Good day, ladies and gentlemen, and welcome to the Acadia Realty Trust fourth quarter 2018 earnings conference call. [Operator instructions] As a reminder, today's conference may be recorded. I'd now like to introduce your host for today's conference, Mr. Kamil Kowalczyk. Sir, please go ahead.

Good afternoon, and thank you for joining us for the fourth quarter of 2018 Acadia Realty Trust earnings conference call. My name is Kamil Kowalczyk, 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 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 14, 2019, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Now it is my pleasure to turn the call over to Ken Bernstein, president and chief executive officer, who will begin today's management remarks.

Thanks, Kamil. Great job. Good afternoon. Happy Valentine's Day. As you saw in our press release, we had a solid quarter, driven by continued momentum in leasing fundamentals especially in our higher barrier to entry street and urban assets. So today, I'll start by discussing some of the retailing and leasing trends that we're seeing and their positive impact on our portfolio. Then I'll also discuss what we're seeing in the transactional market. Amy is out on maternity leave, so I will also update you on the progress we're making in our fund platform. And then John will drill further into our operating metrics and balance sheet strength. Our solid operating results last quarter further confirms our thesis that we're in the early stages of an ongoing long-term separation between the haves and have-nots, both in terms of retailers and retailer real estate. Our fourth quarter fourth quarter leasing activity also provides a clear contrast of 2017 compared to 2018 from the perspective of tenant interest and leasing activity, with 2018 being significantly stronger than what we experienced in 2017. Starting early last year, driven by an improving economy and tenant performance, we begin to see a variety of tenants selectively going back on offense. What we're increasingly hearing from these retailers is that great real estate is going to be a key component of their growth and a critical area of differentiation for them especially in an omni-channel world. We're seeing this shift playing out in our portfolio, especially in our street and urban assets. In 2018, we set forth important goals to accomplish for our leasing in our core portfolio. Thanks to the combination of improving tenant demand and the hard work of our team, we substantially achieved the $8 million of incremental lease up that we sought.…

Thank you, Ken, and good afternoon. I will start off with an overview of our fourth quarter performance and key operating metrics, followed by a discussion of our 2019 guidance and then closing with an update on our balance sheet. Starting with same-store NOI. Our same-store NOI was solid and in line with our expectations at 4.1% for the quarter. This growth was driven by the profitable leasing within our street and urban portfolio. Now in terms of our 2018 leasing goals, we have achieved over 95% of our $8 million NOI goal, with a few of our highest quality spaces remaining inventory as we head into what we're seeing as an even stronger 2019 retail market. This remaining inventory represents approximately $1 million of projected NOI and is comprised of less than 7,000 square feet in Chicago's Gold Coast along the Soho and Madison Avenue in New York. I now want to add a bit of additional color on the two key leases that Ken highlighted, Uniqlo on State Street and Whole Foods in San Francisco. As Ken mentioned these leases are transformational to our portfolio. Not only do they validate our long-term growth goals, but they also strengthen our overall tenant credit mix and credit profile. In terms of timing, we anticipate rent commencement on Uniqlo in late 2019 with Whole Foods in 2021 as they work for the necessary approvals and complete their buildouts. The signing of these two leases represented over 80,000 square feet of urban retail space. Both of these leases were done profitably and in line with our expectations at a combined ABR of approximately $4 million. Now moving on to 2019 same-store NOI. As outlined in our release, we are projecting 3 to 4% growth. Now I wanted to spend a moment to…

[Operator instructions] Our first question comes from the line of Christine McElroy with Citi. Your line is now open.

Hi. Good afternoon guys. Just Ken, following up on your comments about the investment opportunity set. You've got that, the $200 million to $800 million fund acquisition range out there, which is pretty wide. Maybe you can give a little bit more color on how you're thinking about those opportunities. You've been kind of going down that yield investment path. You also mentioned the potential for maybe doing some development project purchases. Sort of how are you thinking about that, all of that type entire opportunity set in the context of that range that you provided for 2019?

Sure. And while I think more anecdotal than where the market is, we do have in our pipeline, and by that, I mean under letter of intent or contract, a volume that's equivalent to what we did in the entirety of last year. So we feel pretty good about how the year is starting off. Primarily those are on the higher-yielding side. We're going to have to continue to be selective on those assets. As I mentioned in the prepared remarks as we've discussed over the last couple of years, we think that it if we can buy in the seven and a half to eight and a half unlevered yield basis, lever it at two to one clip a mid-teens return, that's a compelling place to put capital while we go through the shifts in retailing that are occurring. But that NOI has to be stable. And so we've had to be far more selective than I initially thought, and that's why the volume for that one initiative has been lower. But we think that 2019, those transactions, should continue. And so expect some portion, I would say at least $200 million, of our 2019 goals to be in the higher-yielding side, and it could be twice that. In terms of development, and really more appropriately, redevelopment, the critical piece there is if you buy too many assets or too much land at a time when demand is very weak, you're going to end up having to hold those assets for a while. And we try to be a little more careful about the timing on that side. And so what I'm seeing is in 2017, even 2018, demand was still either soft or just forming. We are now seeing some interesting new demand coming into the marketplace. And if we can match buying assets, buildings, at the right price for redevelopment and bringing in the right retailers, 2019 may be the right time to do that. That being said, we remain very focused on construction costs. They continue to climb in almost every one of our markets. We can always be hopeful that they level off. But at this point of time, I wouldn't do that. So we need to make sure we can lock in our construction costs responsibly, that the tenant demand is really there before we would pull the trigger on the development side.

Okay. And John, just with regard to the recaptured lease and the $0.07 cents of accelerated 141 impact, I just want to make sure I understand the moving parts as it relates to the trajectory of the economic impact in 2019. So is the downtime impact included in same-store NOI? And can you quantify that downtime impact? And sort of what's the cash mark-to-market that's expected on that lease for the new rentals?

Yes. So Christie, just first off, just to be clear, the $0.07 has no impact on same-store NOI. And as you alluded to, it's all on that cash. That is, it's not factored into our same-store. Additionally, the downtime with that lease is, I would project at six to seven months. And in terms of the exact spreads, I don't want to, you know we don't give tenant-specific lease information. But it is a, it will be a profitable spread as indicated by the large below-market recapture we did. And keep in mind that number is tied to a multiyear lease. So that could be a renewal period that extends 15 years, which gives the size of the number. But when you think about that from an NAV impact, we have economically recaptured a global market lease, and that will translate into cash as we put that space back online in the next six or seven months or so.

And so can you give us the dollar amount of the rent loss in 2019 versus 2018?

Yes. Not, don't want to get into the specifics of the actual lease. But that is factored into our 3 to 4%.

Our next question comes from the line of Craig Schmidt with Bank of America. Yourline is now open.

Thank you. I was wondering if we can get a little more color on the same-store NOI spreads between street and urban and the suburban portfolio. I mean, is it stronger contractual set of step ups or more attractive occupancy costs? What's driving that? It seems wider than ever.

It's why we thought it was very relevant to put it out. And as I spoke about in my remarks, while it's half of our NOI, it's, that's 70, 75% of our growth asset value. So it is a meaningful delineation between the two portfolios. So a couple of things. On the suburban, I mean, historically, what we have always said is that of suburban rent, contractually it's going to grow in the 1% range, which is what we're seeing. The slight tick, which would get us zero to one, is we see us losing just from, nothing significant but roughly 50 basis points of occupancy on the suburban side in 2019, which is dragging that typically 1% down a bit with not a lot of growth in it. But then in our street and urban, it's a combination of different things. It's, and this is one we've talked about before is that in our street leases, we see right off the bat 3% growth to traditional nodes. And in urban, about 100 basis points softer than that. Additionally, when the two redevelopments that we have, Clark and Diversey and City Center in San Francisco, those growth will be in. And that's more of when I think of 2022. Those aren't in 2019. But then redevelopment NOI, the growth from that is part of that as well. Again, not in 2019, so that is probably confusing. But the bigger piece is we have, and we talked about last year, is when we got a bunch of space back in 2017, we talked about a 20% spread in that space we got back. That part of starting to show up in '19 and beyond. So it's really the spread as we capture those leases, which as Ken mentioned, was if we look at that $8 million, the in-place rents on that $8 million previously was $6.5 million. It's $8 million and we see that growing to $9 million. So I think that's the biggest driver. To add a little color also from where I'm seeing the most improvement in retailer interest, it is in the street and urban markets. Now they have been a heck of a roller coaster for the last couple of years. But what our retailers are telling us, especially some of these new emerging brands but also the Uniqlos of the world and the Targets of the world and the Whole Foods of the world, they're going to be more selective in where they open. They are not going to been as many stores as emerging brands might have a decade ago. But then they are focused on these key streets. And so that's where we've seen probably the single most improvement in retailer interest, and so that's starting to reflect through on the numbers as well.

And then how might the leasing direction change at City Center now that you've got Whole Foods coming in?

It should. It's still a multi-quarter process and there's a lot of construction going on. But I can't think of a better compliment to the overall property than having a Target, which is also slated for an upgrade; and a Whole Foods with a host of other retailers that we won't discuss now. So I think it's a game changer.

And our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Yourline is now open.

Ken, you mentioned that there's been some movement in pricing and maybe a willingness to transact in the street and urban retail properties and that that could potentially drive some activity in the core portfolio. Are you seeing prices adjust in the private market? Or is there anything specific that you can point to as to what's impacting that change that you're seeing today?

Sure. And the situation is, how would I describe it? Fluid to say the least. And Todd, as you know, when we're adding assets to our core portfolio, the stars have to align. And by that, I mean we have to have both a cost of capital that enables us to acquire accretively. And you have to have sellers who are willing to be realistic. I think the public markets moved quickly and I would say overreacted but reacted much earlier in terms of price shifts and rental shifts even for great real estate. And the private market lagged. It's not so much that cap rates have moved, although they have moved some. We're still in a sub 3% 10-year treasury environment and for key gateway to market assets, there's still a pretty strong dip in terms of the cap rates. But what has moved, to answer your question, is rents have become more realistic. A year ago, it was really hard for any of us to gauge where would retailers reemerge, what kind of rents on a given street. Now there is enough transparency on rents that you can look at any of the given key markets and have enough data points on rent to get comfortable as to where NOI should be over the next one, three, five years. And then the real question is as some of this vacancy gets absorbed, will some of these markets outperform retail in general? Sellers now can cling onto cap rates that they may choose to, but there's enough transparency as to NOI. And there's a willingness among more and more sellers to recognize that mark-to-market that we're hopeful that 2019 could be an opportunity for us to begin to add assets again. That being said, again, it's dependent on a very, very volatile stock market. And we have historically always matched, funded and maintained a strong balance sheet. I think it's fair of you to expect us to continue to maintain a strong balance sheet and not lever up. And it's still a bit early, but we are seeing the shift.

Okay. And your stock price is not far from $30, but you last issued equity at higher prices. Has the threshold, the issued equity changed at all? I mean, how should we think about sort of funding levels for new investments?

The way you should think about it is not necessarily what was our stock a couple of years ago but can we acquire assets that are consistent with our long-term growth strategy, assets that are consistent with our projected NOI growth, which we feel very good about. So those are, the bar is pretty darn high in that respect. It has to be consistent with that strategy, and it has to be accretive to our net asset value. And the devil is in the details, but we have a proven track record of being disciplined on that front. And I would not expect to see that change anytime soon.

Okay. That's helpful. And just one more, if I could. A question on City Point. There's no change in leasing between the third quarter and the fourth quarter. And the shop space, almost 170,000 square feet, it's still 23% occupied. I was just wondering if you could give us an update there. Maybe talk about some momentum and the timing to get some additional leasing completed there heading into '19.

Yes. And there has been a meaningful shift. You won't see it until, we talked about it, and I'm not going to take away Chris Conlon and his team's thunder. But as I did mention in our prepared remarks, we are expanding Alamo Drafthouse because the demand is significant. So we're doubling the number of screens. It's one of the top-performing theater entertainment chains in the country. We are expanding DeKalb Market because of very strong demand there, adding a bar and entertainment feature. Century 21, Alamo Drafthouse, Trader Joe's, Target are all doing extremely well. So from a development perspective, if you can take care of your upper levels and lower levels, the majority of the growth and profitability comes from the street level, which is all that you have left. Then the critical thing has been because of the disruption to traditional retailers, if we had put in the same old retailers that you see anywhere in America, I don't think it would have been well embraced in Brooklyn. And in fact, now, we are seeing a new exciting breed showing up. Some of them are names you'll recognize. Others are names you won't. But when you visit, or you visit with your family, you're going to be very excited. So hard to gauge exactly the opening dates within 2019. But just as I have mentioned elsewhere in our portfolio, there is a meaningful difference in the tone and the type of conversation and the excitement from the retailers that we're seeing for these kinds of properties compared to a year ago.

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

Hi. Can you provide same-store NOI growth for the suburban portfolio in 2018 and 2017? I'm just trying to get a sense if there's a big deceleration in 2019 or 0 to 1% growth will be consistent with the recent levels?

I think, Vince, there was not a, I think traditionally, our suburban has grown between, call it one and two and half percent. So I think in '19, sort of the phenomena was really, you didn't have a lot of larger rent bumps and we had about a 50 basis point drop in occupancy that took us off the norm. I think the bigger story was just the widening spreads that we saw in our street and urban portfolio with the leases that we captured and profitably leased during the past year.

Okay. Certainly not a, that's helpful. Just to clarify, do you, going forward, in the suburban portfolio, do you expect 2019 to be kind of an outlier in the low side due to bankruptcies? And you'll rebound to maybe a 1 or 2% clip going forward? Or just with your view of retail and kind of the bifurcation, is 1% below or, with a better run rate for the suburban going forward?

We have been, I think, cautious about the amount of growth we see on the suburban side. I'm always hopeful, but our expectation is it will be higher than flat. It should be in the 1 or 2% range, providing nothing changes. And the only thing I can assure you is everything is going to change. So sooner or later, we'll be talking about a recession. Sooner or later, there will be additional bankruptcies. But we very much like the majority of our suburban assets. We do think they should have some level of growth. But we also then recognize that there is more generic retail, more suburban retail in the United States than there needs to be. There are a bunch of retailers that are reinventing themselves, rethinking the size of their stores. And in some instances, that will create longer-term headwind. So better than flat would be my expectation. And my hope would be that it could return to 200 basis points above that.

Got it. One more from me. Can you provide a little more color on the approvals needed for the Whole Foods, the lease at City Center? Are these approvals you need to get from the city or from Target? I'm just surprised Target will allow a Whole Foods in the Center.

These are primarily municipal-related. And we wouldn't have signed the lease and announced it without Target being on board. We spent a lot of time with them. And I think among retailers in general, you have seen a pleasant evolution over time of recognizing that there's more compatibility among the great retailers, even if they do periodically compete, than there is conflict. And so I'm actually more encouraged today when I sit down with a group retailers, and in January, I did thankfully get to meet with a wide variety of our retailers. I'm more encouraged about their level of cooperation today. There are some exceptions, but I more encouraged by it today than I was one, three, five years ago. It wasn't that long ago that our retailers said we don't want fitness in our shopping centers. And now that sounds counterintuitive and crazy today. But even that was an evolution of understanding that the shopping experience is changing. Let's bring as many of these great exciting retailers together. And they tend to thrive more so than when they're an island to themselves.

I'm showing no further questions in queue at this time. I'd like to turn the call back to management for closing remarks.

Great. Once again, happy Valentine's day. I know everyone's busy on earnings. But hopefully, you get to enjoy yourselves, and we look forward to speaking to you again soon.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.