Good day, and thank you for standing by. Welcome to the Q2 2023 Acadia Realty Trust Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mackenzie Teper. Please go ahead.

Good morning, and thank you for joining us for the second quarter 2023 Acadia Realty Trust Earnings Conference Call. My name is Mackenzie Teper, and I am an Intern in our Marketing 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, August 2, 2023, 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. Once the call becomes open for questions, we ask that you limit your 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.

Thank you. Great job, Mackenzie. Thank you to you and all of the summer interns. It's been a pleasure to work with all of you. Welcome, everyone. I'll give a few comments, then I'm going to turn the call over to Stuart and then to John. As you can see in our earnings release, we had another solid quarter. Same-property NOI growth was a strong 5%, and our earnings were ahead of forecast as well. And this is not just one good quarter in isolation. For more than two years now, our same-property NOI growth has averaged just under 7%, and we've raised our earnings forecast 6x. And notwithstanding the most anticipated recession in my career and the fact that retailer quarter-over-quarter performance has been choppy, retailers are continuing to look past any short-term shifts in consumer demand and are continuing to pursue key locations. On our last couple of earnings calls, I discussed the likely drivers of this continued growth. And while I run the risk of this feeling like Groundhog Day, let me briefly reinforce a few key drivers. In terms of macro trends. First of all, the threat of the retail Armageddon has passed. While online retailing is here to stay, retailers recognize that physical stores are their most profitable channel in an omnichannel world. Second, tenant demand, especially in our key corridors is quickly outpacing existing supply and retailers are stepping up to secure these must-have locations, whether it's brands establishing their own stores or luxury retailers continuing to double down on key streets, the demand is there and the rental growth is following. Then more micro or specific to our portfolio, the combination of increased tenant demand coupled with several hundred basis points of potential occupancy gain in our Street portfolio positions us for several…

Thank you, Ken. I will spend a few minutes addressing the narrative and press reports suggesting that a new hybrid work paradigm is impacting street retail. There is a view held by some that there must be headwinds for urban retail in places like SoHo in New York or Melrose Place in L.A., since these cities are experiencing weak office attendance or changing commuting trends. Such views gain momentum with reports and articles linking the stalled return to office and hybrid work with negative implications for all urban retail without specifics. These reports generally conflate amenity-oriented retail located in office dense submarkets, which are dependent on office workers and commuters with dynamic retail corridors, which have completely different traffic drivers. Office attendance is just not relevant for the vast majority of our portfolio. Under 5% of our annual base rent is from tenants, which we believe are office worker dependent. Now the data does show that as a result of hybrid work, foot traffic is still significantly below pre-pandemic levels in office-oriented central business districts, such as Midtown Manhattan. At the same time, what we see in our key retail corridors is that, one, foot traffic is virtually unchanged; and 2, tenant demand and rents are stronger than pre-COVID. We are seeing diminished availability, and we are benefiting from multiple tenants competing for spaces. We have a highly differentiated street portfolio in key high-growth corridors such as SoHo and Williamsburg in New York City, Armitage and Rush & Walton in Chicago, Greenwich Ave and Westport in Connecticut, Georgetown in D.C. and Melrose in L.A. We have examined statistics, which are segmented by submarkets. For example, we looked at foot traffic data in four New York City submarkets, Midtown, the Financial District, SoHo, and Williamsburg. Year-to-date compared to the same month…

Thanks, Stuart and good morning. We had another outstanding quarter with each of our key operating metrics exceeding our expectations, resulting in another strong beat for the quarter and raising our full year earnings guidance. This call marks the seventh anniversary that I've been fortunate enough to sit in the seat, and I can say without hesitation and by a long shot that this is the strongest leasing environment I've experienced during my tenure. The demand for our space is extraordinary, whether it's in SoHo or Williamsburg in New York City, Georgetown in D.C., Melrose Place in L.A., or Arbitrage Avenue, the Gold Coast in Chicago. And with that demand is pushing rents and our portfolio is well-positioned to capture that growth, whether it's from multiple tenants bidding for the same space, such as what we saw with the opportunistic re-tenanting that we completed in SoHo last week or through our ability to capture outsized growth for fair market resets such as we did on several occasions on Melrose Place in L.A. And this is enabling us to not only gain further confidence in our multiyear growth projections, but seeing real opportunities to exceed them. Now, I'll dive into the quarter. Starting with our second quarter FFO before special items. We reported FFO of $0.36, which significantly beat our quarterly model. The outperformance was driven by better-than-anticipated operating results within our core portfolio for both an improvement in tenant recoveries along with a robust and strengthening leasing environment and along with cash recoveries, primarily within our fund portfolio coming in above our expectations. As highlighted in our release, our quarterly results included an $0.08 non-cash gain associated with the termination of the below-market Bed Bath & Beyond lease at 5559 Street in San Francisco. As we had discussed on the…

[Operator Instructions] And our first question will come from Floris van Dijkum of Compass Point LLC. Your line is open.

Good morning, guys. So nice results, encouraging on what's happening in SoHo. Maybe if you can provide us with a little bit more detail on the demand you saw from tenants for this space. I believe it was a feeler that was in the space before. If you could also give a little bit of view on what's happening to lease terms in terms of bumps? Are you seeing your peers are all talking about raising bumps in their suburban portfolio? What is - how does that look like for your street spaces, and maybe also touch upon, in particular, in the - what your office - one of the office REITs just sold an asset, I think, in Spring Street as well. Presumably, you're looking at some of these opportunities as well, where do you see the potential for external opportunities in your street retail portfolio?

Well, technically, Floris, I think that was more than one question, but let me at least start taking a step at a - let's start with contractual growth. I do think that it's going to be a multiyear education process in terms of in suburbia, getting especially junior anchors accustomed to perhaps a higher growth rate. And given the duration of those leases, even if we are successful, it takes about 50 years when you take into account the options to turn a shopping center. So I'm in favor of it, and I think depending on your view of inflation, I think it would be healthy for us to get higher bumps to keep up with whatever our view of inflation and growth is, but I think that will take a while. Contrasting that with street retail that for historic reasons and otherwise has generally had about 3% annual contractual growth, which is about 100 basis points higher just in terms of contractual growth, has had fewer option periods and where the option period show up, as I mentioned in my remarks, we often can get fair market value resets. All of that enables us to have more what I have referred to as bites at the apple. Now, I'll concede over the last five, six years, none of that really mattered because we went through a global pandemic, rents were declining, the Retail Armageddon, and now that's beginning to turn. And so I do think we will see higher contractual growth in our street portfolio than in our suburban. We will see more bites at the apple and thankfully, increased tenant demand is resulting in pretty significant rental growth. So let me use the SoHo example. We signed a lease a couple of years ago with FILA. We were…

If I can follow up, perhaps with on the funds, I noticed that you acquired an asset in Tampa. How much more dry powder do you have? And remind us again, I believe, it's end of the third quarter or certainly before the end of the year that you have to invest that. Do you think all of your dry powder will get used up before that goes away?

Yes, we do as it relates to the existing dry powder at Fund V. And so, I don't think it will go away. I think it will go to good use. We're seeing just enough opportunities. And then as I mentioned before, to the extent we see additional opportunities just because it doesn't fit into the existing investment of Fund V, we're going to find good ways to do those as well.

Thanks.

One moment for our next question. And our next question will come from Ki Bin Kim of Truist. Your line is open.

Good morning. So you guys made some favorable remarks about street retail picking back up. I was wondering if you can just make those comments a little bit more tangible to us and maybe try to quantify, how much improvement you're seeing from tenants?

Sure. So - and there's two ways that we think about this. One is tenant's long-term sales trajectory called that tenant health. And then the other is obviously supply and demand and tenant demand. And SoHo is just one example, but also Stuart and John talked about a Melrose Place, a fair market reset in one case, 20% and another case, 50%. But whether you use a 45% increase in SOHO over two years or a 50% increase in Melrose Place over five years, you're seeing a very nice trajectory. Now remember, there's contractual rent growth of 3% to 4% on top of those spreads. But in general, I think what you will start reading in the next year or so because it takes a while for the narrative to change is that market rents in these must-have markets have grown disproportionate to many of the other markets in our suburban portfolio or otherwise. That's after several tough years, but it is a very healthy and welcomed revamp and a rebound, frankly, that is in excess of what we had anticipated.

Okay. So when you think about that as it pertains to your SoHo lease rate of 81% or M Street at 89%, both of which saw a nice pickup in leasing. I guess, how does that strength and demand translate into when these retail corridors can see much more occupancy?? Is that a '24 event? I'm just kind of curious about how long it takes.

Yes. So what's frustrating in all cases is the amount of time it takes from the point that a retailer says they want space to the point that they get open. Some of it's within our control, some of it's within the retailer's design control. And so, we are actively negotiating every space in every one of these corridors. So my guess is it's a '24 event. I am not changing John's guidance that he walked through in terms of rent commencement dates or otherwise. But if you were looking for new space in SoHo as a retailer, you would find most of the spaces are spoken for, and you got to move fast. So my guess is there's active dialogue. And it's not just Soho we're now thankfully seeing on Madison Avenue as well. There's active dialogue on most spaces. Our portfolio should see that as well.

Okay. And when you say Madison Avenue, are you talking about the Sullivan Center type of area?

No, Madison Avenue in New York City.

All right. All right. Madison Avenue. Thank you, guys.

One moment for our next question. And our next question will come from Todd Thomas of KeyBanc Capital Markets.

Hi. Thanks. Good morning. First question, I guess, just quickly following up on SoHo and the lease transaction that you discussed at 565 Broadway. Are you seeing other opportunities across the street and urban portfolio to maybe get back space from tenants that are in place paying rent and operating where they're either underperforming or looking to close and in situations where rents have now risen where you could profitably backfill? And then sorry if I missed this, but what's the mean for the commencement at 565 Broadway?

Yes. I'll start with the easy one first. So, it will be in the first quarter of next year, so first quarter 2024.

And now, yes, Todd, we are constantly reviewing both also for a tenant health perspective. So, this is not just about capturing upside. This is also about curation and making sure we have the right tenants in the right locations. And when we don't, making these shifts. Now, we do that in the suburbs as well. It's just much more difficult, much more expensive to replace the T.J.Maxx with a Burlington Co. and the kind of spread we need there to make it impactful just has a different outcome. But tenant review and then the ability to profitably monetize on it requires both strong tenant interest. Thankfully, we saw that in the case of SoHo, - rental increases and the ability to capture those. So, the short answer is yes, the leasing team is actively doing that, it's the pivot that has occurred over the last 12 months. After several tough years where we are seeing market rent increases, and you will see them too. This is not just unique to Acadia in these key streets that is enabling us to meet the needs of those retailers who want to get in. And then when retailers say, you know what, maybe this is not the right space for me, us being able to let them out as well.

Okay. And then second question, John, can you discuss or provide a little bit of detail around the impact in the 2023 guidance and also maybe discuss some considerations around the model for 2024 as it pertains to 664 and 840 North Michigan Avenue just in terms of the lease expirations at those assets and tentative plans around the redevelopment of those assets?

Yes. So Todd, in the - let's start with the 24, that's an easy one, that both of them are actually pretty - very straightforward. 24, we're not assuming that we get those leased up. Those are very conservatively pushed out into the later years. What I would say in Chicago, and again, this isn't changing my model, but we are seeing signs of life and tenant interest, et cetera, that's showing up. But that's not one that I have in my model and our model the $30 million to $40 million has an incredibly sober expectation of what rents we get there, but similar what we're sitting across other markets, a chance to beat that. In terms of this model, it's - the leases start rolling off in back half of the year and into the first part of next year. But I would say with the growth we have from the sign, but not open, and I also want to highlight that the signed but not open is actually double what the 6.8% I put in there given the other pieces of that. As Ken mentioned in his remarks, that's going to offset this role and we're continuing to believe that we should be able to produce FFO growth that's going to mirror our same-store growth.

So yes, I hear you about the S&O pipeline, but for these two assets, is there is there any cost capitalization that will begin or that will offset the ABR coming offline as we think about 2024?

You're going to make me dig out my CPA again. So Todd, unless we are shoveling ground doing active construction work, we are not anticipating capitalizing in our model, any cost for the balance of this year. And stay tuned for next year. We haven't put out guidance, but conservatively, my model does not - has us flowing through whatever cost of the asset to the bottom line. So anything we would do related to that would be incrementally additive to our FFO. But right now, that's not in our balance of 2023 guidance. And as I'm thinking about that statement where we should have growth in 2024, that's not assuming we're capitalizing all the costs associated with it.

All right. Great. Thank you.

One moment for our next question. And our next question will come from Craig Schmidt of Bank of America Securities. Your line is open.

This is Lizzy Doykan on for Craig. I just wanted to clarify, I apologies, if I missed it on the exact credit loss impact, just the assumptions for reserves for the full year as a percentage of revenue again? And how much of that was recognized last quarter?

Yes. So Lizzy, we're in the, call it, the low 200 range of revenues for the year. And we've maintained - I think we were at 270. We've maintained that heightened reserve for the balance of the year. So call it low 200s as a percentage of revenue against the six months revenue, and we have a heightened - we've kept that in our numbers, the $275 million that we put out at the beginning of the year.

Okay. Great. Thanks. And just, you mentioned earlier on 5% of same-store NOI growth achieved this quarter. It's - that also factors in still headwinds from prior period collections, and we can see that impact outlined in the supplement. But just curious what, I guess, if you could quantify more of that impact, how could we see that start to burn off going into the rest of the year? Maybe if you could just discuss expectations around that level of impact.

Yes. So I think the first half, we really saw the credit loss starting to burn off first half of last year has trickled in. So Lizzy, I would think that, that headwind is largely behind us, which is in my remarks suggested that we are trending towards the upper end, if not, not exceeding it, that's largely behind us.

Okay. Great. That's it for me. Thanks.

One moment for our next question. And our next question will come from Craig Mailman of Citi. Your line is open.

Good afternoon. Maybe I just want to drill into the $30 million to $40 million of NOI growth expectation that you guys talk about here. I know 75% of that is coming from street and urban. But just given the positive commentary around demand and rent growth. I mean, could you walk through maybe kind of some of the basic assumptions there on kind of absorption timeframes versus what you may start to see given the demand. Some of these unanticipated bumps like what you're getting at Broadway. And just kind of give us a sense, I mean, this is through 2026. Should we expect - I know, John, you said there's potentially room above this. But at least from a timing perspective, I mean, do you guys anticipate that this could come sooner than 2026, given the momentum that you're seeing on the demand and rate side?

Let me first address this kind of bigger picture. John, while you gather your thoughts, because we have in prior calls kind of walked through each of the different drivers of the $30 million to $40 million. But just big picture, and Craig, you're spot on. We are seeing improved retailer demand. We are seeing rents coming in higher than we expected. But counterbalancing that, it still takes a long time to get tenants open and economists, which I am not on, are still forecasting a recession at some point in the next 12 months. So we're going to continue to stay very focused on what we think will be exceptionally strong growth if we simply stay on track, and we have certainly given indications of the ability to beat that. More so on the rent per foot as opposed to timing, because timing is very dependent on a variety of issues. But with all of those pros and cons in mind, John, the key drivers, and we will have this in our investor deck. We have had it in the past. But the key drivers of that $30 million to $40 million. Yes, so Craig, key drivers is again of that $30 million to $40 million, starting with just the contractual growth. So we have the contractual growth, which averages to about 2% over the next several years. That I think is we - that's the easier part in terms of lease-up. So in terms of - and this is net lease up, and this is after we have the well-known rollovers that we have been talking about for the past couple of years. The net lease up in the earlier years of the model, where we have the North Michigans and the Bed Bath is rolling. That is…

No, no. That's really helpful. I'm just kind of getting at the fact you guys have a different - a differentiated strategy, right, in these assets, relative to just traditional open air, right? The CapEx, as a percent of NOI is lower. I'm just kind of curious, is that trend even lower, given the rise of rents. And it just sounds like one of the issues that has been as your same-store has been good hasn't necessarily translated into commensurate AFFO growth, given the leverage. It sounds like by '25, that's when the switch should flip here, and you should start to see that commensurate AFFO growth relative to your same-store growth? Is that a fair way to think about this, given the proportion -

And I would say that we hope - sorry, I was talking over there. But I would - I would hope to say that we're going to start seeing that in '24, certainly, but '25 absolutely.

One moment for our next question. And our next question will be coming from [indiscernible] of Jefferies. Your line is open. Again Carlos, your line is open.

This is Linda. My question was on City Point. How are discussions with your partner progressing? And at what point would a decision need to be made?

I think it's going to be a multiyear process, Linda. And as John walked out - walked through, is the delta between our current ownership, 60% and 100% in terms of the earnings, positive earnings impact is 4% versus 6%. So it's not like there's this huge difference. I would expect some of our investors are going to stay in long-term and others will cash out. John also mentioned not a significant cash outlay. So while quarter-over-quarter, it might have some impact. I think we really should be thinking about this in a multiyear context over the next one, three, five years. And we'll keep you posted as to that. More importantly is the positive leasing traction that John mentioned and getting that open, because whether we own 60% or 100%, it's an important asset, and it is nice to finally see these tailwinds.

And then could you talk about what drove cash recoveries above expectations this quarter?

Yes. It's really within our funds, Linda. So we had a couple of - we're able to collect on some old accounts within our funds, the diligence of our legal team. So this was really focusing our funds, not within our core and certainly not within same-store.

One moment for our next question. Our next question will come from Michael Mueller of JPMorgan. Your line is open.

I apologize if I missed this at the beginning of the call. But I guess, the acquisition opportunities that you're starting to see more of, are they predominantly in the funds? Or are you seeing somewhere the math is working for on balance sheet acquisitions?

So in terms of opportunities out there, I'd say it's more across the Board than just when we say funds, what we've been doing in the last several years in terms of Fund V. So we're starting to see opportunities in street retail, we're starting to see opportunity, or continue to see some opportunities in power center. How we fund them, Michael, and making the math work is either dependent, if we're trying to do it on balance sheet, it's probably in conjunction with capital recycling because our stock has gotten beaten up and it's hard to make that math work on just a straight-up fashion. But we have over the cycle always found ways that there's good accretive opportunities to either capital recycle or leverage our institutional relationships. Let's see where things play out. I do give our team a lot of credit because they are beginning to see opportunities where there's significant rental growth and yet the market is not there yet. So where we can see those type of outsized opportunities, it's my job, it's John's job to make sure we find the right way to add them to our portfolio, while not increasing our leverage and making sure that they're accretive. And that math is always tough at this point in the cycle, but there's also out-size returns at this point in the cycle, and that's why we're kind of looking forward to figuring this happen.

Got it. Okay. Thank you.

One moment for our next question. And our next question will come from Paulina Rojas-Schmidt of Green Street. Your line is open.

Good morning. I hope I didn't miss this, but regarding the lease you signed in SoHo, net effective rent of these new lease compared with the in-place rents you have for similar assets in the neighborhood.

So Paulina, your question is the net effective rent of this compared to the other assets in the neighborhood?

Yes. I'm trying to have a sense of the mark-to-market and -

Yes. So I will start with the limited cost because it may be a little bit easier. No. And I would say that the cost, in my remarks, it's under a year, and this is a 10-year lease. So 10-year from a payback, so we get paid back within a year. So I would say mark-to-market, can maybe help you out as we think as this would go to the rest of our portfolio, but yes, I'm trying to say how we extrapolate this to our - we picked up about 45%. The net effective was very similar to that because it's not an expensive lease as opposed to in the suburbs or just by contrast, we celebrated a few years ago, getting back a Kmart in Westchester putting in BJ's. The net effective incremental gain in this one lease is very similar to our share of that large re-anchoring in Westchester. So the net effective gain is just under $1 million, and that feels pretty darn good. That 45% increase in market rents and this is our best proxy because we signed at least two years ago. That 45% over 24 months is a pretty clean number. There's no real cost movement. And so whether you say rents have increased by 40% net effective on that corner, 42%, I think that's all open for debate. But it's a meaningful rebound that we are starting to see in multiple locations, and that makes us feel pretty good. Final point around that. There were three tenants buying for this space. We can only accommodate one in this location. The other two are not going to go home. They're going to go find other spots in SoHo. So I think you're going to see this continued trend, and it's a very nice, healthy rebound. I don't think nor am I even encouraging us to believe that you could see this kind of market rent growth for many, many years, that wouldn't even be healthy, but it is very encouraging after several tough years to see a rebound like that.

Yes, a related question. So I see in your presentation, you say that your strict portfolio has a mark-to-market ranging from 10% to 50%. Can you remind me where your key corridors within this range? Not to numbers.

Yes. So Paulina, I think when we think of our key corridors, and we break down our Street portfolio, of that Street, we're saying these are in these very high-growth markets. So, that's going to be in New York, that's going to be SoHo. That's going to be Williamsburg. That's going to be Melrose Place in L.A. It's going to be Georgetown, Westport, Greenwich, Connecticut and Gold Coast to Chicago and Arbitrage Avenue. So, those are the markets where we see on the low end, somewhere ranging from 10%, but in others as we experienced in Melrose Place in LA, 50%.

Then it's a question of when we get to those spaces. And that's where it will take some time. But after several years of headwinds, these kinds of increases are very welcome.

And Paulina, just on that point, what I would say is in that slide, and that's where if I visit the slide in my head or the one you're looking at, that's where we say that we have a 10% CAGR over the next several years. What I will tell you, when we put that slide together, SoHo that we just signed wasn't built into that. So that is incremental to that piece because that was never part of that, meaning that growth - the 10% growth that we were not assuming that in that, that was incremental to that is my point.

Yes. Okay. Thank you.

[Operator Instructions] I would now like to turn the conference back to Ken Bernstein, CEO for closing remarks.

Thank you for joining us. Everyone, enjoy the remainder of the summer, and we will look forward to speaking to you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.