Good day, ladies and gentlemen, and welcome to the Q2 2019 Acadia Realty Trust Earnings Conference Call [Operator Instruction]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Destiny Nelson. Ma'am, you may begin.

Good afternoon. And thank you for joining us for the second quarter 2019 Acadia Realty Trust Earnings Conference Call. My name is Destiny Nelson, and I'm an intern in our finance department. Before we begin, please be aware that statements made during the call are not historical are may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934, and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, July 23, 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, Destiny. Great job. Good afternoon, everybody. I'd like to start with an overview of some of our longer term goals and the drivers of growth for our business, as well as then touch on how our solid second quarter results reflect on that progress in advancing those goals. Then John will discuss our quarterly results in more detail, as well as our forecast and our balance sheet metrics. Then, finally, Amy will discuss our Fund Platform and our progress on that front. As we discussed on past calls, there are few key drivers of growth for Acadia. First comes from our Core Portfolio, where there are two broad drivers of long-term net asset value growth and earnings growth. Most importantly, it comes from the internal embedded growth in our Core Portfolio, driven by lease-up of some key vacancies, contractual growth, and then a few redevelopments. And these should combine to enable us to deliver 3% to 4% annual NOI growth from our existing Core Portfolio for the foreseeable future. As John will discuss, our second quarter results are consistent with this thesis with same-store NOI growth coming in at the high-end of our internal goals and we're also making continued progress with our key redevelopments, most notably the City Center in San Francisco, where we're working through the municipal approvals for adding Whole Foods to the property, and then the leasing of our shop space is also meeting our internal estimates. Then complementing our core internal growth is the ability to periodically add properties to our Core Portfolio when the stars align. The requirements and our goals here are pretty straightforward, the acquisitions have to be accretive to net asset value as well as to our long-term earnings growth and then they need to be consistent with our focus…

Thank you, Ken, and good afternoon. As outlined in our release, we had another strong quarter. We exceeded our expectations across all areas of our key operating metrics, increased our full year earnings and same-store NOI guidance. And lastly between our Core and Fund businesses, we have nearly $400 million of transactions to-date completed or under contract. By diving into the quarter and starting with same-store NOI. As Ken discussed, our second quarter same-store NOI once again came in strong and ahead of our expectations at 4.8%. As we have previously guided, our street and urban portfolio led the way with quarterly growth in excess of 6%, coming from a combination of contractual bumps, lease-up, and mark-to-market, along with some operating and other efficiencies. Additionally, our suburban portfolio also performed nicely and ahead of our expectations, coming in at just over 2% for the quarter. We are continuing to experience better-than-expected credit loss and tenant recoveries. This contributed over 100 basis points during the past quarter. As outlined in our release, we have raised our full year same-store guidance to 3.5% to 4.5%. So as we think about the variables that could impact our same-store NOI results for the balance of 2019, a couple of thoughts. From a leasing perspective, we have already signed the vast majority of leases necessary to hit our 2019 expectations. So unlike prior years, achieving our goals aren't dependent upon getting leases signed or quite honestly even the timing of rent commencement dates. Keep in mind that as we have previously discussed, our same-store NOI metrics for the second half of the year will continue to be impacted by the profitable retenanting of H&M on State Street with Uniqlo, which we expect will commence late in the fourth quarter. Our current model has us coming…

Thanks, John. Today, I'll review the steady and important progress that we continue to make on our Fund Platforms, buy-fix-sell mandate. Beginning with acquisitions, we are pleased with our current transaction momentum. During the first half of 2019, we completed approximately $190 million of acquisitions, of which approximately $140 million were completed during the second quarter. This compares to approximately $150 million of volume for all of 2018. Since the beginning of this year, Fund V has invested approximately $175 million in four properties. All four are open-air shopping centers in non-prime markets in Utah, Florida, Rhode Island and Connecticut. We have, therefore, our high-yielding, that is entry cap rates of 8% plus. In general, we've been able to buy these higher yielding properties at a significant discount to replacement cost. Since cash flow stability is key to our strategy, we are extremely focused on co-tenancy provisions and metrics, such as rent to sales and rent to market. With leverage, these investments should deliver an attractive current return enabling the Fund to get most of its total return from cash flow. In fact, we are currently clipping an approximate mid-teens leverage return on our existing Fund V investments. And when it's time to sell, our view is that the yield starved capital markets will return to these stable assets and create an attractive exit opportunity for our finite-life Fund. In addition to these higher yielding suburban shopping centers, during the second quarter, Fund V also made a value-add investment which was derisked by some pre-leasing activity. Overall, Fund V has made fewer value-add investments than originally anticipated. Make no mistake, we have and will continue to carefully underwrite potential value-add opportunities. But while some value-add opportunities are starting to pencil, headwinds remain most significantly construction costs and full scale development…

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

I wonder if you could spend a little time on other potential opportunities where you could pursue the clustering strategy?

Sure. So simply clustering assets, Craig, on the wrong card or with the wrong tenants, I'm not sure would accomplish a lot. But there are handful of markets that we're currently active in and then there are several others that we've certainly been observing over the years. So when we think about our activity in New York, it will be where we see tenant's gravitating to. First and foremost would be Soho. There are some markets in Brooklyn that are interesting and a couple of others in New York City. But I'd say, first and foremost would be Soho. In Chicago, we like the Gold Coast, where we're active on Rush and Walton; Oak Street could also present an opportunity. And then in San Francisco, there are also two or three other markets that we're spending some time on. So it's really a matter of listening carefully to our retailers, understanding where the new emerging retailers want to show up ideally with a combination of also strong existing retailers, being able to acquire enough density of buildings, preferably contiguous, which is what we'll be doing in Soho, but at least close to each other, which was the case, at least when we started out on Armitage Avenue in Chicago. So that the retailers, the shoppers, can all work together and enjoy a vibrant shopping experience. And what we're seeing more so today, I think, than ever is that that confluence really assist so wide variety of the retailers and we want to make sure we own enough up in any given street that we're benefiting from that.

And it's my sense that the digitally native names want to be clustered, they actually want to be near the other names that are emerging?

Yes, and that's not a new concept. Retailers wanting to be around other successful retailers has been around longer than Acadia has. What is new this time is these digitally native retailers, for example, and it's not just the digitally native, but in those instances when the shopper is going to Armitage Avenue and has a choice between Allbirds and Outdoor Voices and Bonobos and UNTUCKit, and a variety of others, the sales that are generated from that street are not simply four-wall EBITDA, it's also attracting and familiarizing the customer with those brands. And then the customer can choose when and how they want to shop, when they want to accept delivery, and a variety of other instances. And that type of retailers also then attracting food, attracting fitness, and you're seeing that clustering benefit a wide variety of users and then our goal is to capture as much of that as we can. Amy discussed the new concept that Lululemon is executing on North Avenue in Chicago, where we put them in. And that's a prime example of the shoppers are there and we need to make sure that they are getting as well-rounded experience as they can.

And then just a quick question on capex. It looks like it may be trending slightly less than the year ago, is this consistent with your expectation given the second half?

So I would say that in terms of a trend, we did a bulk of the leasing, we talked about last year we had $8 million worth of leasing to accomplish, which we accomplished last year, which created a heightened CapEx burden. And, currently, as we're releasing a lot of it is -- as we highlighted in our release, street and urban, which isn't a lot of square feet. And from a cost perspective, and I laid out the cost in my remarks, was coming in around $30 a foot. So here we are seeing those costs becoming particularly with the spaces we have to lease in a much more -- a much lower level.

Thank you. And our next question comes from Christy McElroy, Citi. Your line is now open.

Ken, I appreciate all the comments that you made in the opening remarks regarding uptick in leasing you've seen in your assets. Just wanted -- hoping you can address, you've not seen a great trend in overall sentiment around street and flagship space, generally you've had Topshop filing, you've had concerns around Forever 21, and Barneys, Abercrombie closing some larger stores and others talking about occupancy costs in the larger flagships just being too high. How do you reconcile that sentiment and the negativity that's out there with regard to larger space on Fifth Avenue and other tougher locations with your portfolio and what you own and how you're buying?

So I think there are few distinctions that are worth watching. One is, there is no doubt that for larger format users, it's a more challenging time. Now whether that's due to the increase in omni-channel where retailers can do more with less, and thus there are fewer takers of large format space or other reasons, I think it will take a while to understand, but that's why we were very excited, for instance, when we announced adding Uniqlo in replacement of H&M on State Street, because it's large format and those are the ones that do concern me more. So in the instances of large format users, I think you will see continued challenges. Long-term, you have seen, in many instances, large format users retreat from some of these great corridors and alternative users show up even more profitably. So if I had predicted 10 years ago that Lord & Taylor's flagship would end up being an office use and it would have been a profitable trade, people would have thought I was crazy and now it's factual. So do keep in mind that some of this will lend to profitable alternative use. But thankfully for our portfolio, we have minimal large format and we're talking about smaller format locations. In those instances, we are seeing a net increase in demand, notwithstanding, some of the retailers you just mentioned and there the way I would divide it is, if you have a retailer who is struggling to drive their top line sales throughout the country, throughout the world. Well, there is no way to make the math work in more expensive flagship locations. If your sales are declining, it's going to be painful and you can imagine the decision-making that's going on in the boardrooms or the bankruptcy courts,…

And John just wanted to follow up on your comment regarding Bed, Bath and Pier 1 and Ascena, and recognizing the nature of your portfolio and opportunity to raise rents on recapture. If you look at that watchlist exposure, how much of that ABR is sitting in that 60% urban street versus the suburban portfolio. And Bed, Bath and Pier 1 specifically are two retailers that are actively trying to renegotiate rents lower. Are you working with either on restructuring anything and what kind of risk is coming down the price in terms of expirations for those guys?

Yes. So Christy, in terms of the 60% when -- I said that number out in my remarks, that was 60% of the rents from those names are in street and urban. So if you look at -- specifically, that's -- a good chunk of that is sitting in San Francisco and that is not a space that they are looking for rent relief on and same with Ascena on North Michigan Avenue, which is 80% of our -- Ascena exposure also has not -- have not come to us requesting rent relief.

So nothing happening on any of those spaces. And with regard to explorations, is there any risk in the next year or two, losing stores?

Of those locations, no I don't think so. And given that they haven't come to us on the others, don't anticipate a follow-up from that the next few years. And there is a decent amount of term on all those leases.

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

Ken, in terms of the investment opportunities that you're seeing in some of your existing street and urban markets like Soho and some of the other markets you mentioned that you're observing, are you seeing any larger portfolios or chunkier assets come to market? And would you contemplate a larger scale transaction, maybe a partnership or some consolidated joint venture in the Core Portfolio?

So, first of all, we have not seen any large portfolios that are attractively priced to our expectations yet. I say that with the following caveat is, there have been some very large transactions on Fifth Avenue that folks are probably pretty aware of on private, on public, and that's certainly where multi-billion dollar transactions in, combined. Could there come a point in time where we team up with sovereign wealth capital or otherwise to fund something like that? Very possibly. Right now, though, our main focus is doing more of what we're doing in Soho where we are clustering a bunch of the assets. So I don't want to rule that out, but that is not currently on our radar screen. In terms of other large portfolios, I think we're in the early stages, but we are finding that sellers are being much more realistic 2019 than they were at 2018. We are seeing just enough new data points as to where market rents are today. So if you have a seller, who is willing to be realistic about cap rates, realistic about where rents are today, then we get pretty excited because what our retailers are telling us is, at today's rents, for the right locations, for the right format size, at today's rents, they can get constructive. And the thought that we're somehow limited to 1% or 2% or even 3% market rent growth when these stars align, what we have seen on Armitage Avenue, what we're seeing elsewhere is a pretty decent bounce back. So, hopefully, there will be enough realistic sellers, hopefully the stars, as I described before, will align, because then for these right corridors we would like to buy more rather than less, but what I outlined, Todd, of doubling the size of that portfolio over the next five years, I think, would be the realistic expectation not over the next five months.

Okay. That's helpful. And then in terms of Soho, specifically, previously you've said that you're underweight Soho and it does represent less than 10% of the Core Portfolio in terms of NOI. You seem emboldened by the activity you're seeing there. How should we think about that? Can you help us size up the potential longer term opportunity in that submarket, in that context of doubling the size of the street and urban retail portfolio over the next five years? I mean, where do you think Soho should be from in terms of its waiting within the portfolio longer term?

So, I'll partially answer that question, Todd, because I don't want to put out a definitive number for one specific submarket. In the past, when I said we were underweight New York and Soho, it was because the pricing just didn't make sense. Pricing defined as what, our billing and yield was, what the perceived growth was, and what our retailers were telling us was the growth potential in terms of their rents. So we were under way, because we couldn't find good entry points. If we can find good entry points, there is no reason that New York and probably Soho wouldn't be a larger piece of our ownership than D.C. or San Francisco or Chicago. So there is fair amount of room to run within this five-year plan without getting specific as to Soho. But let me take a moment to explain the process how we think about our acquisitions. Has to be on a match-funded leverage-neutral basis, we have multiple different ways we can access capital. But I would say the most important thing is listening carefully to what our retailers are telling us. Are these stores important to them? Are they profitable? Do they have room to grow in those markets? And where do they want to show up? So we spent a fair amount of time, our leasing team but all of us, listening carefully to, where do we think our retailers want to show up. And it changes over time as we've talked even earlier on this call about some retailers who used to be hot, now they're not and they're leaving. So we're trying to listen carefully to where might the future be. So far what we're hearing is the kind of locations that we are owning that are attracting that right blend of retailers both emerging and reemerging, whether it's M Street, Georgetown, Lincoln Park, Chicago and now Soho, which is more expensive, so retailers have to get their act together before they show up, but we are bullish on Soho for that reason. But I don't want to make it sound as though we should own everything in Soho at the expense of some of these other good markets, we will have to see where the sellers are most realistic, where the tenants are most enthusiastic, and the capital markets have to make sense. And then, thus, stay tuned over the next year or two to see how the percentage has changed.

And just one last one. John, you run through some details around the non-conforming lease to sign in the quarter and also spoke about the timing of the Uniqlo commencement at State in Washington in the fourth quarter. Can you help us bring some of the leasing activity back to that $8 million NOI bucket, which you've said is now closer to $9 million plus. In terms of how much of that's signed now and how much NOI on an annualized basis from that opportunity did you realize in the quarter?

Sure, Todd. So I think just as a reminder, we had, in 2018, put out a goal of getting $8 million worth of annual NOI leased. And as we announced a few quarters ago, we accomplished that goal in 2018. So sticking with the $8 million; $3 million of that $8 million was reflected in our 2018 results and the incremental $5 million is showing up in 2018 or 2019, Todd. So to answer your question, all of the $8 million is currently commencing. So that gives us an incremental $5 million over where we said if we look at that pool of leases compared to the prior year. Then when we think about the $9 million, so we -- as we started start leasing and our expectations of where we thought would be and where rents have grown to, we had saw the $8 million growing to $9 million and then with some of the leases that both Ken and I mentioned on the call, those are well along our way to getting into the $9 million and which start to see those showing up potentially toward the end of the third quarter, but certainly by the end of the fourth quarter we'll see those in our results. The other thing I'd point out, Todd, as well, maybe the last point on this is that, if you look at where our occupancy currently is, with -- in addition to the nine that we've signed, we're at just under a physical occupancy of 94%. So we have some incremental room to grow. So it's not as if we're done is that we still have some NOI -- some occupancy that we could capture and some good spaces remaining in that, that it's not -- there is still some growth in front of us just on the occupancy level.

But the $5 million that you were expecting to show up in ' 19, how much of that is in the run rate, I guess, as of the second quarter here?

All of it. So, yes, all of the $8 million is up and running. So they have the full $8 million in '19; $3 million of the $8 million was in -- I'm sorry, the full $8 million is in '19; $3 million of the $8 million was in '18.

Okay, full amount, so an incremental $5 million before -- for the prior year.

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

Could you provide some additional color on the new development on Wisconsin Avenue? And then also help me understand why that property was included on the acquisitions page? It's all the footnote, but just any more clarity would be helpful.

Sure. It was a small ground lease addition to our partnership, so not a meaningful amount of capital being deployed. It is a good addition to that overall portfolio on M Street. We own couple dozen buildings there and this was one that was available, we want to see that the right retailer comes in.

And, Vince, what I'd highlight in terms of on the capital outlay was well under $1 million that we actually outlaid as part of that. So not a big dollar amount and several years in front of us.

And then on the -- just I saw there was -- somewhere on the Wisconsin Avenue development page, is there any more color for the $30 million in spend what you guys are going to be doing there?

And it's still in the early stages, so that's -- so not at this point.

My next one is probably for Amy. I mean how much of all-in borrowing rates change for non-recourse mortgage debt now that treasury rates were much lower than they were late last year, like have the spreads widen back out now the treasuries are lower?

So I think certainly -- and guess I'll take that. So I think on terms of all-in borrowing rates that -- I think, we're still seeing -- just given the drop in rates still meeting where we expect it to in terms of financing, so we're doing the high-yield. We are capturing that on the bottom line. But I would say that, I'm not sure the spreads have changed all that much, albeit the underlying index has. So I'm not seeing a big change in spreads.

No bulge in spreads, Vince, and then to the extent that we can reach out into the three- to seven-year range, it's a meaningful cost savings.

Do you think that's had a change in buyer appetite or just demand -- investor demand for the higher yielding assets?

Given that our volume is in fact ticking up, we have not seen a change in cap rates, meaning we've not seen cap rates move in. We have seen competition over the last few years. I don't think there is a significant increase, everyone still spooked about retail. And as long as we can be disciplined and careful about how we're underwriting through and what Amy discussed about co-tenancies and rent to sales and the other metrics, we think we can find low growth, perhaps no growth, but stable yields in the 7.5 to 8.5 range, sometimes higher if there's more risk, but not really lower and we're not seeing that compress, we're just seeing an increased volume on our side.

Thank you. And our next question comes from Michael Mueller with JP Morgan. Your line is now open.

In terms of doubling the $2 billion urban infill portfolio. Can you talk a little bit about high-level funding components between cash flow, how you think about dispositions, equity and just how we should be thinking about that over the next several years?

Sure. As we have for the past 15 of our 20 years, we've been very disciplined to make sure that we are realistically match funding and that means probably two-thirds equity, one-third debt, but recognizing that we have other avenues for capital. We touched on a little bit earlier, Michael, the potential to utilize joint venture capital, that's always a possibility, but there is enough complexity within Acadia as we all know, today that I'm not jumping up and down to add another layer of complexity. Secondly, if the public markets are not there for prudent match funding, then we do need to keep in mind that our capital recycling component of our business, primarily through our funds affords us a fair amount of capital that comes back, partially it's the equity that's return from our pro rata share in a given fund investment, but also since these fund investments are two-thirds levered, our net debt effectively has reduced as well disproportionately from any sales. So that's also a portion. But I don't want to understate the importance of one form or another of equity. I do not envision this growth being driven by us leveraging up. Historically, we have found a certain percentage of sellers are interested in OP units in the 2012 to 2014, 2015 period when we were growing street assets, about 20% of the transactions had OP units involved. So that's also a possibility, but this is a five-year goal where I simply wanted to lay out we could double the size. We could have meaningful earnings accretion, NAV accretion provided the stars align and we'll check in every year or so to see how we're doing relative to it.

Thank you. And I'm not showing any further questions, at this time. I would now like to turn the call back over to Ken Bernstein for any further remarks.

Thank you all for joining us today and enjoy the rest of your summer. And we look forward to speaking with you again in the fall.

Ladies and gentlemen, thank you for participating in today's conference. This conclude today's program and you may all disconnect. Everyone, have a wonderful day.