by approximately 400 basis points and we continue to see this trend continuing as we look forward over the several years. Additionally, as we have previously highlighted, our NOI is split roughly 50-50 between our suburban and street and urban portfolio where the much…

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

Hey good afternoon everyone. John, just a follow-up on your comments on the SoHo deal. Are you able to provide that going-in-cap rate? And maybe you can sort of speak more philosophically about the decision to start buying here. You've been pretty quiet on that front for a while in the Core. And is this sort of – should we be thinking about this as more one-off or is there more things that you're looking at doing here?

Why don't I take a crack at that, Christy? We are not going to lay out the specific going-in-cap rates. But I think, John was pretty clear that the bar is pretty high and that if our internal growth is 3% to 4%, we threw a variety of in-place cash flow, lease-up of vacancy or other items, we're going to need to be in excess of that. And we are going to need transactions that are also accretive to our current cap rates, NAV, et cetera. You could probably back into, but it's going to vary building by building. The first $100 million is in SoHo and whether this is a one-off transaction is dependent on the stars aligning. We need to have a cost of capital that enables us to be competitive with cash buyers. And as I mentioned in my prepared remarks, there are far fewer cash buyers out there, but there is still enough that if we do not have a cost of capital that makes sense, then this will be one-off. And then the second piece is, we need to continue to see in a bumpy road, the enthusiasm from our retailers to come to these markets, such that we can believe and so far we're seeing that, that there's going to be a nice bounce back in terms of market rents. The amount that market rents have fallen over the last couple of years, we've all been watching, it has been significant. So thankfully, we're seeing new tenants showing up and they're providing enough support on certain streets at the right rents for us to get bullish as we are on this first portfolio.

Okay. Thanks. And then just understanding that the H&M closure within the quarter and that the quarter end commence occupancy is reflecting that. Could you maybe tell us how much NOI flow through Q1 that won't be recurring in Q2? And sort of how does that play into the trajectory of same-store growth into Q2 and sort of the rest of the year?

Yes. Good, Christy. So I think we had, as we had talked about, got back H&M and right at the end of the quarter, so a good chunk of the quarter reflected the NOI from the H&M lease. As I said in my remarks, we intend to give that space to Uniqlo in the next couple of weeks, and they should be rent paying in the fourth quarter. Don't want to give specifics as to the exact NOI from H&M, but it's 28,000 square feet and you should assume the majority of the quarter reflected that. Other big movements of some of the leases I had talked about the Madison Avenue lease that we signed. We think that one will be rent paying by mid second quarter. During the quarter, we also, and Ken mentioned, in Lincoln Park and Armitage, which is completely sold out. Outdoor Voices started this quarter as well as Allbirds and the two additional leases we signed that fill up the block should start in the second and third quarter. So in terms of quarterly same-store NOI, what I would tell you is, as I mentioned, we feel very good about the 3% to 4% for the year. But on a quarterly basis, while I certainly have a view and we have models, there's so many variables that could move around, I think, really don't want to get into projecting specific percentage quarters, but rather looking at the annual basis in the 3% to 4% that we feel very strong about.

Okay thank you.

And our next question will come from the line of Todd Thomas of KeyBanc Capital market. Your line is now open. Todd Thomas of KeyBanc Capital market Just Ken, first question. Back to the investment in the Core, the SoHo collection. So the first two properties were leased as indicated. Can you just describe a little bit more about those, the portfolio itself? How much term is left on those leases and can you describe the tendency for the other 4 assets in that collection?

It is a variety of tenancies. Many or most of them are tenants that we're very familiar with. In one or two instances, there will be lease-up opportunities, meaning either the lease term is very short or we're in the process of working on that lease-up. I don't want to give more detail because there's moving pieces around it. But you should expect on Greene Street, on Mercer, the kind of tenants that you're seeing showing up, whether it's retailers we're working with in Lincoln Park, Chicago or down in D.C. or elsewhere. Thankfully, there are a bunch of retailers who are recognizing they need to have these key locations and that they especially want them where they can drive their brand. And as I mentioned in the prepared remarks, a gain from a halo effect, and so we're very encouraged by what we're seeing. And as we close them, as we announce who the tenants are then we'll certainly give you more color on that.

Okay. And then the investment opportunities that you're beginning to see surface for the Core portfolio. Are they primarily in SoHo or in Manhattan or are you seeing some of these opportunities begin to surface a little bit more broadly? And are there any new markets that you're looking to enter as you begin shifting to offense for the Core?

So, from a retailer perspective, when we sit with our retailers, whether they are these new, young brands or Target and Trader Joe's, and T.J. Maxx, we're hearing a pretty consistent statement that here are the key markets we want to be in and thankfully those are primarily the key markets we're involved with. D.C., New York, Boston, Chicago, San Francisco. You can add other markets to that list. L.A. would be one of them, for instance. But we've always been pretty clear that at least as we're starting to go back on offense, we're much more inclined to avoid paying what we've referred to as the dumb tax of getting into a new market and we should be able to be better informed, more confident and better execute in those markets that we're active in day in, day out. So within that, the market that I think has gotten beaten up the most is New York City for a variety of reasons, partially because rents grew too fast in New York more so than elsewhere. But from a tenant's perspective, I'd say the enthusiasm we're seeing in Chicago is very re-enforcing. The good news is we have a very meaningful portfolio in Chicago, so I'd rather see it grow in New York, D.C., couple of the markets first. But these are all markets that our retailers are saying this is where they're going to be. Watch Target's activity, watch lululemon's activities, watch Whole Foods and the list goes on.

Okay. And then just one last question, just shifting over to the City Point. Just wondering if you could give us an update there on the status of the ground floor leasing, the shops are still just a bit over 20% leased and the ABR for the asset fell a little under $9 million. Just wondering when you think the environment will be right to begin signing permanent lease deals there for the shops, and I see that you have the projected stabilization date to be 2020, just looking for an update there.

Yes. And the ground floor leasing has taken longer than we had hoped, than we thought. For the most part, thankfully, we did not sign leases with the wrong retailers. So we haven't had to go through that. And thankfully, Alamo Drafthouse is crushing it, we're expanding there. And Target is doing very, very well. Our food hall, Trader Joe's, et cetera, all of the Core building blocks are doing exactly what we want. And we're now, I think, very, very close measured as quarters of getting those right tenants in McNally Jackson, which is a SoHo-based experiential bookstore is opening. There is two or three others that, I think, we're close to announcing. We want to be deferential to our retailers and let them announce first, but it's feeling closer now than it ever have. And the key for us is not rush it, but to get it right. Thankfully, the core building blocks are coming into place. And then let's not ignore the fact that it is still more of a construction zone for longer than I wanted, but with -- for at least a short period of time the tallest residential tower in Brooklyn, I know it's just been topped off. That's our Phase 3. Then right next door to it, you may have read Stern just got financing for what will then be the largest tower in Brooklyn. It's the population growth, the shifts that are going on there are pretty exciting. And so we want to make sure as we're bringing in ground floor retailers, that they are the right ones to capture all of this change, but it is taking longer than we wanted from that perspective.

Or do you think you're still on track for the stabilization in 2020?

I hope so. I hope so. We'll know a lot more over the next quarter or two.

Okay, thank you.

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

Ken, I wondered what your read is for urban street transaction market following the QIA sovereign wealth fund and crown acquisitions, acquisitions of Manhattan retail real estate?

So, we spent a fair amount of time talking to the different institutions. Hopefully, we spent more time talking to our retailers, but certainly fair amount of time. Few things that we have heard is again for global investors owning great real estate in key gateway markets is where they are focused, for me. Then within that, when you say, Well, how about retail? The response has been a few things. One, retail requires a level of expertise that we need to be very careful about. And I like to hear that because again we don't want to see this space overcrowded by amateurs and there are a handful of very talented groups out there. We think we're one of them, that institutional capital should follow into what is complicated street and urban retail. But compared to any other type of retail, that is where they seem to voice the highest level of enthusiasm, and you're seeing transactions that would indicate that. And then the other thing that, I think, is good news is we're starting to hear, I hope it's true, that maybe the public markets are a great way for institutions to get this kind of exposure. So compared to a year or two ago, where they were just running away, we are seeing institutions saying, We want and need exposure to these great markets. We need to do it through great manager operators and we're looking at it, a variety of different ways. But I would expect to see more capital heading in. It's still a bit early. The institutions generally move a little bit slower, but we're starting to see that ramp up.

Great. And then just thinking about acquisitions beyond the $130 million in Fund V. Is that equally balanced between the high yielding and the value add as well?

It's still tending more towards the high yielding side. And to be clear, we really enjoy doing the value-add deals when we can get them done on time, on budget and get them leased up, but construction costs continue to concern me and timing is very important. So we're starting to see some redevelopments. Teams working hard on seeing if we can make them pencil out. But in the interim, where we can buy yields between 7.5 and 8.5, we're having to be more selective than I initially thought, but we are seeing enough deal flow on that side that 2/3 of what I anticipate to be our total pipeline for the year, probably will be more on this high yield, where we are levering two to one interest rates are very favorable. We are clipping a low to mid-teens depending on the growth profile going in, and we can get the majority of our return out of cash flow. So that still seems to make sense as long as we're being careful about it, but if a couple of these redevelopment opportunities hit, those will be really exciting.

Okay thank you.

[Operator Instructions] And our next question will come from the line of Vince Tibone with Green Street Advisors. Your line is now open.

Would you consider selling assets in the suburban portfolio if there were additional street retail opportunities? And I'm just curious how that would rank as a funding source relative to additional debt or equity?

Yes, so the short answer is yes. But let me add a little more color into this. As we've said, while it's about 50% of our NOI, it's probably only 30% of our NAV, the suburban portion of our portfolio. And all of it is within our core competencies, meaning the team at Acadia, what we have done over the last several decades has included everything on the suburban side through the street and urban. But just because it's part of our core competencies, doesn't mean it needs to be part of our Core portfolio. And within that, I would say about half of our suburban -- existing suburban Core portfolio blends in very nicely. Seeing retailers, whether it's T.J. Maxx our Target, seeing style of real estate higher barrier to entry with some growth, albeit not as much as street and urban. And then the other half are assets that we either need to fix and then should sell or as soon as the market reloads, we should sell. It's been pretty clear based on what we're buying in our funds that prices have gapped out on that suburban side. As John pointed out from a balance sheet perspective, we don't need the cash, we don't need to do it. But one way or another, either as the markets get stronger or if we see compelling opportunities on the street and urban side, if you cut our suburban portfolio in half and think about that half, those will be assets opportunistically, we would dispose them.

That make sense. I mean is there any concern about the potential earnings dilution or the – just trying to get a sense of how much potentially these sales could be, if it's half the assets or maybe not long-term holds, how are you kind of weighing those different considerations?

The answer is, I wouldn't and I don't think anyone needs to be concerned about the earnings dilution in the near term because there is nothing that is requiring us to move on these nor do I think the timing is right. The earnings accretion from a host of our other businesses should more than offset what we might do in the normal course of business on that side. So this is not – this is – and then from my perspective, I'm going to do what makes the most sense from an NAV and a overall shareholder growth perspective. So there could be some quarter over the next 1, 3, 5 years, where there is some short-term, what I refer to as positive event dilution, but I don't think you need to take your pencils out and start factoring that in.

That's really helpful. One more for me. I mean you mentioned some about capital interest, but can you just talk specifically, do you think there's been any cap rate movements on the street retail side this year? Everything has been pretty sticky, now it seems like people – more people are agreeing on what market rent should be.

Yes, so -- and I think what you're getting at is correct. When rents were dropping, 5%, 10%, 15%, 20%, either per year or per month, depending on who you were talking to, it was less about the cap rates. And when interest rates, when the 10-year treasury, when risk-free returns felt like they were shooting up, it was also hard to really find a balance cap rate. Now that I think a lot of people are getting more comfortable that the pendulum is swinging, you should expect cap rates for these highly liquid gateway markets to remain relatively low. But they're at least being rational. We are finding sellers being rational on that side. And then the question is it's more about rents. If you have sellers who are fixated on rents two to three years ago as being market, well, then there's not much to talk about almost irrespective of cap rates. But now we're seeing enough sellers saying, I get it, I now see enough new leases. I recognize where the market is. Retailers are telling us that if they can get in at these rents, these are really powerful locations for them, and you start seeing more and more of them show up. And then I do think you will start to see attractive, but gateway-like going in yields with superior growth because this is how our retailers are going to make money in the future. So you put it all together. And you're absolutely right, it's less about just the cap rate than cap rates/rent/growth and demand.

Thank you. That’s all I have.

And our next question will come from the line of Michael Mueller with JPMorgan. Your line is now open.

I tried to get out of the queue, the prior question on the suburban portfolio is what I was going to ask, so I'm good.

Great, thanks.

Thank you. And I'm showing no further questions in the queue. So now, I'll hand the conference back over to Kenneth Bernstein for any closing comments or remarks.

Great. Thank you all for joining us today. Today is bring your kids to work day. So I'm going to head into the other conference room and see what a bunch of great school kids are working on in terms of the shopping centers of the future. Look forward to seeing you all again soon.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody, have a wonderful day.