Acadia Realty Trust (AKR) Earnings Call Transcript & Summary

Thanks, everyone, for coming. Good afternoon. If you don't know me, I'm Craig Schmidt. I cover the retail REITs at BofA. All right. At this end of the table, we have Emily Marzo and [indiscernible], who are also [indiscernible]. So they're the ones that really want the answers. They really want to follow up again after we meet. I want to introduce the Acadia team, but before, let's keep it interactive. Please jump in with your questions. Don't hesitate. We like it better if you can ask questions. And so on my immediate left is Ken Bernstein, President and CEO. To his left is John Gottfried, Executive Vice President and CFO. And to his left is Amy Racanello, Senior VP, Capital Markets and Head of Asset Management. I know who to go with my asset management questions. But why don't you go with your introduction and then we'll devolve into the...

Sure. Sure. So for those of you less familiar with Acadia, there are really 2 key areas of differentiation that I'm sure we're going to spend the majority of our time talking about. One is, we do run a series of investment funds that enable us to punch above our weight, but also, frankly, add a layer of complexity. And we'll try to provide as much transparency around the successes there in that fund business, which Amy oversees and we'll certainly get into. And the other, more meaningful, because it's the most important part of our NAV and value is that the REIT is focused heavily on street and urban retail throughout the key markets in the United States. About 70% of our core portfolio, REIT portfolio's value, NOI is derived from street and urban retail. Most of those assets took a yield gut punch during COVID that resulted in our NOI declining by about 10%, which, frankly, when we forecasted that during the dark days of COVID, people thought we were being way too optimistic. Now in hindsight, we were right. We said by 2023, we should be able to get back to pre-COVID NOI. In fact, it looks like we're on track by year-end this year. We have recovered that NOI. And the trajectory going forward, notwithstanding the scary roller coaster of capital markets and for reasons we'll get into, the trajectory going forward feels better today than it did 6 months ago. The assets that we're talking about on the street side of our portfolio, 2/3 of them are poised for having north of 10% compounded annual NOI growth over the next 3 years. That's driven by a combination of lease-up recovery from COVID, contractual growth that is 3% in street retail and mark-to-markets. And the mark-to-markets are worth thinking about because the narrative around street retail, "Oh, my gosh, it's got to be so bad." But do keep in mind, prior to COVID, rents had already substantially gone through a multiyear period of correction. So we started at a low point, went through a painful time period and now we're seeing in a variety of our markets, whether it's Soho or Melrose Place or -- Craig, you were talking that you were just in Armitage Avenue. We'll get into that a little bit. The retailers' sale starting during the COVID recovery, but then through to today, the retailers' sales are starting to comp well in excess of pre-COVID. And rents are still low and demand is showing up. If you think about what drives our business, a combination of rent to sales and supply and demand in places like Greene Street and Soho, where there was arguably as much as 50% vacancy 1 year, 1.5 years ago, it's now leased up. And so we have pricing power, and that's showing up in our spreads and we'll get into that in just a minute. So the markets that we're focused on, D.C., New York, Boston, Chicago, San Francisco, L.A. were recently down, and there's a handful of others out there. Our tenants are showing up, they're signing leases. I am not seeing a slowdown yet. I'm looking as hard as all of you are. I don't want to mislead anyone and say everything's fine, if it's not, but I've never seen as big a disconnect with the current fundamental and what we're seeing in the market. Now I'm not saying who's right or wrong, time will tell, but thank goodness the leasing progress -- we put out a press release yesterday. Thank goodness the leasing progress continues. Our retailers are telling us what they see, what's in front of them. They're managing through it, and [ they're coming ].

[ Yes, most impressive. ] I wanted to say, first off, could -- you put out a press release on yesterday regarding some event subsequent to second quarter. So maybe you could touch on some of the more salient points in that press release.

Of course. So we put out a release yesterday morning. I really want to highlight the activity that we saw after the end of the quarter. So we increased our signed but not open by about 30% from the prior quarter. And what that equates to is now our signed but not yet open portfolio represents about 6% of our ABR. So a meaningful number. And it gets us pretty close to 94% occupied. So we're 90% physically occupied at the end of the quarter. And with the continued progress we've made, it gets us right around that. Secondly, I thought was important is that 90% of the incremental leases that we signed were in our street and urban portfolio, which in terms of -- which is a much larger percentage than we have of -- it's about 70% of our overall business. So a disproportionate amount of our incremental lease is coming from our street and urban portfolio. And lastly, in some of the markets -- and I'm sure we'll get into the growth piece, is within the Gold Coast of Chicago and Soho, of those new leases and renewed leases that we've signed, we achieved 40 -- in excess of 40% spreads on those new leases in Soho and the Gold Coast of Chicago. So really good progress. And again, echoing what Ken said, we're not, on a fundamental basis, seeing what you guys maybe are seeing on your screen, we're not seeing that on there.

And then just one point on City Point, which tracks exactly with what you said, John, we signed 2 leases totaling about 77,000 square feet on the fourth floor of City Point in Downtown Brooklyn, an expansion of Alamo Drafthouse, a high performing movie theater asset property and also a complementary [ tenancy is now in -- back in the systems. And our former Century 21 listing, really possible. ]

[ Is that whole -- that post come back and then that experiential, social on somebody without -- leaving a good sign on... ]

Yes.

Absolutely.

Absolutely. Yes. It's still not at pre-COVID peak. There's going to be a shakeout in the movie theater industry. There's going to be [indiscernible] in Alamo [indiscernible] and in Brooklyn for Alamo because that is their most important location [indiscernible]. Sure, there are still certainly going to be headwinds in terms of streaming versus the Netflix of the world.

I saw that -- I can remember when I went to the movies and I was expecting an empty theater. [ I grabbed -- queues ], but it was full. I mean like literally, I had to go in the front row. And you're [ like -- maybe I didn't get a seat ]. So...

Yes. Well, we don't like to advertise that. It's supposed to be a great experience.

Okay. No, no, I didn't mean to...

But this -- when I walked in, you talked about Armitage Avenue, so -- we own in Chicago. I would tell you one of the things that's important, North Michigan Avenue is slow to recover. It's in our numbers. When we say 5% to 10% growth, we're not ignoring the headwind. And some of the issues we have in various spots in our portfolio. But everyone who has not been to Chicago, right, but reads the headlines thinks, "Oh, my gosh, you were at Armitage Avenue." And I can go and ask you to be a proponent for Acadia or otherwise, but what we have seen...

I said it was very active. And it was young people shopping, carrying bags, talking, gathering, laughing and carrying [ lattes, store to store ]. But no, it was -- you knew it was a very -- I said it's almost as if we hired a Hollywood director there.

No, we don't track -- view it at all.

You want to find out when people come to visit. But like constant traffic and people enjoying themselves.

What we have experienced in the last few years is all of us traveled less or most of us traveled less. And so only now is we're getting back into conferences that people are going down. Someone said, "Oh, it's just in DC." [ We own a lot of M Street in Georgetown. And that is why -- in ways that even pre-COVID was skewing high. ] Certainly, Soho. I won't spend time here. Go shop in Soho then, right? In places like that. We're seeing the sales. Our tenants are seeing it. And thankfully, that's starting to show up. That's how we get 40% lease spreads. And that's how Soho and Greene Street, anecdotally, rents. Year-over-year, market rents are up 20%, which again, painful few years. So I'm not saying we're back to normal, but we're starting to see that rebound. And it's hard to appreciate it in a market that's [indiscernible].

Yes. I -- you touched on this, but I know -- you said over the next 2 years, Acadia is expecting about 15% growth from its street portfolio. This includes the anticipated rollover on North Michigan Avenue. [ What are impacting them as the drag on North Michigan Avenue lease-up 15%? ]

Yes, I would -- actually, within our -- in [ our portfolio ], I'd encourage those that haven't had a chance to look at it. We put an updated investor deck at -- in our book. And what we did rather than targeting [ where in these ] different markets, we've had within -- our street portfolio represents -- about 50% of our overall portfolio is in the street. We've segregated that 50%. It's geared to those markets that over the next 3 years deliver a greater than 10% CAGR over the next 3 years. So we've listed in our book, and we think we could go through those. But if you looked at a vast majority of our street markets, 2/3 of those that are expected to deliver. And coming from the combination of the first part, which was differentiation of street retail, it was 3% contractual growth. So in suburban, it's between 1% to 1.5%. [ The street growth's between, actually, 3% to 5%. ] In addition, as part of that -- getting to that plus 10% or at least -- so we have some lease-ups, some key leases that we've made good progress on. And it's in the 400 basis points that we have signed but not open on the lease-up side. And the last piece of that to get us above the 10% is on the mark-to-markets that we see, we sprinkle throughout our investor book. The various places where we've seen would be already captured or we believe we will still capture mark-to-market, in Georgetown. Soho we're seeing it. Gold Coast [ certainly audited ]. We did -- and then -- so that's 2/3 of our street is -- we consider that greater than 10% CAGR over the next 3 years. And then we have a slide that says the other 1/3, and that's Greenwich Avenue, Westport that we think is going to grow nicely in the 5% to 6% range. And then we have the North Michigan Avenue. So nice blend, but 2/3 of our street. [ And we got some open, it's going to grow in that sense. ]

Can we ask what our specific projection on the H&M currently?

No.

[ Let's just hear your time frame, time. ]

But let me be clear, H&M has not found an alternative location [ then to refinance, so it might ]. But I'm not going to say it's the end up saying we'll openly negotiate, which is no, it means that we'd be very conservative towards this view to that exposure there. We're seeing a nice rebound. Armitage Avenue is doing certainly better than pre-COVID, and there is just no vacancy there and tenants are thriving. But North Michigan Avenue could take a while. And even if it does, assuming a conservative outlook on it, we're still going to deliver the [ annual. And I think that's the critical, rather than we telling H&M exactly what we're willing to do ].

Okay. You've increased your ownership of City Point from 33% to 62%. And when there's -- you expect a modest [ appreciation in '22, but substantial increase in year '23 ] [indiscernible]. How is the leasing on the first one going beyond some of your successes with [ the big leases ]?

And I'll let Amy get into all of that. So let me explain. To those of you who had followed Acadia for years, our fund platform, our fund assets, we think we keep those separate from what we own in the REIT. If we started to add and subtract assets, well, that's a great way to either go out of business or go to [ jail ], right? So that being said, we have identified City Point for years now as an asset that makes sense to be in the REIT. And we have not been shy in our discussions with our investors on the LP side or in the REIT world. One of the investors, a decade ago, sold their interest into the secondary. If you're familiar with the LP market -- so there's groups that buy secondary interest. So it was a great group. We had a great relationship with them. It nice of them to liquidate -- vacate that opportunity for us to buy. And we thus offered other of our LPs, asking them to buy, saying -- some [indiscernible] affording the opportunity while simultaneously making it clear to them that this is converting from finite-life to [indiscernible]. And with that, we delevered the assets because within our own finite-life portfolio, we don't want to carry the [indiscernible] leverage, right, that we do in our private equity fund. And thus the [ opportunity ]. Perfect world -- well, it's never a perfect world. So the pricing was very attractive, it was set by a secondary market. And that's why we [indiscernible]. The asset level NOI, we're still in lease-up mode. There's a Target, there's a Trader Joe's, they did great during COVID. But the balance is now leasing up nicely, running [ a profit ].

Yes. Just to start, leasing momentum has been really strong there. So on that point, the point that we talked about yesterday, we [ actually used them as entities with competing tracks to do. And we chose Alamo and this tenant, that's the ] execution. But that's kind of continuing elsewhere as well. We saw population growth in that, [ some of the homes from 50% ] over the past decade. And a number of new residential towers, including the tallest tower in Brooklyn, which is adjacent to City Point. If you were to go there today, you would still see construction happening on that residential development on the perimeter of [ our place, which is slowing our street-level leasing ]. We also have a new one acre park that is [indiscernible] for a lot of our street retailers. That should open spring, summer of next year. So as the construction intensifies and as this park opens, that's really the time to leasing the market with new street retail. We also have [ Himart ] opening in the second half of this year. We have [indiscernible] level opening in about a month or so. So those tenant drivers plus the [ fourth floor ] that I mentioned will really enable us to lease up that street level, [ even for the perfectly. It's the most high valued thing. You don't want to lose to that COVID lens. ] You've been patient. It will be worth it. It's about 50% of our incremental revenue coming from that street level. And we don't want [ to, just like we said, lose to that COVID cycle ].

It's interesting [indiscernible]. But renewing...

We're doing thousands.

[ That's why it's amazing. You really ] [indiscernible]. Beyond that, what other leasing have you done for '23?

What leasing...

How much leasing for '23 [ did you get ]?

So for '23, on the call I mentioned we are about 60% of the way to hit our targets, on the call. So obviously, just -- we've done here [ for the presented, so call it 70-plus. ]

[ On the seventh day milestone and... ]

Oh, well, not in the bag, but well on our way. Because what...

Yes. Okay. Great. And then I was thinking about your street retail versus your suburban. It would almost seem given the contraction of homes alone [ that you're going to throw that in the line at some point ]. Is that correct? I mean we can expect a more street, urban kind of ABR NOI probably.

Which we already saw that. So I think -- and again, in the investor deck, you would have -- last time we would have met, we would -- we [ said the 60-40, 60% should be in urban and the 30% separately or outside retail. So that means -- that's otherwise ] what's happening. We've added some asset spread to that. That helps it. But it's also that the growth of street can go past the [indiscernible].

Any -- when you hear economists rejecting the recession, including REIT, is it -- first thing, you introduce these [ steps in FY ]? Or is there nothing you can really do anymore? Proceed about your business again.

There are a bunch of stuff. But let's stay with this contractual growth piece that's also -- if this were just economists predicting a recession, like they're -- just off the playbook. I'd argue this feels more like the 2001 recession in a lot -- yes, the dot-com bubble bursting, which is dissimilar to what we're seeing in terms of the shift from online through appreciation for omnichannel, but just off the playbook. The challenge here is what does inflation mean. And what I would remind all of you when the time is right -- and who the heck knows when that is, it could be today -- but our ability to pass inflation through in our street retail -- because at some point, you're going to have a discussion, "Wow, retail feels cheap in general." And I think it is. But they have low contractual growth. If there's inflation happening, I make money owning a portfolio of T.J. Maxx and/or Kroger or whatever. I would remind you on our street retail, we have 3% contractual growth, not 1.5%. And we have more bites of the apple. And by that, I mean, we get fair market value resets from our retail. I didn't invent it, so I won't take credit for it. But our retailers are willing to, somewhere 5, 10 years down the road, say, "Fine, our option to renew is at the greater of contractual, call it, 10% bump or a fair market value." And that has not been worked a lot in the last decade because either rents were declining or we were in an inflationary low interest rate environment. And those fair market value resets could be very valuable in the future. Every now and then, I say it's -- hey, guys, how about introducing that? And they laugh at me immediately. You're not going to see that in our suburban portfolio. You will see that in the street retail. And that means if you're concerned about inflation and its impact, we should be able to capture [ that anyway ]. Now how do you prepare for a reset? First of all, in the environment we are in right now, there's a few things we're thinking on about. The biggest issue that our industry is dealing, landlord and tenant, is construction CI costs. I will point out -- and again, I'm talking my book. On our street retail side, tenant improvements are just less relevant. If you think about a $15 rent, and $50 becomes $100 to put a tenant in, much more impactful than at $150, okay? But we're going to watch very carefully before we take anything out of them, new construction. The good news is it's not a big part of our business plan. Cost control is something that we can do. We have spent most of the money for most of our redevelopments already. And I don't think the industry talked about ground-up development as a key driver of growth we do. Second, balance sheet matters. And so you will watch us be that much more careful about where we can recapture the dollar. Remember, we own a piece of Albertsons, where we can modify the asset. The public market may be right in some respect, but the private markets are still there. Right now, very short-term debt markets are problematic, but there will be training so we can deal with that. During the periods of recession, if people were willing to [ evaluate assets in the private market, we can deal with that well ]. And then listen to our retailers very carefully. How are they managing through this recession? If we go into a recession, right? We're doing a great job of talking ourselves into a recession, but if we go into a recession, how are they thinking about it because counter-intuitively, when you see more and more companies talk about profits matter, that may be a negative thing for our industry because profits don't matter. And that's when the retail Armageddon would really happen, right? And what we're hearing from our retailers now is profits matter. And thus, in an omnichannel world, they're thinking about their store carefully. We need to listen carefully [ to find what they want to do ], what location. And that tends -- depending on how long you foresee this recession and by watching your balance sheet and listening to your retailers carefully and watching your costs and what you are building, [ you'll manage it ]. You and I have been through more recessions than we would like to think about. Not one of them felt like the one today.

I was going to say, I hear people mistake -- in my mind, mistaken, comparing the recession to COVID. And I mean [indiscernible], just a nightmare situation. So...

What they're saying?

That the recession's in.

Yes. But we need -- then, fine. [ They're like, okay, I'll go back to the only other recession now, which is a global financial crisis, right? No. We've not yet seen the failure of Lehman Brothers and Company. Our enemy ], watch consumer sentiment but don't get confused by consumer sentiment versus consumer spending. Consumer sentiment is driven by what cable channel you watch. Consumer spending is you want to go out to dinner tonight. And what we're seeing, we're seeing more demand shift than demand disruption. We're seeing -- and especially for our retailers who are meeting the needs of the more affluent, we're seeing sales top line hold up. Then we do have to be sensitive to bottom line and the [ squeezes there and ] how much of that feels more temporary than permanent. And in general, watch how retailers are comping through 2019. In the sense that they have good businesses and are comping positive, then we'd probably get through this recession a lot differently certainly than [ a lot ].

Yes. [ One of the things that we have been thinking a lot. There is a pullback, but it's mainly 75 paying the loan. And if you look at the shoppers in 125-plus ], they are still shopping. They are still comping things in clothing, accessories, shoes, all those are -- all these discretionary items are still comping positive. Well, like who do we need to worry about, is it the stock market. It's changing. And then you [indiscernible]. Right now, I'm thinking we're going to see a very solid [indiscernible]. I think the [indiscernible] up, but I don't think it will be great. But I think it's going to be solid. And I think when you look at it sequentially, we're going to be happy with how [ inflation's going to be, despite what we see in terms of the lower income on that ].

So what our retailers are telling us among those lines is -- and again, think about Melrose Place, Greenwich Avenue, [ Westport, Fort Loop, think of the demographic of their comp ]. They are being careful about things -- they're more worried about inventory management than they are how they're thinking about signing their leases for the long term because the hard part of this Christmas is if you can get the right product on the shelf, not too much of one thing and too little of another. That's been their real challenge. [ But so far, the consumer is showing up. On the shopper floor, that's above 75,000. ] And in some markets, you're talking lower there.

I mean in terms of your street portfolio, where are you seeing the most demand, luxury, value retail or entertainment?

So -- and it's a confluence of a few things. Luxury doubled down on street retail during the pandemic. They're being opportunistic, but they're also being realistic. In the department store, that wholesale channel can be important, but it is not as important as it used to be. The notion of online for luxury made no sense. Scarcity is part of their formula, but they wanted larger formats. So whether it will be Chicago or Rush/Walton across the street from us or expand ads to more men, Spring Street in SoHo, LVMH doubled its square footage there, so retailers that want to and benefit can be near them. More [ bridge retailers ], high end but not luxury, we're seeing a lot of demand on that side. But -- those retailers who are gaining market share from the retailers that lost their way and are capturing the imagination of the shopper. So I would say those are the 2 levels that are kind of the most interesting. And then entertainment has to be a huge part of that. When we talk about entertainment, we're thinking restaurants and a variety of other things. And that confluence is making a lot of the street front. So Armitage Avenue, you see plenty of both. Fun places you can go for coffee, good places to go for lunch and a lot of [indiscernible]. Not luxury at Armitage Avenue that you would see.

I'll call it more lifestyle.

Yes, more lifestyle, fun places.

Okay. And then I saw you did the acquisition in Fund V. But what's remaining -- do you expect to go right over to Fund VI? Or look for more [ acquisitions ]?

So we -- in our press release a day ago, all like 80% [indiscernible] we have with that acquisition. We have $100 million of [indiscernible] is about $300 million in buying power. And we unanimously, with our LP's consent, extended the investment period another year. We have a year to put that money to work and to take it through strategy.

So the one thing that's been clear over the last couple of years, I'd say more difficult by not meeting in person, there's a layer of complexity [indiscernible] as simple as you look at our leverage and take all of our debt and all of our funds and ascribe it to Acadia with 300% [ lever ]. And that's just crazy. Now even if you take our pro rata [ share and spring it for floating rate debt, the fund business by itself, then we should have more finite-life debt, more floating rate. We do our pro rata share of that, as we do, but ] I don't think about that as our interest rate exposure. Within the REIT, we're 90% [indiscernible]. So there's layers of complexity that shareholders have talked to us about, and we have to balance the pros and cons of that. It's a platform that enables us to make really nice profits. Albertson, when that gets modified, will be probably record breaking for us. But we've done a lot of good ones from 5 that we just mentioned. We have bought well over $1 billion of out-of-favor suburban shopping center, levered them to the one. I believe we're at about an 8 unlevered yield. So interest rates matter, but they don't matter nearly as much. We have been clipping a mid-teens yield. We even had a conservative cap rate. Exit that's going to be very profitable. So we're thinking about different ways we can consider the monetization, recapitalization of that with a view towards -- we don't want to make life more complicated than it needs to be in a complicated world. So those are all the things we think about. We said rather than launch a Fund VI and do all of that, let's finish them in [indiscernible]. Sell the opportunities out there. Don't go running out of this room saying, "Ken says that suburban shopping is going to [indiscernible]." I'm not saying that. I'm saying we're able to selectively acquire those assets [ that made it through COVID, so they are success ]. And we can see that at the fund level and enjoy the use of leverage, so that has been a good difference.

Nice. [ If there's -- questions from the sale, anyone on the floor? ]

[indiscernible].

So I never -- don't underestimate denial if a seller has been [ in debt ]. What we're seeing right now, most of the deals that are in our pipeline, we announced. We disclosed one recently that [ was, I think -- it's ] all about debt maturities. And so you'll say, "I don't want to believe that there's a price shift." And then all of a sudden, your debt's coming due and you got to pony up to pay down the debt or refinance it. Or you have TIs in front as well. That's where we're seeing the activity now. And my guess is [ that's it ]. So it may -- it probably won't be wholesale, [ those can end -- ride ] out this double whammy. And I'll get into that in a second what I mean, probably do, but we will see. The double whammy is spreads. I'm not faulting Bank of America for SOFR. But the spread you guys are charging, my gosh.

[ You ] make money, too.

Right. But you're making money [indiscernible]. But it's one thing to have the tenure go to 3, 3.5. Our industry can manage that. At the same time, spreads gap out an extra 100 basis points and even worse for a subprime borrower. That's shameful. Get out of here. So as I was saying, I think shorting PIMCO is a great strategy.

I have 3 rapid fire questions I have to get to.

Okay.

So number one, which of the following is the greatest macro challenge facing U.S. public REITs today: risk of higher rates, risk of recession or the rise of private equity in NTRs?

Risk of recession.

Which of the following is the greatest sector-specific risk: one, labor issue; two, supply; three, capital markets?

Capital markets.

Okay. And then finally, I think we answered this, but...

It's not fair that we get to listen to this.

That's all I came to do.

They're just so eager.

I know. I know.

Bum-rush the show.

Yes.

And anyway, are you seeing any signposts of weakening demand?

No.

No. And I think that's great. Okay. Thank you for coming and doing the roundtable. Thank you, [ people ], for coming to the roundtable. I hope you have a great rest of the conference, [ which is due in like a few hours ].

A couple more.

Yes.

Thank you, Craig.

Thank you. Thank you, Ken.