Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Acadia Realty Trust Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Joy Liu. Thank you. Please go ahead, madam.

Good morning, and thank you for joining us for the second quarter 2020 Acadia Realty Trust Earnings Conference Call. My name is Joy Liu, and I am an intern in our Finance and Capital Markets 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 6, 2020, 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. [Operator Instructions] 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, Joy. Well done, and thank you to all of our summer interns this summer. Welcome, everybody. While we have plenty of details that we're going to drill into today, I think it's worth beginning with an overview of the progress that we have made since our last earnings call. As you may recall, back in April, we announced we were at a 50% collection rate. And of the 50% of tenants not paying, about half of them were national credit tenants seeking rent to maintenance. By June, we saw many of the nonpaying credit tenants back off their initial positions of force majeure, and recommenced paying such that by the end of the second quarter, we were collecting in excess of 70% cash. And then inclusive of short-term strategic deferrals with national credit tenants we are at above 80%. Also, we're seeing continued improvement in collections such that June was better than May, July better than June, and August is showing positive trends as well. So the first question is how solid is that 80%? Well, we have longer-term leases with average lease roll of less than 10% a year over the next three years. We have a nice blend of credit, essential retailers, high quality locations and strong demand. But we need to take into account the fact that there still is credit loss, rollover and supply demand pricing pressures. And additionally, we're still in the very early days of understanding which segments of the consumer will be most impacted and most sidelined as government support abates and as the new normal for unemployment and the economy emerges. Nevertheless, given the demographic quality of our portfolio, given the quality of our locations and the credit quality for our portfolio, this 80% portion of our revenues feel solid.…

Thank you, Ken, and good morning, everyone. I will start off with a discussion of our second quarter results, focusing on how COVID has impacted our portfolio, along with a few observations as to what we're beginning to see in a post pandemic environment, and then closing with a discussion on our balance sheet. Starting with FFO. FFO as adjusted was $0.29 a share. And within our adjusted FFO, we generated approximately $6.5 million or $0.07 a share related to our realized gains this quarter from our investment in Albertsons. Amy is going to provide some further color on the investment specifics, but I did want to spend a moment on how we are treating Albertsons within our adjusted PFO. Consistent with our past practice, our adjusted FFO will only reflect realized gains. Thus, any unrealized mark-to-market adjustments will be excluded until the underlying shares are sold. As a reminder, at our 28% pro rata interest, we have approximately one million shares remaining that we expect will be sold over the course of the next two years. In terms of the $0.10 of cohort-related credit losses this quarter, this translates to $9.4 million and is comprised of $2.7 million of reserves on straight-line rent and $6.7 million on current period billings. First, starting with the $2.7 million of straight-line rent reserve. While the current period reserve is somewhat irrelevant, given that it represents an amount that is built up over multiple years, I think the more relevant data point is what remains on our books at June 30. At quarter end, our pro rata core straight-line rent balance was approximately $35 million. And to date, we have reserved approximately 30% or $10 million against this amount. Now moving on to the $6.7 million reserves that we took against build grants…

Thanks, John. Today, I'll provide an update on our fund platform. First, with respect to our capital allocation strategy, our funds are a mix of street, urban and suburban retail. Over the last few years, we knew we were wait cycled. Accordingly, we shifted our fund acquisition focus away from value-add development to more stable but out-of-favor shopping centers. Since 2016, we've successfully aggregated an approximately $650 million portfolio of 14 open-air suburban shopping centers on behalf of Fund V. The portfolio has strong geographic and tenant diversity. We acquired these properties at a substantial discount to replacement cost at an unleveraged yield of approximately 8%, and we secured 2/3 leverage at a blended interest rate of 3.7%. Pre-COVID, we were clipping a current leverage yield of approximately 17%. Over the past several months, the fund's collection rate has generally remained consistent with that of our core. Given the overall durability of Fund V's cash flow, in May we reinstated our monthly operating cash flow distribution to our fund investors after a two month pause. Looking ahead, if we assume that Fund V's NOI returns to a baseline of 90% of its pre-COVID level by next year, consistent with Ken's earlier remarks, then the fund will still be delivering a mid-teens current return on a leveraged basis. And that feels pretty good, especially compared to alternative investments in the real estate sector. On the acquisitions front, the transaction markets remain quiet. We have approximately $200 million of dry powder or approximately $600 million on a leveraged basis, and we have at least a year to invest it. Given increased headwinds in the near-term due to COVID-19, we will remain appropriately disciplined. Since launching our fund platform more than 20 years ago, we have invested under four key strategies: Opportunistic, which…

[Operator Instructions] Your first question comes from Craig Schmidt with Bank of America.

Thank you. You guys said you executed 25 new and renewal leases in the core and fund portfolio. And basically, you said that the rents or the close were pretty near what you thought pre-COVID expectations. Could you provide a little more detail on that? As well as maybe leases that are coming up, what kind of rent spreads are you seeing?

John, why don't you go first and then I will.

Yes, absolutely, Craig. So two things. I think on the first point on where we're seeing rents in line with our pre-COVID expectations. That's on the pipeline. So on the pipeline, and Ken mentioned it in his remarks, that we have over $6 million of leases sprinkled throughout our -- each of our portfolios that are well along in the process, whether at lease or under LOI, and we are seeing those being signed right in line with where we would have expected it before the pandemic hit. On the -- so that was -- that's on where we mentioned on the in excess or in line with expectations. And then in terms of the other point that we put in the press release on new and renewal leases of those. There were no new conforming leases in the core, we just had renewals. And those were spread throughout the portfolio.

And then just in terms of color and feedback that we're getting from those retailers ready to go back on offense. Many of them think back to the last recession, and every recession is different, but those that feel that they are well positioned, and there will be many, to go back on offense and that their business models are well situated for what they see over the next several years, what they're telling us is they don't -- they do not want to wait and miss the opportunities. And so we do see them stepping up. Some of them are the off-price retailers who are not really thinking about omnichannel, who are really executing and just want the best locations, and we're very encouraged by their interest throughout our portfolio, including in our urban assets. And then there are a variety of retailers who are recognizing the benefits of omnichannel, whether it is some of the digitally native that we've been talking about for a while, but then also look at what Target has been doing and the new leases that they have signed post-COVID in New York City alone, and that also is giving a positive indication. So those retailers that recognize they're going to weather the storm and recognize that they're going to be in a strong position, they're starting to step up.

Great. And then just for a follow-up, how long do you think it might be before Fund V starts to see some opportunities? And what type of assets would you be targeting in terms of acquisitions?

And it's impossible to predict precisely, Craig, because as you know, our capital is fully discretionary and on call. So for the right deal, the answer could be tomorrow. I doubt it will be tomorrow because I would know about that today. But there's so much disruption in the system that we are seeing real estate embedded into retailers, that's quite intriguing. We are seeing, especially from the private market, a variety of ownerships that use too much debt. And now there is going to be restructuring, whether it results in foreclosure and the purchase of debt, or preferred equity taking over and looking for a new operating partner, still too early to tell. And then there's all of the other areas that are in our core competencies. So what I say in the very short term, we saw that everyone throws stood still for a bit to just figure this out. And now we're starting to have those kind of conversations. They could hit quickly. But if they don't, and we have to be patient, our capital is very patient, and we'll wait until we see the right time.

Your next question comes from Christy McElroy with Citi.

Hi, good morning. Thanks. I'm just, Ken, in regard to your comments about the potential for a 10% NOI impairment, and I appreciate your willingness to put that number out there. How do you think about the impact from occupancy loss versus an adjustment to your in-place rent? So just trying to think about it from the perspective of occupancy, which can be backfilled, versus lower in-place rents that could be locked in for longer.

And Christy, as you know with us, it even gets more complicated, because we have some very valuable spaces that are low square footage versus a K-mart box somewhere in suburbia, which is a lot of square footage. So it will be hard to track on a square footage, and this is what our occupancy will decline to. That being said, if we think about it from an economic occupancy, if you will, I do think that the majority will be from tenants that go away and then get refilled. So that falls more into the vacancy than from just melting ice cubes and a significant amount of rent declines. And that just has to do with where our basis is in terms of rent per square foot, as I said, in Manhattan. Thankfully, we were careful that we didn't have top of market rents. We tried, but the leases were long term, so we didn't get to get to those peaks. So we don't have that problem of significant rent declines. There'll be some in some spots, but overall, we feel pretty well insulated on that side. We feel very well insulated as it relates to our long-term leases with Target, for instance, where it's measured in decades, not years. So I do think it will be losing tenants or tenants pausing until they can fully reopen and then climbing back to the new normal rents.

And then I wanted to go back to a comment that you made in answer to Craig's question about looking in the context of the funds about the real estate embedded in retailers that could be intriguing. And how would you think about taking advantage of some of those opportunities? Could you maybe expand more on that comment, given your willingness in the past to do those sorts of retailer driven investments, and as we just saw with Albertsons that can be profitable.

Sure. And the same thing with Mervyns way back when, where there was a department store chain that needed a turnaround at the opco level, but equally important was a turnaround at the propco level, and that's where we were involved, taking closed stores and converting them into other retail uses or other mixed uses. Without getting into the specifics of which retailers today have real estate that best and highest use probably goes beyond their current use, those are the conversations that our acquisition teams have with bankers and brokers and owners all the time, and there certainly are some of them today. Because one of the many things that COVID has done has certainly accelerated the reinvention of a wide variety of real estate, and we have the capital and the skill set to execute on that. Again, it requires the stars aligning. It needs to make sense. I can gladly talk about Mervyns and Albertsons, the deals we did do. I could talk a lot about the deals we did not do. So we'll see if, if that right real estate shows up, but if it does, we'll be there.

Your next question comes from Todd Thomas from KeyBanc Capital Markets.

Good morning, Ken, just following up on the your comments around the 10% NOI reduction that you discussed over the next year or so. As you think about the portfolio, how do you think that NOI losses spread out across the suburban street and urban segments of the portfolio?

Sure. And John, feel free to chime in as well. As what we as we said, the urban piece. So they're major cities, but these are shopping centers anchored by Target or Whole Foods or Trader Joe's, that the collection rate feels or has been the strongest of all three components. And my guess is that, that will continue to be the case, and the NOI will be the most stable. Now the flip side of that is, as you can imagine, the contractual growth of a Target-anchored property with limited satellite space is also the lease. So the growth of that 20% of our portfolio comes from densification, and you see us executing on that where we're redeveloping in San Francisco, our city center, and there will be others over an extended period of time, but none of them happen quickly and nor do we need them to. So that will be the strongest. And so far, I think if you think about the 40% that we say that is our street portfolio, the half of that, the 20% that is in the major markets, I think that's where we're going to see, at least in the short run, the biggest short-term challenges. But the good news here is we're in touch with all of those retailers. And almost without exception, all of them look forward to reopening once it's safe for their employees, once they can get their businesses back on track. And none of them are saying, these are markets we don't want to be in. So what I can't answer right now, Todd, is how long is that dip and how quick is that rebound. But that would be the area conversely that we're probably most focused on in the short run. John, I don't know if there's additional color you want to add.

No, Ken, I think that summarizes it well.

All right. And then just digging in on that leasing pipeline. So you talked about $6 million of NOI. Can you talk about the timing that you might expect to see that materialize? And is that largely for sort of new noncomparable space in the portfolio? Or is that demand waiting to re-tenant some existing space? I guess you framed it up as backfilling more than 50% of that 10% NOI loss. Is it targeted to replace tenants? Or just -- that's sort of how you're framing it up. I was just curious if you could comment on that.

Yes. So the vast, vast majority falls into that 10%. You're correct, Todd, meaning some of those spaces, if you think about the 10%, and some of them are tenants on our watch list, we don't have control of that space yet. But we do anticipate -- and some of the space has been in high demand for years. I don't want to say much more than that. But -- so retailers, it's been on their radar screen for a while. And now they're saying, you know what, we think you might have the opportunity to get this back sooner rather than later. And so we are trading paper on that. It is dependent on us getting those spaces back. The good news if we don't get the space back is it NOI right now, the bad news is I am much more excited about the new tenants coming in than the existing ones there. So that's a decent chunk of the $6 million is scattered throughout our core portfolio on that side. And then others are just vacancies that you and I have discussed over the last year or two, high-quality locations where tenants were gearing up. With COVID, everything paused for a couple of months. And now thankfully, what our retailers are saying is they're ready to come back. The challenge as to timing, Todd, is I don't expect, nor do we really encourage retailers to open and start paying rent before a given community center or street is reopened. And so this summer will be challenging. And I think that it would be imprudent for us to expect a lot happening during this quarter. But then I -- what we're hearing from our retailers is as soon as they can safely reopen, they want to be open. They're doing site visits now. They are actively negotiating. This is not just peak ball staying busy. And so I am encouraged, as we get past the health crisis, that we will see these over the next several quarters.

All right. That's helpful. And just a quick one for John. You mentioned the 1.8% exposure to ascena that was reserved against this quarter. How much ABR exposure do you have to bankrupt tenants in the portfolio overall?

So in terms of bankrupt tenants overall, so I would say, Todd, it's probably in the 3% to 4% inclusive of ascena. So maybe another 1% or 2% on top of that. Overall watch list that we took was around 5%. So I'd put it probably another 1.5% on top.

Your next question comes from Mike Mueller with JPMorgan.

Just curious how good of a handle do you think people have on what street rents are today, whether it's in SoHo or Georgetown or Chicago? What's that visibility look like?

The visibility has probably never been worse, Mike. At one hand, we all think that this is just something that landlords and tenants agree on in a vacuum. But the reality is it's sales based, and that retailers are thinking about what revenue can they produce out of those four walls and then what other halo effect or other incremental benefits might exist in omnichannel or otherwise. But in a market that's shut down, the best they can do is look back to what were comparable sales pre-COVID, what might does the recession look like once we get past this initial phase, and so there's not a lot of clarity. The flip side is, they know where their customers are ordering from. They have very good data for those that have online, for instance. Additionally, as opposed to the last recession, this one has not hit the housing market, has not hit the white-collar market, has not hit the affluent market, and those shoppers are still shopping. They're just shopping in other ways. So many of our retailers say, we know if we can open a store here once we are post-pandemic, we can see based on where we're shipping to that, that's where the shopper is. So there are ways that people are feeling their way through, but it's still very early days.

Got it. And then thinking about the core portfolio, thinking about how your capital deployment looked over the past three years, whenever you start putting money to work again on a go-forward basis. How do you think it will be do you think it will be similar to the types of investments you made in recent years or different in somehow, whether it's geographically or the type of property buy?

Way too early to know. Because of, first of all, all of the realities of working through this crisis and everything I touched on, but also just the reality of where the REIT market and our stock price has gone, I don't think we're alone in this. I think there's very few retail REITs that are trading at or at a premium to their NAV, such that they could use their currency. And we have always been very clear that we need to be able to match fund in order to accretively acquire. So step one is we need to see a recovery or a reconciliation between the private markets and the public markets before we can think about using our currency for just about anything. And then once we get to that point, and I hope we do, and I'm confident we will, then where will the best opportunities to grow our core portfolio be? And so much of that depends on what this looks like when we get to the other side. We have always worked very hard to listen to our retailers and hear from them where they see their strongest growth opportunities. And we're still in the early days of that. We'll get a better sense as we see how the lease-up plays out. But then also a whole host of other shifts that are occurring in our economy, in the consumer and then how the consumer is shopping. So that's a long way of saying, we have a pretty broad set of core competencies. We have biases and we're certainly going to be guided based on where the retailers come. But first and foremost, we just need to focus on leasing up some really valuable space, getting that NOI and FFO to the bottom line, and then we'll figure out the other stuff.

Your next question comes from Linda Tsai with Jefferies.

In terms of the 10% hit to NOI, and it not being a snap back, how are you thinking about the pace of recovery returning to 2019 levels, acknowledging there's some obvious differences? Do you think the financial crisis holds any clues?

I don't no. So here's what I'm puzzling with. And Linda, we're all looking at similar data. I probably spend more time talking to retailers, but we're all seeing a bunch of things that are playing out similar and then many that are different to the financial crisis. As I pointed out earlier, during the GSC, the housing bubble burst, and you saw housing prices up dramatically. The stock market dropped dramatically. Now if you look at the S&P 500 or many, many housing markets, perhaps outside of New York City and others, you see a lot of stability. So what I can't predict, because some of this is in the government's hands, some of this is dependent on when the health crisis and how it is resolved, as to what shape or how long it takes. And I'm hesitant to guest other than to say, we're going to watch all of these trends carefully. We are not going to be presumptuous as to predicting when we see the resolution of the health crisis. And then we're going to see in the next few weeks what the government support the next round looks like. And that may give us some sense of which portions of the consumer are going to be in tougher shape than others. And that then also will guide which portions of our portfolio recover faster. But if you just think about what I've said, we may see and it wouldn't surprise me to see, that recoveries follow that portion of the consumer that is better insulated from this crisis than others.

And then one for John, what's the level of collections you're getting from restaurant and gyms?

Hi Linda, so starting with the gyms. So I think the gyms is, it's less than 3% of our ABR. And on a collection percentage, those fall into the category of not get open, given the locations where our gyms are, and we're seeing around 20% collections on those and have reserved appropriately. And then on the restaurant side, it's kind of, I think, a bit more nuanced. So overall, as you'll see in our supplemental restaurant exposure, we list at 8%. But it's in we think about it in different, different categories as it relates to collection. So I think the, what I highlighted in my remarks was what I think is the most challenge at the moment is on the full-service side, which is under 2% of our ABR. And that one's struggling, and we're seeing less than 30% collections -- right around 29% collections on our full-service. And then when we look at the other categories of restaurant, whether it's coffee or fast food, that is trending almost at the -- at full collections. And then we have some what we refer to as quick service. And that's less than half, call that, 45% that we're seeing there. So on a blended basis, Linda, we're about 45% collections on our restaurant exposure overall.

Thanks a lot, guys.

Your next question comes from Floris Van Dijkum with Compass Point.

Hey, guys. Question on your closed space. And I might have missed this in your earlier remarks, Ken, but what percentage of these stores and ABR that's closed is mandated closed versus closed by choice?

John, do you have that data?

I do. Yes, Floris, I would say the vast, vast, vast majority is -- what is closed, it's mandated by close. And then the other ones that are not is for the health and safety of the employees. So I think, well, we don't have any in our portfolio, but like an Apple, where they're choosing for the protection of their employees not to open. So I think it's a relatively small bucket that are truly -- that are actually not open for reasons that they could be.

Great. And maybe can you also talk -- some of the other -- some of your peers have talked about August -- initial August collection trends. Can you comment maybe on that and give some more insight?

Yes. And I think, Floris, what I could -- almost echo out what Ken said, is that we, when we first started looking at cash collections as being such an important metric. And first time we did this, we're at 50% when we talked about April. We then -- next time we spoke to it, we're at 56%, moved to 71% and we're at now 74% in July. The point being that, I think as the world is starting to reopen and the relevancy of the physical space to the retailers became very apparent, we saw collections rise as part of that. So what I would say in August, and we're still early into the month, and just following up on what Ken said in his remarks, is we are seeing similar upward trends in our cash collections. So don't want to give a percentage yet because there's still several days left to go. But we're seeing the same positive news as stores start to continue to reopen as we -- the deferral agreements, as I mentioned, flip to full rent, where we see ourselves trending towards the 80% range in the, hopefully, very near term.

Okay. Thanks.

[Operator Instructions] Your next question comes from Vince Tibone from Green Street Advisors.

Hi, guys, for tenants that are open in your Street portfolio, how are sales trending relative to last year? And are there big differences based on geography?

There are big differences based on geography. There are big differences based on whether those retailers had going into the crisis, a strong digital omnichannel presence, and thus, we're able to execute through the crisis and use the stores for all of the benefits there. So those we have seen the a strong rebound on Street retail sales. The others, obviously, Vince, Trader Joe's, Target and some of the other essential retailers, you have seen sales growth that is hard to wrap your head around because of the obvious shift. Where I think it has been the toughest has been those retailers without strong digital, that the cities are just reopening. And there, it's quiet. And I would expect it to be quiet in places like SoHo until New York has really come back. And I think that's a post Labor Day phenomenon, and that's what we'll be watching for.

That's helpful. So anything you mean to just quantify a little bit more on average street retail selections for what's open? Or is it still even too early to have that?

It's still a little too early. And the other thing I'd remind you is we don't get official monthly sales reports. So the dialogue we're having with these retailers, certainly they're discussing their sales. And if sales are good, you tend to hear about those. And the rent collection's high and the others a little less so. So it's still a little early. I think that's a worthwhile conversation for us to have post-Labor Day.

Makes sense. One more for me. Could you discuss the background on the town center transaction and the conversion there?

John, you want to cover that?

Yes, absolutely. So Ken Vince that you're referring to within the supplement, how we converted a note into an equity ownership in the town center. And that was just part of a tax transaction, which we did several years ago and several steps to the conversion where it was where we converted a note that was tied to an equity interest in the partnership and in a noncash exchange, exchange the note for a full ownership in the property. And that has happened over the past several years.

Was the price prenegotiated, or I'm trying to get a sense, is this at all a comp of what a negotiated transaction could be. Because the way I'm looking at it is you acquired beyond 27% of additional interest for in $39 million. So I'm just trying to get a sense of this new pricing, reserve. I mean that is all prenegotiated.

Prenegotiated several years ago. So not an indication of post-COVID or anything like that.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Kenneth Bernstein for closing remarks.

Great. Thank you all for joining us. Look forward to catching up with all of you on our next call. And until then, stay safe and well.

Ladies and gentlemen this concludes today's conference. Thank you for participating. You may now disconnect.