Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to your host Sarah Gale from Acadia Realty Trust. Ma’am, you may begin.

Good afternoon. And thank you for joining us for the second quarter 2018 Acadia Realty Trust earnings conference call. My name is Sarah Gale, and I am a Summer Intern in our Acquisitions 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, July 25, 2018, 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.

Thank you, Sarah. Great job. Good afternoon. As you saw in our release, we had a busy and productive quarter on multiple fronts. So today I’ll focus my comments on the progress we made last quarter and how we have positioned ourselves to benefit both over the next few quarters as well as the next few years. Then John will drill further into our operating metrics and balance sheet strengths. And finally, Amy will discuss the progress we're making in our fund platform. Beginning with the leasing environment and our core portfolio. While not ignoring the significant changes that are occurring in retailing and in retail real estate, compared to a year ago, we are seeing selective but meaningful improvements in leasing fundamentals and thankfully this shift is now beginning to be reflected in our leasing progress. As you may recall, we entered the year with significant re-leasing goals for critical space in our core portfolio. We projected this lease-up to contribute approximately $8 million of annualized net operating income over our existing base of approximately $130 million. At the beginning of the year, we said, of this $8 million roughly one-third was leased. As of the last quarter's call, 60% was leased and now heading into the second half of the year, we’re at over 75% of the weighted income. Importantly, we’re far enough along to have increase conviction that our rental assumptions will be validated in thus. It's no longer an issue of if leases will get executed at the rents we forecasted but just when the rent commencement days will occur. This progress is fairly broad-based and for the remaining 25% balance we had strong traction. Consistent with our thesis, we see continued separation between the haves and have-nots, both in terms of retailers and retail real…

Thank you, Ken, and good afternoon. I’ll first start off with a deeper dive into our leasing progress followed by a discussion of second quarter performance and key operating metrics, and then closing with an update on our 2018 guidance and balance sheet matters. Beginning with leasing. I want to add a few additional details that Ken highlighted. We have accomplished over 75% representing $6 million of annualized NOI of our 2018 leasing goal. We have continued to see the momentum that's started earlier this year and are continuing to execute leases at both the volumes and rents that are in line with our expectations. Of the $6 million in executive leases, we estimate that $3 million of this will show up this year with the balance in 2019. This equates the $5 million of incremental NOI in 2019 when factoring in the remaining lease up. Given these efforts, we are starting to feel increasingly confident about our 2019 NOI growth as well as our goal of increasing our core NOI by over $20 million by year end 2022. The successful lease up of these key street and urban leases with an integral part of that plan and we are well long away with the key drivers beginning to fall in place. Now I want to head a few of our second quarter metrics. In line with our projections, we have increased our in place occupancy by almost 100 basis points to 94.8% at June 30. Our second quarter same-store NOI came in above our projections at just under 1%. This was driven by lower than anticipated credit loss and stronger than expected revenue growth along with the timing of certain operating expenses. As we have discussed in prior calls, our first quarter 2018 metrics were impacted by the 2017…

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, as discussed on several calls, our funds have been pursuing a barbell strategy, acquiring both high-quality value-add properties and higher yielding or other opportunistic investments. This month, Fund V acquired Elk Grove Commons, a 240,000 square-foot shopping centre in California for $59 million. This well located centre in the Sacramento MSA has stable healthy anchors. In fact, HomeGoods, Trader Joe's and Kohl’s have all occupied the property since it's development in 2004. We consider this investment to be a high grade between our higher yielding and value-add strategies. For higher yielding assets, we’re still able to acquire in the7.5% to 8.5% cap rate range. And with respect to this specific property, during our hold period, we expect to have opportunities to attractively release certain spaces. To date we’ve allocated about 25% of fund sized capital commitments. So far all the fund's investments have been higher yielding or hybrid. By remaining selective, we’ve generally been able to buy these assets at a discount to replacement cost. In fact, our weighted price per square foot for our Fund V acquisition is approximately $150. And while it varies from market to market, it's hard to replicate a shopping centre for that amount even if someone gives you the land for free, especially in this era of rising construction costs. The financing market remains supportive of the types of assets we're buying and as rates rise, we are in fact seeing some spread compression. Year to date we’ve completed $104 million of acquisitions and our 2018 fund acquisition guidance is $200 million to $700 million. Today we still have $1.2 billion of dry powder available to deploy through the summer…

Thank you. [Operator Instructions] Our first question comes from Christy McElroy of Citi. Your line is open.

Hi, good morning, everyone, or good afternoon, I should say. Just on -- with regard to your comment on Q4 same-store NOI growth being 47%, you mentioned that you expect that momentum continuing into 2019. How should we think about that comment? How should we read into it as it relates to 2019 same-store NOI growth given that it sounds like you have a lot of visibility and conviction in this $3 million hitting in 2018 and then the $5 million hitting in 2019? Is it unreasonable to assume that 2019 growth could fall in that range if it's a relatively normal bankruptcy year?

Thanks, Christy. Yes, I think, couple of thoughts, one on rent commencement date. Just want to highlight -- just as the volatility, which that where we look at, if you do the math of every day that we have movement in rents, it's about $10,000 on a monthly basis. During the year, it's roughly a 100 basis points movement either way on rent commencement. So I do really think, in 2018, there's going to be just a lot of variability into where we end up when we deliver the space, which in turn flows into 2019. So we guess where to sort of taking the wide range in 2019 is really going to be driven by when we get these tenants up and running on the executive leases. And then 2019, I think your observation directionally is right. So we do have some strong things happening in 2019 between the carryover of -- we're expecting it to be $5 million of rents from the lease up as well as the redevelopments that Ken mentioned. You know, we think things are starting to come together nicely in 2019 and more importantly the $20 million as we extend out through to 2022.

Okay. Great. And then Ken you talked about not seeing any distress guide in high quality assets from an acquisition perspective. But with your stock having partially recovered from trough levels earlier in the year, how do you feel about your own cost of capital as it relates to the potential to do acquisitions in a core portfolio. Are you leading for that distressed or are you looking at something?

Because we have capital on multiple fronts, including on the fund side, we're always looking, but there still is a disconnect between our cost of capital right where it is today and our ability to acquire accretive lead to NAV based on where sellers are so far today. Here's my hope. One I hope for recovery because the public markets overreacted in my point of view and then what we're starting to see is better price transparency and acknowledgement on the part of sellers. In 2017, it was hard to get a seller to acknowledge shift in rents, much less shifts in cap rate. Our sense is now that there's a more realistic dialogue. We're not there yet. We haven't missed out on anything as I said as of yet. If the REIT market were not to recover, then we would not have a cost of capital advantage such that I would think our public REIT would be competitive with private capital, but as you point out, we're getting a lot closer.

Our next question comes from Todd Thomas of KeyBanc Capital. Your line is open.

Hi, thanks, good afternoon. Ken, you mentioned that you've seen a meaningful improvement in retailer interest in selected locations and high quality locations. And leasing activity appears to be improving also. Are rents stabilizing or moving higher off the bottom in some of these key high streets and sort of core markets that you're focused on?

It seems that way. But let me first add one clarification. Don’t get too confused by asking rents, which it would not surprise me that you still are going to see so called asking rents decline, because the ask was crazy a couple years ago and it’s slowly recovering. That being said from a retailer’s perspective, here is the difference between 2017 conversation and 2018. In 2017, far too many of our retailers of all different stripes were frozen. So even if you were willing to lower your rent, there were not worthwhile conversations to be added. Fast forward to 2018, and what we’re seeing -- and I’ve discussed it on prior calls, but some of our well-known names are back on office. They’re disciplined about rents, but they’re ready to sign leases. Amy touched on Lululemon, and they’re doing something very exciting with us in Lincoln Park, Chicago. But there’s a host of others. I look at what targets doing here in New York City and that’s another good example. And then you are seeing new retailers that you and I probably wouldn’t have talked about a few years ago. And they’re showing up as well. We’ve added several new names in our Armitage quarter of what we call screens to stores. And again, they can afford to pay market rent. They have no desire to pay more than market and my sense is that market rents are going up. So the short answer is yes, we’re seeing positive momentum in terms of retailer interest. Yes, we’re seeing that translate through into better rental comps than 2017. But to be crystal clear, you may still see quote asking rents come down and 2017 was a frozen year.

So on the $8 million NOI opportunity, so you're 75% of the way through that. How are rents trending relative to expectations? Do you see the potential for upside on the remaining $2 million?

Great point. We are -- it is pleasant to see retailers coming out and fighting much harder than they used to for space and not looking over their shoulder, not second guessing whether or not rents will be cheaper six months from now. And in some cases we are seeing retailer getting competitive in terms of rents. There is a decent chance and this is a -- that’s not lose sight of the fact. The economy is good, stock markets good, job markets good, our consumers are benefiting from all of that and our retailers are feeling those benefits as well. So there is a chance and that not only will we achieve our goals, but some of the space that we have in inventory now we’ll exceed our goals. And thankfully, just as I look anecdotally of what’s basically leased up towards the 75% and what we had in so-called inventory, we have a lot of good space in inventory that I think we’ll have more opportunity to benefit from any increased market enthusiasm on behalf of retailers, because we still have a space in SoHo or Madison Avenue, some really good space in Chicago. And all of that will benefit to the extent that we see this continued separation of the have and have-not in terms of retailer interest, in terms of location. So that makes us feel pretty good.

Okay. And then -- so outside of expansion space, when you talk to the retailers, have you seen any changes in the level of spend and investment that’s earmarked for existing stores or remodels, reinvesting in the store experience and so forth?

It runs again. But the short answer is yes. Every retailer is keenly focused on how do they position themselves in a Omni channel world, how does the supermarket of the future play out, what kind of spend, what does drive through look like, what does driverless cars look like. We will target and focus this expansion. You see them rolling out significant number of stores in urban markets. Each retailer is thinking about it differently, but I would call it refreshing and encouraging to see how they’re thinking about investing in their existing fleet, refining that fleet and then extending on it.

Our next call comes from Craig Schmidt of Bank of America. Your line is open.

Great. Thank you. I am just wondering what are opportunities for fund side of acquisitions might open up by your patients are waiting to pull the trigger. And would it be more on one side of the barbell or the other?

I’ll take a crack at it first Amy but feel free to chime in. Where we have found over the Five Fund, the sweet spot to be is when we can step in front of increased demand, primarily from retailers. And there is no doubt over the last couple of years that demand for new space has been somewhat muted, demand for new space that enables new construction has been even more difficult because of increased construction costs. So now that we’re seeing some shift and some retailers come to us and say here is where our expansion focus is, here is where we need to be and here is what we can afford to pay. There is a decent chance that we will start seeing. Increased demand from retailers such that we can step in front of that and use our leasing redevelopment skills for the right kind of markets. And we’ve been doing this for a while. So we know we can’t rush it, but that would be one area that I’ll be excited about. The other would be -- we're having to be selective, but we still think that these high yield opportunities, higher yield is a moment in time due to dislocations in the public REIT market and the private REIT market and probably has a year or two more of opportunity there. And we have the capacity, as Amy had pointed out, where we have $1.2 billion of buying power left. We‘re only 25% allocated, and I have no problem going to 50% allocation within that thesis, so there could be additional growth there. Amy, anything else to add?

No. I think that's covered it.

Do you feel you might see more products in the second half of the year than the first half?

We’re seeing a fair amount of product and I wish we could do more. We also understand that we are being selective. And I think that’s important as well. So it could kick in, I wish, it kicked in already. And there is absolutely no reason that we couldn’t do two, three, four extra volume. Historically, as a company we had tended towards close to $1 billion of transactional activity and we're at a lower level because that's where the deals are settling out. We're seeing a lot of stuff those that we can act on, we will, but the second half to kick in. And one way or another we have a pretty good proven track record of putting the dollars to work more often than not at the right time. So we think our patience and discipline will be rewarded. And we recognize that that $1.2 billion until it gets puts to work and doesn't provide a level of accretion, but our focus is finding the right deals that are profitable waiting until we see those. It could be the second half, Craig, if its next year still be yet.

[Operator instructions] Our next question comes from Vince Tibone of Green Street Advisor. Your line is open.

I have another question on the fund platform. Can you provide a little bit more color on kind of exactly what would need to change in the market, whether it would be rents or cap rates, in order for the fund platform to maybe grow more aggressively? And any color you could share on maybe why -- what changed from your original expectations to today and that caused some of the underwriting volumes or acquisition volumes to be a bit lower than what you are, maybe originally expecting?

Sure. If I had to pick one word, it would be co-tenancy, but now let me add a lot more color around that. In general, we think cap rates are in the right range, meaning Amy articulated 7.5% to 8.5% yield to the extent we can buy stable, but low growth because that's what is for the most part being offered up in the market, stable but low growth asset. In that 7.5% to 8.5% range we think based on an historical basis relative to other assets, we think that that makes sense given where borrowing costs are for roughly two-thirds of the purchase price. So I had no argument with or hesitance to continue to proceed on that. The problem has been, because we're buying these assets in relatively small portfolios and because frankly we need to be prepared to sell them in five to 10 years, we need to make sure that that NOI that is stable in loan growth is stable. And when you take a quick glance at the assets, they all look fine. And they're -- the usual mix of retailers. It's when we drill in, some of the assets have co-tenancy problems meaning of one retailer lease that can create a domino effect on others that would cause that yield to be in jeopardy, would cause asymmetrical downside and then we have to pass on those. So if I were to pick one reason, that would be it, but there are probably a host of reasons and maybe we are being slightly more selective in terms of locations. But if you look at the list of locations, these are secondary assets. And we think that there is a market for buying secondary assets at discounts to replacement costs, as Amy pointed out, in many instances discounts to construction costs. So we're ready to go as we see those but that would be the general shift is where the NOI, the yield does not look stable enough for us.

That's really interesting color. Do you expect Toys R Us to cause a lot of co-tenancy issues, it's across the industry. I mean could that be buying opportunities for you guys, if sellers, maybe you could buy the uncertainty and then fix the lease structure. Is that something you would consider or do you think that’s going to be increased visibility throughout the industry after a lot of some channel supply?

Toys is a possibility. And I wouldn’t discount it although I wouldn’t look at any one retailer or one group and say that that will be all of it. There will be dislocations whether it's the office supply or the Toys or a host of other changes. And where we can underwrite it? Where we can see a path to recovery of that yield? And we believe the markets pricing correctly. We -- not only will we do those, I prefer to do them. We have a very talented team that actually enjoys creating value at the real estate level. So our strong preference would be to buy into some of that vacancy, could buy into some of those headaches to fix problems for other more passive owners or otherwise, that’s what we do. So it’s very possible, it could show up, whether specific to toys or specific to other retailers will have to say.

Great. Thank you. One last one from me. Can you share your thoughts on Five Below signing a lease on Fifth Avenue? I’m curious to see if you think more off price or discount concepts could be more interest in this industry or retail space than they were in the past?

I won’t comment on that specific deal because, frankly, we were not part of it. We’re big fans of Five Below. And what retailers tell us in general is as they think about how they’re going to grow their brands in the 21st century. Getting in front of a lot of foot traffic, getting in front of important eyeball establishing flagships can be an important piece of this. So again, moving away from whether it’s Five Below or Dyson vacuum cleaners on Fifth Avenue, everyone wonders about all of these. But frankly, both of those companies now are getting airtime on a conference call, and they’re getting foot traffic and retailers need more and more to connect with their consumers directly. So you will hear DTC, direct-to-consumer, on multiple different levels. Now I realized that Five Below slightly different. But we are hearing consistently from our retailers they want to penetrate these markets. I mentioned earlier target. I could mention 10 or 20 other retailers whose focus is exclusively in the higher barrier to entry, urban markets. Watch what Acadia is doing over the next several years? Watch what a host of other mature brands are doing and using the urban markets, using the density to further connect with their customer. And I think a lot of this will make sense.

Our next question comes from Michael Mueller of JP Morgan. Your line is open.

Couple of questions here. Ken, when you’re talking about that the environment being better this year than last year. Would you say it's a little bit more on that depth of the tenant pool? I think we're trying to lease space to better discussions on friends or something else?

So I had to pick door number one or door number two or something else door number three. I would say it’s the pool of tenants. Let be very clear, while rents to sales matter and rents to EBITDA, and a whole bunch of other metrics matter a lot in our conversations with respect to rent. Supply demand matters as much as anything. And what we have seen as a broader range of retailers stepping into the market. Now these retailers are very good at establishing where market rent is. And so even at this point it's still, I would argue more of a tenant market but the retailers are stepping up. We have a broader range of them. We can find the right retailers now that blended nicely for our streets that blended nicely for the cluster of assets we have, whether it's Clark and Diversey or Rush and Walton in Chicago. The retailers will use the market information to see where market rents are. And as we have discussed market rents have corrected plus they’re getting better because the pool is getting better.

Okay. And then just, I think you said in your statement you sell a lot of investing on the fund side of late. As we got tell you that 2019 when you look at the 2019 you’ll be more active on the core side?

Unlike the Fund business where we know we have the cash and we know what that our cost of capital is give or take where LIBOR may go. The activity on the core is so dependent on having a competitive cost of capital relative to cash buyers out there. And the jury is really out on how much longer that we bear market continues. And I would refer to you frankly as to this has been a long extended bear market in terms of REIT sell off of when REITs with strong balance sheets with a focus on differentiated strategy like that when we can be back and often. It's beyond my pay rate to predict which quarter or year that happen.

I’m showing no further questions in queue. I would like to turn the call back to Ken Bernstein for any closing remarks.

Thank you all for joining us. Enjoy your summer. And we will speak to you next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.