Thank you for standing by. And welcome to the Fourth Quarter 2021 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advise that today’s conference maybe recorded. [Operator Instructions] I would now like to hand the conference over to your host, Joe Rizzoli [ph]. Please go ahead.

Good afternoon. And thank you for joining us for the fourth quarter 2021 Acadia Realty Trust earnings conference call. My name is Joe Rizzoli, and I am a Property Accountant in our Accounting Department. Before we begin, please be aware that statements made during the 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, February 16, 2022 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 those non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue and we will answer as time permits. 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, Joe. Good job. Welcome, everyone. Good afternoon. We had a strong quarter and we will delve into the details in a minute, but first, a few observations. While not ignoring the impact of Omicron on our healthcare system in the lives of many, from the perspective of our portfolio performance and our business plan, we remain very much on track as evidenced by our fourth quarter results and our forecast for this year. We did not see an impact on our collections, on our tenant interest, on leasing progress or investment efforts. If anything, from a transactional perspective, it may have helped nudge certain sellers off the sidelines and we are seeing that reflected in our increasing investment volume. In terms of leasing and tenant performance, last quarter we continue to see a meaningful improvement in fundamentals after a very scary 2020, and frankly, a few years of headwinds for many of our retailers even prior to that. The reopening that began in early 2021 gained steam throughout the year. As a result, our second half NOI last year increased over 5% and it looks like this above average growth as several more years in front of us. These longer term tailwinds have several important drivers. On a macro level, our retailers’ performance, their balance sheets and business models are with few exceptions, stronger today than pre-COVID. And the recognition by our retailers of the critical importance of brick-and-mortar real estate in an omnichannel world is certainly clearer today than it has been for many years. This re-embracing of physical stores is happening faster than we expected and we are seeing this from a wider range of our retailers and formats. For instance, as it relates to Acadia and our street retail portfolio, we are seeing it from luxury…

Thanks, Ken, and good afternoon. Let me first start by addressing the 8-K that we filed last evening. As outlined in the filing, during the course of our year-end audit, actually within the past few days, we identified two fund investments, acquired about a decade ago, that were incorrectly recorded as consolidated investments rather than as equity method investments within our GAAP financial statements. In plain English, this means we need to amend our prior year GAAP financial statements to show these two fund investments on a net basis rather than gross. And in terms of its impact, while we need to fix this, the netting down of these two investments -- these two fund investments does not change any of our previously reported pro rata financial information or any individual line items within our pro rata financial statements or any of our prior operating metrics. Furthermore, this does not change any of our pro rata share of core, our fund net operating income, our net income, our FFO per share or our net worth. Rather, they simply reflect reclassifications between individual line items within our GAAP financial statements and our team is actively working through the process of updating all of our filings. We fully expect to meet the SEC reporting deadlines, enable us to access the capital markets in the ordinary course. Now, moving on to our results, we have had an incredibly active few months with our fourth quarter full year 2021 along with our 2022 guidance exceeding our expectations on all fronts. As Ken mentioned, we are continuing to see elevated demand for our space with over $13 million of executed leases to-date, representing approximately 10% of our core ABR, along with meaningful amounts of external growth in both our core and fund businesses. Starting with…

Thanks, John. Today, I’d like to provide a brief update on our fund platform, beginning with Fund V. First, deal flow remained strong. During the fourth quarter and as detailed in our press release, we completed a $70 million acquisition located in a suburb of New York City. We acquired the property at a cost of approximately $180 per square foot, which represents a substantial discount to replacement cost. The 385,000 square foot open air shopping center is anchored by a high performing ShopRite supermarket in addition to PetSmart and Best Buy. Not only was the property acquired at an attractive going in yield, but also we have an opportunity to add value to the returning of two junior anchors totaling 60,000 square feet. Looking ahead, we have $120 million of fund acquisitions in our near term pipeline. The thesis here is consistent with the properties in our existing high yield portfolio. Overall in Fund V, we have been acquiring properties in the 7th and 8ths on an unlevered basis and have been able to generate a mid-teens current return on our invested equity using two-thirds leverage. As a result of our typical five year hold, we can generate most of our total return from operating cash flow. Since 2016, we have been assembling a $1 billion portfolio of handpicked high yielding suburban shopping centers in Fund V. As previously discussed, we see a tangible opportunity for outsized performance in this fund due to cap rate compression. In fact, based on our current projections, an eventual sale of the Fund V portfolio at a blended 7% cap rate would bring our projected IRR into the low 20s and our projected multiple to a 2x on equity. While it’s still too early to declare victory, our cost basis in these assets…

Thank you. [Operator Instructions] First question comes from Floris Van Dijkum with Compass Point. Your question, please.

Great. Hey, guys. Thanks for taking my question. Ken, maybe if you could touch on -- a lot of your competitors have been talking about the compression of cap rates as growth expectations are rising? How does that relate to the streets and urban portfolio? And are we seeing -- are you seeing signs of that and how will you plan to operate or how does your investment philosophy change as a result of maybe higher growth or lower cap rates?

Sure. And obviously, they are correlative meaning, if you have better visibility as to growth, you are going in yield arguably could be less and still achieve your returns. What I would tell you is, we tend to do better when you have a more liquid market. In 2020, things were frozen. What we are seeing now is, better visibility in terms of street and urban growth rates. But folks are still fairly cautious or scared in terms of competition. So we actually think this is a unique window right now, where if we can buy assets in some of the key streets. We mentioned, we acquired a building in the corner of Soho, so to pick Soho, for instance. But it’s true for many markets. If you can buy an asset at today’s market rents, we believe that you are going to see substantially higher growth, both contractual, because street rents have higher growth and then mark-to-markets, which happen sooner just because of the bounce back, and as I mentioned, that bounce back rents could increase 50% and you are still not at the prior peaks. So we have that conviction. There are some other folks out there. So as if there’s no competition, but there’s far less than for some of the other areas that institutions are starting to pile into. We welcome the capital markets recovering the way they are, but we do think we will see with increased conviction good buying opportunities.

Great. And maybe if you could touch on the billion of, basically higher yielding suburban assets in your Fund V. And as you think about monetizing that, and I know, Amy, talked about a cap rate at 7% would basically double your equity already or roughly. But I mean, what we are hearing in the markets and what we are seeing in terms of other cap rate evidence, I mean, a 7% yield appears to be fairly conservative? How do you -- I mean, are there any near-term things that might cause you to pursue a portfolio trade or is this more likely to be split off in parcels over time?

So I am not going to predict what avenue we choose over the next year or two. But your numbers are correct and I agree with Amy’s analysis as well. Let’s start with, what was our thesis around this, and keep in mind, it’s somewhat of a barbell approach. On one hand, we like very much so the growth potential that we see in the street and urban markets. We prefer not to have gone through a global pandemic, but we already are seeing rents that are pre-pandemic levels and we see strong, strong growth rates there. The other end of the spectrum is what we have been doing in Fund V over the last several years where we were able to buy out of favor retail, not counting on much, if any NOI growth and it has lived up to our expectations. And by that, I mean, not a lot of growth, but that’s just fine when you are buying in the 7s and 8s when you are levering 2 to 1, you are clipping mid-teens returns. What do we do with that portfolio as there is recognized cap rate compression? Does it get recapitalized? Does it gets sold one-off? Well, as Amy pointed out, we still have a couple hundred million dollars, a few hundred million more of acquisitions that we have got to get done before we really have that fund fully invested. But I do feel like that thesis has been well validated, the team has done a great job executing it and we will have a lot of different choices to ponder as to the best way to maximize the value for all of our stakeholders there.

And does that lead you to raise more money in Fund VI? Is that the thought process?

Well, we will see. So if you dial back six months to 12 months ago, not only was the $72 million acquisition not done, but the next $120 million that we still have another $200 million above that and our investors at that point would say, well, what is the recovery look like? Now that volume is renormalizing, I feel as though we have a very good thesis to continue the execution on for Fund VI of what we are doing on Fund V and I will leave it at that for now.

Thanks, Ken. That’s it for me.

Sure.

Thank you. Our next question comes from Todd Thomas with KeyBanc Capital. Your question, please.

Hi. Thanks. Good afternoon. First question, Ken, so look it sounds like there is a lot more activity in the core and in the funds than you have seen in some time and so I just wanted to circle back to cap rates a bit. Can you share the going in cap rates on investments completed in both the core and in the fund since the start of the fourth quarter, I guess? And what you expect may be to achieve during the year, if there’s sort of a way to bracket pricing or provide a sense of pricing that would be helpful? And then what does the $300 million to $500 million investment assumption that’s in the guidance look like for the year between the two segments of the portfolio?

So let me touch on the last question first, so that I don’t forget it. And the answer is, I don’t know, Todd. The nice thing about the dual platforms is we can respond to opportunities as we see them, but not feel overly obligated to do something we don’t want to do. For instance, if the public markets are not open for us to acquire assets accretive to NAV, accretive to FFO, we are not going to push that, and then you probably see us be more active on the fun side. But in general, over any extended period of time is generally a nice split of about 50-50. But in any given year, it’s never 50-50. So that’s that piece of it. In terms of cap rates and you touched on this and I will try to answer it, but it’s a moving target. To state the obvious, a lot of cap rate pricing is dependent on what’s the growth rate look like, what you are levered returns look like and all of the moving pieces around that, as well as then what is the competitive bid? We tend not to be particularly impacted by what the competition is doing as much as does the pricing work. In terms of fund yields, for the assets we have been successfully acquiring and there’s an increased percentage of off-market and private sellers as opposed to during the earlier days of the retail Armageddon where we are mainly buying from public REITs. That marketplace we have been able to hold on to are going in cap rates in the 7s, perhaps, 8s. But the difference is those cap rates may be down a bit where we see more lease up, more value-add, more growth. But I don’t really care for that…

Okay. That’s really helpful. And John, the question for you on the guidance, last quarter you commented that, you thought $0.25 to $0.27 was the right range to think about from an FFO standpoint, excluding the promote income and ACI stock sale gains. You did a little better than that this quarter. Does that imply that the run rate heading into 2022 is a little higher or should we still be thinking about that $0.25% to $0.27 range to start the year, just given some of the maybe some of the move outs that you previously discussed in Soho, San Francisco, will we see that sort of step back a bit or has the range potentially changed?

Yeah. Todd, so yeah, I think the range has changed. I think for the reasons outlined in the script. So I think, so the short answer is, yes. So between where an improved credit environment, the investments that we put to work and the leasing that we have done. I think that that range certainly has improved since the $0.25 to $0.27 that I said for the first half of next year. I think this feels like the new normal.

Okay. Great. Thank you.

Our next question comes from Linda Tsai with Jefferies. Your question, please.

Yes. Hi. Ken back to your comments on rents being able to grow another 50% and not being at prior peak, but sales being well on its way to prior peak. What does this translate in terms of -- what does it translate to in terms of current occupancy ratio and what do you think the market is willing to bear in terms of a steady-state occupancy cost ratio?

So let me point out a few things, my 50% comment is factual, it’s just math, meaning rents peaked in 2017, they dropped in a very building-by-building and deal-by-deal, but they dropped significantly. We have been talking about that for five years now and so the rebound of 50% is just pure math and that doesn’t get you to the prior peaks. But sales, for those retailers that have figured out how to use these streets, and Linda, you can remember a few years ago even pre-COVID, the jury was out as to whether luxury retailers were going to continue to dominate these streets and the answer is, yes, they will. The jury was still out as to whether the Warby Parker and Allbirds of the world and the other digitally native were ever going to need stores, and yes, they will. So let me explain now occupancy cost. When you are talking about occupancy cost for luxury, it’s very different than when you are talking about occupancy cost for digitally natives or advanced contemporary, so I don’t want to give a one percentage one size fits all. But if you just intuitively do the math, occupancy cost as a percentage tend to now be 20%, 30%, 40%, 50% less than what retailers were bearing during the prior peak. Different world, different choices, but what we are sensing from retailers is they have got a lot of glide path if their topline and bottomline continues to grow, and this is before we even think about things like inflation. So what does this mean for rents? Well, there’s two things that drive our leasing team’s ability to rent space. One is rent to sales, and it’s an important one to watch, because just because a retailer wants the space that they…

Thanks for that color. And then just one more follow-up, in terms of the Century 21 at City Point at 70% backfilled by Primark. Any updates on the 30% of the space remaining?

Now, we have been seeing solid momentum at the asset, like I mentioned with 6 point coming, as well as other tenants in our pipeline. So we look forward to continuing to share updates there.

Great. Thanks.

Amy, doesn’t want to tell you what’s in our pipeline.

Thank you. Our next question comes from Ki Bin Kim with Truist. Your question, please.

Thanks. I am actually going to follow up on that last question. Can you just provide some more details or color in terms of what you are seeing in your forward leasing pipeline? Not necessarily for City Point, but I am asking more about the street and urban segment of your portfolio.

Sure. And Amy, now you are off the hook. So what has been a pleasant surprise, if you dial back to pre-COVID, there was a lot of concern and we felt like, what after three years or four years of rental declines, that retailers were ready to step up. But then COVID happened and now let’s see where we are. As a result of a combination of the cleansing process that had occurred during the Retail Armageddon, the confirmation process that had occurred as a result of omnichannel actually working. We are now in a position where, luxury retailers are stepping up and meaningfully so, and they are stepping up in ways that are different than you saw five years, 10 years ago. The luxury retailers are not simply counting on their mall-based tenancy. They are not simply counting on their department store sales. They are recognizing they need to get in front of their important customers in these key areas. And the sales are supporting this. These are not just showrooms. So expect to see, in many of the corridors we are active in and other corridors that we are not yet active in, luxury continuing to show up. That’s trend number one and our leasing team is excited by that. Trend number two is that because omnichannel has worked for so many of the digitally natives, what you are seeing today compared to two years, three years ago where some of those online retailers said, we never need to open stores, as they have been going public, as they have been growing, they are all acknowledging that the store is the most profitable channel for them. And so expect to see the Warby Parker and Allbirds of the world open up stores in these corridors. And that combination, plus everything in between is leading to a much stronger leasing environment than we certainly expected a few years ago or fear during COVID and we are in a position because we have enough vacancy to lease up, we have enough of the right spaces, we are in a position to capture that.

Got it. So how does that all translate into dollars and cents, meaning your street and urban retail portfolio is at 90% leased today at 4Q. I am not going to get as specific as what exactly embedded in your guidance for 2022, but I am just trying to figure out when does that get back to 94%, 95%?

John?

Yeah. Keeping the way I would think about it is, we put out a multiyear guidance that, we think we grow to 5% to 10%. So, rather than expecting when we RCT and what period, I would say, late 2023, 2024 timeframe is where I would model that we should be at that that level that we view with full occupancy to 94%, 95%.

Okay. And then just last question for me, in your past 2021 lease rolls, how much of high priced street retail has rolled and what does that mark-to-market look like for those group of asset and realizing that rolling kind of leases every year. So I am asking more specifically about like, if more about mark-to-market on lease roll in places like Soho versus like Flatbush, right, so more Gold Coast versus some more suburban type of locations. So the higher priced price point leases that have rolled, what has your experience been so far on mark-to-market?

Let me take a first stab at that, John. But, so let’s be clear, it really depending vintage in and vintage out. If you were talking about a 2017 lease vintage signed rolling out during COVID, oh my gosh, that would have been horrific. Thankfully, we were really careful of not buying into that 2017 peak, so we avoided the peak, and along the way, we have had our fair share of valleys, but nothing as precipitous as that would be. Rents dropped by anywhere from 20% to 50% in the different markets that you just touched on, less so on Armitage Avenue, less so on Melrose Place, but somewhere in that range. And if you were capturing that peak in valley in a Soho, boy, that would hurt. Thank goodness we avoided that. And so what we have said is we have cleansed through in Soho, for instance. We have cleansed through most of the above market and even at todays market rents without further appreciation and I expect further rental growth. Even at today’s, we have material upside through the lease-up of some of those spaces that we lost over the last few years, as well as positive mark-to-markets. So, John, what might you want to add to that?

Yeah. No. I think that explains it. Maybe give a couple of examples to make it probably cave in. So if we look at the Gold Coast in Chicago where we did have high lease rollover. So we lost Marc Jacobs on the corner of Rush and Walton, and we backfilled that properly with our existing tenant expanding that space, as well as adding Veronica Beard there at a positive spread. So I think that’s one example where we have been able to see rolls. Again, we look at Melrose similar and we talked about the spread that we saw in Melrose also a higher dollar lease. And then I think the last thing I’d point out, just Soho in general is that, we put out and I am losing track of years when put this out, but it’s still a relevant data point is that, we showed that our NOI from our sort of -- our core -- from our Soho assets doubles over between and I am going to -- I have to remember the exact timeframe, but during this period of the 2023, 2024 that I mentioned to you and we are on pace to do that. So, I think, again, there are some areas of occupancy fell up in there, but that’s also driven by rental rates as we are replacing tenants that we are at a basis that we are now exceeding that basis in rents that they were paying in that period of time. So we are seeing positive spreads and roll as we roll and our experience is supporting that.

Final point on that. Not every single store will be positive spread. In our numbers, taking into account the growth we see, are going to be wins and losses. It’s just we are now seeing far more wins than we either thought and we are seeing fewer losses.

Okay. Thank you.

Sure.

Thank you. Our next question comes from Katy McConnell with Citi. Your line is open.

Great. Thank you. Just wondering if you could walk us through your additional capital raising plans for this year to fund external growth and what are the main drivers of the higher interest expense that you are assuming for this year.

Hi, Katy. So I think the capital drivers, one is, we have raised a decent amount of equity to fund what we think is our near-term pipeline, so with $115 million that we are confident it gets us to closing what we have expected in the near-term. Additionally, and you think of the various capital sources within our business, we have some structured finance loans that that we are continually getting proceeds from. So that’s a source of capital and also a dividend payout ratio given where it’s at even with a 20% raise is enabling us to retain cash flow, as well as Amy mentioned, as we monetize some of the fund investments. That is a source of capital for us. So that’s just internal cash flow. And then we need a cost of capital on the equity side. You have seen we have issued at a $250 price and we are able to deploy accretively. So I think that’s the other piece of it. And our higher debt assumption factors in again the investments that we -- I will jumping to your second question in terms of the higher interest expense. First of all, we are hedged. So if you look at our long-term debt profile, we have long-dated interest rate swaps that are locking in our interest over a very extended period of time. But as we added the nearly $250 million worth of investments throughout 2021, that’s the biggest driver of on a go-forward basis we added -- throughout the year that’s sort of the full year impact of those investments in 2022.

Got it. That’s helpful. And then it sounds like the overall tenant health and leasing environment continues to be really strong. But just wondering within your same-store NOI guidance, what you are assuming for new bad debt expense in 2022 and are there any specific closures or watch list tenants to be aware of so far for the first quarter?

Yeah. And I think we are at a point in the cycle. Katy where our watch list is, I don’t want to say virtually non-existent, but it’s virtually non-existent. I think the weaker retailers have moved out and what we are seeing and I look at them very closely, our tenant sales are strong and growing. So what I would say, the way I would think about our -- or the way I did think about our credit reserve is that, I am assuming in our -- what I will call our low case that we stay at a 98% collection rate and a roughly 2% reserve. And our higher case is going to go back to historic norms where we have ranged between 50 basis points to 125 basis points. So that’s the way that we have modeled our 4% to 6% range, as well as the NOI range.

Great. Thank you.

Thank you. Our next question comes from Mike Mueller with JPMorgan. Your question, please.

Yeah. Hi. I guess following up on Ki Bin’s, you don’t have a lot of street expirations in 2022, but in 2023 it looks like about 20% or so rolls. Can you give us like a rough sense of bracket as to where you think that group would roll to and does anything in particular stand out during that year?

It really runs the gamut, Mike, and it’s a bit early. So I don’t have any specific numbers around it. There are some tenants that we are going to expect getting the space back and re-tenanting and then there’s others where we are in conversation right now about extending long-term. So, yeah, I -- my guess is over the next six months we will have much better visibility.

Got it. Okay. That was it. Thank you.

Sure.

Thank you. Our next question comes from Craig Schmidt with Bank of America. Your question, please.

Yes. Thank you. Just thinking about Fund VI, will you continue with the existing investor base or are you going to try to bring in some new names?

What we have found historically and it varies fund by fund, but usually there are new investors that come join in. The world evolves. The core fund investors that have been with us over the decade are the endowments and foundations, but then there’s always new folks and we welcome that. So, the first few is, we had to find profitable investments to put the money to work, because until Fund V was well on its way, hard to talk about VI. We are now at that point. And Amy and I are looking forward to starting those conversations.

And thinking about the more seasoned endowment investors, how do they react during the COVID crisis?

It ran the gamut because to some degree there are also heavy investors in tech and did quite well there. They have been supportive of us over the decades, so they know that we are watching carefully. But we were trying to communicate with them as regularly as we were communicating with all of you, because it was a scary time period when a large percentage of retailers stopped paying rent for a period of time. But thankfully, we are past that. Thankfully, our collection rates are where we want them. And retail pre-COVID, there was questions about whether retail was an investable asset class. Now, as it relates to the kind of stuff we do, the answer is, yes, it is. And so the question is, what price? What returns? What is the profile look like going forward? And we are looking forward to having that conversation.

Okay. Thanks.

Sure.

Thank you. And I am not showing any further questions in queue.

Great. Thank you all for your time. We look forward to speaking with all of you again soon.

And with that, we close our program today. Thank you for your participation. You may now disconnect. Have a wonderful day.