Good day and thank you for standing by. Welcome to the Fourth Quarter 2022 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Romero Reyes.

Good morning and thank you for joining us for the fourth quarter 2022 Acadia Realty Trust earnings conference call. My name is Romero Reyes, 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 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, February 15, 2023, and the Company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue, and we will answer them as time permits. Now, it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.

Thank you, Romero. I bet that we didn't tell you about having to do this when you joined us, and you did a great job. Welcome everyone. As you can see in our release, our fourth quarter results represented another strong quarter with operating fundamentals coming in above our expectations and same-store NOI for the year exceeding our guidance. Looking back, our leasing activity for the year was strong in terms of both volume and rent levels achieved, and this momentum continues. In the fourth quarter, we increased physical occupancy by 150 basis points, and this occupancy gain is worth noting because over the last year, due to supply chain issues, getting tenants open on time and on budget has been a significant industry challenge, and our team rose to the occasion. Notwithstanding this progress, we are certainly keeping an eye on the macro data, which has been recently sending mixed signals about the consumer and the retail environment for the next year. In a world where good news is bad news and bad news is, well, bad news also, landlords and tenants alike are trying to prepare for the most anticipated consumer recession in a generation, while reconciling this with the strongest job market in a lifetime. And while we'll let the economist in the financial markets debate whether this is the best of times or the worst of times, in the interim, we're staying busy leasing space. In fact, when looking at our current leasing pipeline, activity remains on track with our prior forecast, and we haven't yet seen any fallout in tenant demand. Now, this does not mean that retailers are ignoring the potential macroeconomic challenges over the next year, and nor are we. And while we are expecting that there will be a higher level of tenant disruption in our portfolio in 2023 compared to last year, most specifically Bed Bath & Beyond, we have conservatively incorporated this into our guidance. Most importantly, we also expect our leasing progress to more than compensate for this disruption and thus should lead to continued internal growth. So given the near-term economic pressures, why do fundamentals feel more resilient today than at this point in prior cycles? There are a few likely reasons for this. First of all, the headwinds from secular concerns of the so-called retail Armageddon have passed, as we have been discussing for several years now. Retailers have universally recognized that the physical store, especially in mission critical locations, is the most important and profitable channel for their execution in an omni-channel world. Second reason, there is a scarcity of high-quality space. The combined impact from the lack of new development and the growth of direct-to-consumer stores means that retailers, whether they're luxury brands or more mass market, are increasingly choosing to add their own individual stores to enable them to connect with their customer directly. Third, somewhat specific to our portfolio, our continued internal growth is being driven most significantly from that portion of our portfolio that is still in the early stages of recovery and thus has room to run. This above-average internal growth is driven by a combination of occupancy gains, lease structure, and market rent improvements. As we have said in the past, our occupancy gains are not of equal economic impact. So while overall, we're about 95% leased within our much higher rent dollar value street and urban portfolio, physical occupancy is still only 89%. Based on the increasing demand and leasing progress on most of those streets, we are well positioned for multi-year growth here. With respect to lease structure, as we have discussed in the past, our street leases typically have about a 100 to 150 basis points higher annual contractual rent bumps than our other retail formats. If rental growth runs hotter than in the past, our street leases will capture more of that growth sooner, both from contractual growth and from more frequent fair market value resets. Then in terms of future growth from improving market rents, while scarcity and tenant demand are true throughout the majority of our portfolio, both urban and suburban, the greatest market rebound is now showing up on our street and urban corridors, where, after several challenging years, tenants are aggressively pursuing space. Furthermore, the strong sales performance of those stores is once again leading to competition among desirable retailers for their best locations. While retail rents have thankfully rebounded to pre-pandemic levels in many of our streets and in some cases beyond, rents remain well below prior peak levels of 5 to 10 years ago, even though many retail sales are starting to approach those prior peaks. Now, even within our street portfolio, the trajectory of future growth is going to vary and really depends on where in the recovery stage the various streets are. Some markets such as Greenwich Avenue in Connecticut actually got a COVID bump. Other corridors, such as Melrose Place in Los Angeles, were hit hard during COVID, but quickly rebounded past pre-COVID levels due to very limited vacancy as new tenants entered that market. Now other corridors are still fighting to recover, but even in those markets, we are seeing signs of green shoots. On North Michigan Avenue in Chicago, last quarter, we signed up high-demand on-trend retailer Alo Yoga at 717 North Michigan Avenue for their flagship store in Chicago. This lease, as well as other current activity, is a very strong sign of support for this important corridor that has been struggling. Then in San Francisco, another market slow to rebound, in the fourth quarter, we signed an important lease with the Container Store at our 559 property. You may recall that the property is a well-located two-level shopping center, and given the current tenant layout, shopper access to the stores has been historically limited to just the street level. The Container Store lease will anchor and activate the upper level, converting it into its own self-contained open-air shopping center with its own dedicated parking and shopper access. Furthermore, as John will discuss in contemplation of recapturing all or perhaps a portion of our Bed Bath & Beyond store there, we should be able to activate the balance of that second level. In short, as it relates to our internal growth in our conversations with our retailers, they indicate that, for the most part, they are looking past the short-term uncertainties and remain focused on 2024 and beyond. All of this simply reinforces our view that our internal growth forecast for '23 and beyond remains on track. Turning to external growth in new business, given the extreme shifts in the debt markets last year, the spread between bid and ask has gotten very wide, and so far there have been fewer actionable opportunities in the private markets. While the investment sales market is currently relatively quiet, especially for larger transactions, our team remains very active, underwriting a variety of opportunities since sooner or later the bid and ask spread is going to narrow, and we want to be ready. First, in terms of our core business as it relates to core acquisitions, our cost of capital kept us on the sidelines last quarter. It is still too early to predict on balance sheet acquisition activity for the year, but the public markets often lead sentiment and pricing on the way down but then are often quicker to bounce back. So, we'll make sure we are positioned if and when accretive on-balance sheet opportunities arise. But in this market, what we can do is periodically harvest gains with opportunistic and accretive sales. An example of this is last quarter we were able to sell a stable urban asset in Boston at a sub-five cap rate, and thus it was a very good and accretive source of capital. And while we don't expect the disposition market to be particularly deep, where we can opportunistically monetize assets, we will continue to do so. Now looking at our fund business, in terms of fund investment activity, last year we were able to both put new dollars to work, and then successfully sell several assets. In fact, we sold just under $200 million of fund properties and bought just over $165 million. Continuing these efforts last quarter, we completed the fund four disposition of Promenade at Manassas generating a 17% IRR and a 2.2x multiple on the fund's equity investment. In terms of new fund investments, we made a Fund V acquisition post-quarter end for $61 million, and we believe that the strong going-in yield on Mohawk Commons, a grocery-anchored community center with a solid credit tenant, reflects very attractive pricing in a period of relative uncertainty. With the remaining equity in Fund V, we have about $250 million of gross acquisition activity, and while things are a bit quiet right now, we have plenty of dollars for the deals, and we are seeing signs that there could be good opportunities in front of us. Thus, we expect to add to the strong gains already embedded in our Fund V investments. Furthermore, in addition to focusing on profitably deploying the balance of Fund V capital, we are actively exploring additional sleeves of capital and partnerships that could be additive to our current dual platform and drive further external growth opportunities going forward. In terms of our fund's asset operating performance, Fund V shopping centers continue to perform consistent with our expectations, and as the capital markets heal, this should provide us with some interesting monetization opportunities. Our Fund IV and Fund III assets teams are busy, both stabilizing the few remaining assets like 717 North Michigan Avenue and monetizing others like the Promenade at Manassas. Finally, in terms of City Point, we continue to successfully execute on our business plan there, and our lease-up and stabilization targets remain intact. Primark, a new anchor for City Point opened in late December, with both foot traffic and sales volumes exceeding our expectations. The energy from the strong Primark opening contributed to December shopper traffic at City Point approximating pre-pandemic levels, and we're seeing this energy throughout the center. In November, sales at Alamo Draft House exceeded pre-pandemic levels, and with their expansion now underway, as well as the build-out for Court 16, the upper levels of the property are approaching stabilization. We are about 60% occupied, but 90% leased on the upper floor. The final and most significant push will come from the street-level leasing, where we are making strong progress with several exciting new leases executed or in the final stages of negotiation. Finally, as a testament to the strength and depth of our senior and junior management team, we issued a press release last week detailing the annual promotions of our professionals. In that release, we noted that Amy Racanello, who you know from her reporting on these calls, has moved on, and we wish her the best of luck. The press release also gave a snapshot of promotions of several of our most senior members, as well as the addition to our team, Stuart Sealy, who many of you know well. Stuart, welcome to the show. And as significantly, we had almost promotion of rising stars throughout the organizations. Congratulations to all of you. Watching team members advance is by far the best part of my job. So to conclude, while we recognize that macro news headlines are not all positive, our leasing fundamentals remain strong and internal growth intact. While we wait for exciting external growth opportunities, which we are confident will eventually arrive, our leasing team will continue to provide record levels of internal growth, making any future external growth that much more additive. And with that, I'd like to thank the team for their hard work this quarter and turn the call over to John.

Thanks, Ken, and good morning. Before diving into the results, I want to reflect on a few of our team's key accomplishments during 2022. First, we grew our FFO in excess of 7% in 2022, raising our guidance three times over the course of the year as the rebound in our street and urban portfolio began to take hold. Secondly, we increased the physical occupancy in our core portfolio by 270 basis points with solid cash rent spreads, resulting in 6.3% same-store ROI growth, which exceeded the upper end of our guidance. Lastly, in a turbulent capital markets environment, we completed both profitably and accretively over $800 million of transaction volume comprised of over $0.5 billion of new core and fund investments along with nearly $300 million at dispositions. As I'll touch on later in my remarks, we see these trends continuing in 2023 and beyond. Now, starting with the quarter, we had another strong quarter with earnings of $0.27 a share coming in above our internal expectations. In terms of same-store NOI, we reported growth of 5.7% for the quarter and 6.3% for the year, with our annual growth exceeding the upper end of our initial 4% to 6% range. We achieved 5% fourth-quarter growth despite over 200 basis points of headwinds from prior period cash collections. If we were to exclude these headwinds, our same-store growth for the quarter would have exceeded 8%, and this fourth-quarter growth was driven by both occupancy and market rent increases. During the fourth quarter, we increased our core physical occupancy by 150 basis points to 92.7% at December 31st, compared to 91.2% at September 30th. The 150 basis points of occupancy gains represented $3.3 million of incremental pro-rata ABR net of expiring leases. When we break down this incremental occupancy, $1.1 million of the total $3.3 million increase represents lease spreads, or said differently, market rent growth of about 50% over the prior in-place tenant on a same space basis. As highlighted in our release, we reported cash leasing spreads consisting entirely of renewals of 4.7% in the fourth quarter. This moderation in growth from prior quarters is simply a function of the population of leases that were up for renewal during the quarter. Now, in terms of lease occupancy, I wanted to provide an update on our signed but not yet open pipeline. We added an additional 60 basis points of lease occupancy during the fourth quarter, increasing it to 94.9% at December 31st, compared to the 94.3% that we reported at the end of the third quarter. Our signed but not yet open pipeline of 220 basis points represents about $5.6 million of pro-rata ABR and $6.5 million of NOI, and we expect that 60% of the pipeline will commence in the first half of 2023, followed by another 10% in the second half, with the remaining 30% in the first half of 2024. Please note that given the timing of rent commencements, we won't get the full benefit in our reported results until the subsequent full annual or quarterly period. Now moving on to our 2023 guidance, starting with same-store NOI, as outlined in our release, we are guiding towards 5% to 6% same-store NOI growth in 2023. I want to highlight a few things in our guidance. First, our same-store guidance is unadjusted for the headwinds from prior period cash collections, which I estimate will have a negative drag of about 200 basis points. Said differently, our 5% to 6% of projected same-store growth would have been closer to 7% to 8% absent the headwinds from prior period cash collections. Secondly, our street and urban portfolio is projected to drive our 2023 growth with an expectation of 6% to 7% growth coming from our street and urban assets, and 2% to 4% from our suburban portfolio. Third, I wanted to highlight our assumptions on tenant credit. Please note that I will give detailed guidance assumptions on both Bed Bath & Beyond and Regal Cinemas in a moment. Our historical credit loss, excluding periods impacted by the pandemic, has ranged between 50 to 150 basis points. While we have yet to see any significant signs of retailer distress or declines in our monthly cash collections, given the realities of the macro environment, our 5% to 6% projection of same-store growth conservatively factors in 150 basis points of a general credit loss. I also wanted to highlight that the 150 basis points is in addition to the known exposures within our portfolio, including Bed Bath & Beyond and Regal Cinemas, which I will discuss in a moment. Lastly, our 2023 same-store pool excludes the accretion from our 2022 acquisitions, which include Williamsburg, SoHo and City Point in New York City, along with Henderson Avenue in Dallas and our acquisition in Los Angeles. These investments will not be included in our same-store pool until the first quarter of 2024, and are projected to add further accretion to our multi-year growth trajectory. As previously discussed on our last call, our core North Michigan Avenue investments will be placed in redevelopment in the first quarter of 2023 as we execute alternative uses and formats. Now moving to our 2023 FFO guidance. As outlined in our release, we are anticipating 2023 FFO before special items of $1.17 to $1.26. While our 2023 FFO guidance at the midpoint is up moderately over 2022, it’s worth highlighting that absent the impact of prior period cash collections, our projected 2023 FFO would have increased in excess of 5%. As we think about the projected FFO contributions from our core fund platform, I wanted to highlight a few things that we see playing out in 2023. As detailed in the guidance assumptions that we provided within our supplemental, you'll see that we have separately broken out the projected NOI and the related costs from our core fund businesses. In starting with our core, we anticipate that our core cash NOI will grow about 5% in 2023 when using the midpoint expectation of about $145.5 million of NOI for 2023 as compared to the $139 million that we reported in 2022. Our overall projection of about 5% core NOI growth encompasses both those assets embedded in our same store, which, as we've said, is projected to grow at about 5% to 6%, as well as those assets included within redevelopment and excludes any assumptions for core acquisitions or dispositions. This cash NOI growth is counterbalanced by an anticipated non-cash decline of about $0.03 to $0.04 from lower straight-line rent and below-market lease adjustments. Now moving to our fund platform, consistent with our strategy of operating a buy-fix-sell fund business, net-net, the contributions to our 2023 earnings are relatively flat year-over-year. With the expected increase in profits from our ongoing monetization of fund assets, along with our investment at Albertsons, being offset by additional interest cost and the positive dilution from fund asset dispositions. I now wanted to highlight our guidance assumptions for Bed Bath & Beyond and Regal Cinema. Keep in mind, as I shared a few moments ago, our assumptions related to these tenants are separate and in addition to the 150 basis points of credit loss that I discussed earlier. As a reminder, we have two Bed Bath locations and one Regal Cinemas in our core portfolio, with an aggregate exposure of approximately 3% of ABR. First off, each of these tenants are current on their monthly rents, meaning we have received February rents for each of these locations. Secondly, we are fully reserved and have been for several quarters, all straight-line rent balances for each of these tenants. Starting with Regal, as we've discussed in our prior call, we have a single location in our core portfolio, and this has been and continues to be a productive location for Regal. In the past few months, they have confirmed that they intend to retain our lease at its current rent without modification. While we continue to report Regal on the cash basis of accounting given its bankruptcy, our 2023 guidance assumes they remain in place and continue paying us throughout the year. In terms of our two Bed Bath locations, both of our core locations are included on Bed Bath's recent store closure list. As we have discussed in prior quarters, our Bed Bath exposure is in prime locations at variable replaceable rents, which we were able to demonstrate. As reported in our release last night, we are excited to announce that we have successfully signed a new lease at our location in Wilmington, Delaware. The tenant has requested that we hold off on identifying them, so please stay tuned, but it is a high-quality credit retailer that will be taking the entirety of the Bed Bath space, in conjunction with an expansion and an added rent that will exceed our current in-place rents. Although we have not yet reached an agreement with Bed Bath on an early recapture of Wilmington, our guidance conservatively assumes that we get this space back as of the end of the second quarter, and incorporates an expectation of about 12 months of downtime associated with the tenant build-out. As it relates to our second location in San Francisco, Ken discussed the strategy of re-anchoring and accretively activating the second floor of 555 9th Street. We commence the strategy with the signing of a lease with the Container Store in the fourth quarter, and as it relates to our plans for the Bed Bath space while still in the early stages, given the recent announcement of its closure. Please stay tuned as our leasing and development teams continue to refine our plans to unlock the value of this below-market space. If we were to have the opportunity to regain control of the space in 2023, it would not result in a downward revision to our earnings guidance as we have conservatively built in reserves to reflect an earlier recapture. So, in summary, when factoring in the 150 basis points of credit loss as a general reserve, we have an additional reserve baked into our guidance of about 125 basis points related to known exposures for a combined credit reserve of about 275 basis points. Lastly, I want to touch on a few items on our balance sheet. We have ample liquidity with no meaningful core maturities over the next several years. In terms of interest rate exposure, approximately 97% of our core debt is fixed, hedged with long-dated interest rate contracts, and under 15% on a look-through basis inclusive of the pro-rata portion of debt from our fund business. We remain on track with achieving our near-term balance sheet goals, which, as a reminder, involves moderately decreasing our leverage and targeting a low six-core debt to EBITDA ratio. Given the multiple levers available to us, we should be able to achieve these goals without diluting our earnings from a combination of retained earnings, selective core and fund dispositions, and proceeds from our investment and operations. So in summary, we ended 2022 with very strong results and momentum continuing into 2023 and beyond. We will now open up the call for questions.

Our first question comes from Floris van Dijkum with Compass Point.

Thanks for the information, guys. A lot of details for us to sift through, but I just want to make sure that I understand this correctly. Your same-store guidance for '23 of 5% to 6% incorporates 275 basis points of credit loss. Is that the right way to think about it?

Of course, I would say the 275 applies to FFO, right? Because some of, for example, 555 9th is not in there.

Got it. Okay. But the 150 basis points, presumably is part of your same-store?

Correct. As is the Brandywine location. So, it's somewhere in between those two. Because the Brandywine, Wilmington, that downtime is reflected in the same-store pool. So call it roughly 200 basis points in same-store.

And then, obviously, you talk a little bit about your 89% street and urban occupancy and the potential to lease that space. Wanted to get maybe a little bit more granular detail from you guys. Where is your remaining vacancy? How much of that is at City Point relative to some of your other properties? And how much of that is in Chicago and San Francisco? When can we expect, I guess the timing of that is that dependent on market improvements or redevelopments that are taking place?

So, you've mentioned a bunch of different buckets, and John, I'll have you add some color to this. But first of all, Floris, you should understand that the 89% is within our on-balance sheet core portfolio. So City Point, for instance, is not in that number. While there is significant lease-up in City Point, that'll start showing up in '24. The embedded lease-up of our physical occupancy for our core portfolio, about half of that is with leases already signed. So there, we just got to get those stores open as we did with 150 basis points before. Final point before I hand the details to John is physical occupancy is not a great metric for our NOI growth because some of these smaller stores can have a much more impactful effect than our larger ones. So, it's one data point, and the upside in NOI is pretty significant. John, any color or data you want to add?

Yes, I think you hit most of it. I can add some more about what we're seeing in SoHo, but we have some opportunities where there are currently already leased. For example, in SoHo, we have some spaces that are leased that are ready to commence but have not yet started. We also have some opportunities to lease that will drive attractive rents. In Chicago, we have some opportunities in prime locations. So we have a location in the Gold Coast, which is booming, as well as some in Lincoln Park. So sprinkle in Chicago, and then Ken, maybe talk about DC because we have some room to grow in DC, and we're seeing rents recover there, and we have some occupancy uplift opportunities in DC.

One of the final areas is the M Street Georgetown corridor in DC that got hit hard during COVID. But even pre-COVID, M Street was suffering from getting a little stale. Last year or so, we've had several new retailers showing up, and the shopping experience has improved dramatically, and now other retailers are following suit. So we should be able to drive both rents and occupancy there over the next couple of years as that early-stage reopening plays out.

Our next question comes from the line of Linda Tsai with Jefferies.

Where do you think occupancy could end at year-end '23? And then, maybe just stepping back, how far do you think we are in the urban recovery from pre-COVID for New York versus say Chicago or San Francisco or DC?

John, why don't you take the first part, and then I'll add some of that color.

Yes. So, Linda, I'm going to go back to the caveat that Ken just mentioned, that not all occupancy is created equal given the street we have to lease up. But having said that, I would expect that our occupancy is going to further increase physically, net of expirations probably 50 to 100 basis points off where we are today. But at the same point, we have to look at what we actually do. I would target about a 50 to 100 basis points increase.

Now, for where we are in the recovery for our various cities, what we have seen over the last year, is probably the easiest metric for you to look at to gauge where we are in recovery is where residential rents and occupancy are. What we found was New York recovered faster because, even though return to work and return to Midtown has been very slow, return to downtown and residential rents around there rebounded quickly. Indeed, we saw that rebound in SoHo. We certainly saw that rebound in Williamsburg, Brooklyn. So, New York was earlier in that perspective, notwithstanding return to work. Chicago is somewhere in between, and they certainly have their challenges. We've been clear about North Michigan Avenue on that front. But then the other components of our Chicago portfolio, like in the Gold Coast and Lincoln Park, they have had a stronger residential rebound, and we’ve seen it in terms of sales. You mentioned San Francisco, and it's slower there. I know we are finally seeing improvement there, but the workforce there is only beginning to come back now, and they are coming back. With that, you will see an improvement, but that would be in the earliest stages. Some of our other markets on the beneficiary side, Greenwich, Connecticut, absolutely got a COVID lift, and what was a downward trajectory of rents on Greenwich Avenue for the five years prior to COVID got a COVID lift. Then down in Dallas, Henderson Avenue, continued population growth, where we’re seeing a lift as well. So at different levels of trajectory, some are going to post very strong growth off a low point, while others will show consistent growth because they got a COVID lift. What our retailers are telling us is they really want and need to be in all of these locations over the next five years, because these are mission-critical locations for their customers.

Thanks. And then, the activity in your fund business this quarter, is this a byproduct of financing distress, indicative of greater opportunities for your fund business going forward?

Probably, it's a very confusing time for investors. In terms of activities so far, things have quieted down, and they have quieted down in ways that we probably didn't anticipate prior to the Fed's move, meaning lower cap rate, higher growth assets in many instances got hit harder than higher-yielding assets. On a portion of value that reset is playing out. I think we have better clarity as to where long-term borrowing costs could be. I think you're going to start to see now sellers come back to the market either because they're being forced by their lenders or partners or fatigue. We're just starting to see that kick in after a period of a couple of quarters of relatively quiet activity.

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

Ken, first question, I just wanted to go back to your comments about acquisitions. Sounds like your cost of capital is not where you needed it to be to make core investments pencil today. You have dry powder in Fund V, but you also mentioned exploring additional sleeves of capital. Can you just elaborate on that comment a bit, whether you're talking about the funds platform or if you're contemplating joint ventures or some other strategic capital that would allow for investments in the core?

Sure. And I'm glad you picked up on that, Todd, because the world has been evolving. If you think about that five years ago when we launched Fund V, the best practice standard operating procedure, whether you were larger platforms or certainly smaller focused vertically integrated fund platforms, was to have one vehicle. Over the last several years, you have seen that evolution, whether it’s the large folks or other fund managers, where investors have a higher level of tolerance and expectation for multiple vehicles at the same time. Now our first responsibility is to put Fund V dollars to work profitably. Since our unlevered yield, as we've bragged about prior calls, on Fund V is quite good because we were buying out-of-favor retail at very attractive yields, clipping a very attractive coupon. Our responsibility is to continue that and get the balance of those dollars to work. So no one should think we are distracted from that. As we think about the best way for Acadia Realty Trust to both serve the needs of outside investors and most importantly create value for our shareholders, every time we get to this juncture between one fund and the next, we say, has anything changed? And this time it has. So maybe there will be multiple vehicles, multiple sleeves so that we don’t have a one-size-fits-all. Those are conversations that we are undergoing. Some of this is driven by the fact that we acknowledge the fund business creates lumpiness. It can create complexity because we have to fully consolidate all our ownership, which sometimes causes confusion on the shareholder investor side about our exposures. One of our goals will be to simplify that, but we also want to continue to be entrepreneurial and profitable because Todd, as you started this conversation, I think it is fair to assume that wholly owned rates' cost of capital may be higher than alternative structures over time. We want to make sure, and we have always wanted to ensure we are not simply beholden to one source of capital, particularly in public markets, if and when we see great buying opportunities. Good news, right now, there have not been great buying opportunities within our core competencies for the last one or two quarters. It's going to change, and then we will make sure we have the powder available. We do right now in Fund V, and we'll continue to work that in terms of what that might look going forward, and we'll keep you posted.

Okay. I guess similarly along those lines a little bit, you've been working with DLC and Fund V, seems like a 90:10 sort of JV format within Fund V. Is that relationship just asset by asset or is there something more programmatic in Fund V with DLC? Can you talk about that relationship a little bit, and sort of the terms, who's sourcing deals, asset management responsibilities and so forth?

I can provide some details. It's a relationship that has lasted for decades, and many of those assets were integrated into DLC, allowing us to successfully recapitalize them together. While I won’t dive into the specifics of the economics and structure, I can say they have a very capable team, and our collaboration is effective. The deals are performing as expected and even exceeding our projections, which is always a positive sign for maintaining a strong partnership. We aren't tied to them in any unique way, but we are excited to engage in business with them when they have assets, whether they currently own them or for other reasons.

Okay. And John, just a quick question for you. Appreciate some of the detail of the 5 points, the signed but not occupied pipeline. I think you said $5.6 million in ABR, $6.5 million in NOI. Is that all generally in the same-store? If I'm not mistaken, is that right? Or is there something else in that?

No, Todd. That’s all same-store, that's our core portfolio same store.

Okay. And then, I guess, so you talked about some of your assumptions around Bed Bath, and Regal at some assets that are outside of the same store. But what else is there any NOI or signed but not occupied pipeline that's discussing at all in terms of assets that are in their development pipeline? Anything significant there that's sort of outside of that same store SNO pipeline that you provided?

No, for sure, Todd. So, I think we have in redevelopment, we have City Center in San Francisco, which is the target anchor with Whole Foods that's going through its approval process. So there is a several million dollars of signed but not open in our redevelopment related to City Center, as well as 555 9th. So, 555 9th with the signing of the Container Store lease is also in redevelopment, so there's call it a couple million dollars that are not in that signed but not open but are part of our redevelopment signed but not open.

Yes. I mean, they both have in terms of commencements, let's start with City Center. They're going through a lengthy process called a CUP in San Francisco. We're in the midst of that. I highly doubt that there will be a rent commencement for Whole Foods in 2023. I think that's more likely later in 2024. The costs have already incurred, so in terms of the funding costs, the build-out of City Center, we've incurred those costs and are just waiting for the approval. There is a bit of capitalized interest that we're doing related to the Whole Foods space itself, not the entire building, but the Whole Foods space itself. There is a bit of capitalized interest, but not overly material. For 555 9th, we are not capitalizing any material costs at this point until we start the larger-scale redevelopment.

Our next question comes from the line of Craig Schmidt with Bank of America.

And I first just wanted to congratulate Stuart on joining the Acadia team. In terms of your small shop occupancy, it's now higher than it was pre-COVID. I'm wondering, what is driving that and what is the room for growth on that small shop occupancy number?

Yes, so I think, Craig, we are seeing, as Ken talked about, the really the recovery that we saw in the street and urban markets. I think that's a big piece of it. We are also seeing our suburban markets filling up nicely as well, so kind of if you have any room, but we are seeing in a small shop, but that is an element where we do see further growth coming from.

Yes. Without getting into the particulars of how we define small shop vis-à-vis our street and our suburban properties, the two things I already mentioned in our prepared remarks that I think is important for the investment community to understand are, first of all, the secular shift that online shopping, as opposed to physical stores, is continuing to drive tenant demand, especially for important mission-critical locations. It may show up in the small shop data, and it's going to show up in the junior anchor and anchor data as well. You should expect to see that notwithstanding whatever speed bumps in the economy exist. The second point then is, in terms of good news being bad news from our retailers' perspective, when they see strong January sales, they are not complaining much. So far, the consumer is showing up, not perfectly, not everywhere, but the consumer is still showing up and tenants are still signing leases. My sense is that this is going to continue unless the data gets consistently worse than what we’re seeing right now. Whether it’s small shop or otherwise, expect to see that momentum. Final point, though, is if we hit a hard recession, the historical trend shows that our small shop is the first to weaken. So, that's certainly an area we should continue to watch because our smaller mom-and-pop retailers are often more fragile. But so far, we’re not seeing any signs of that.

And then in terms of the transaction market, how long do you think it's going to take before we see the new normal and a meeting of bid and ask on retail assets?

So I think we're getting closer. Let's start with the secular shifts. Retail was an out-of-favor asset class heading into COVID due to the retail Armageddon, and investors had other areas of focus. What we're beginning to see is the investment community saying, you know what, there are other asset classes we're now more worried about, and retail has actually proven itself getting through the COVID storm through some other recession. Physical bricks-and-mortar retail feels like a better investment. So that’s a positive. Just as you saw that momentum starting, there was the huge shock to the capital markets in terms of interest rates. What I would argue is for more stable asset classes in retail, now that we are heading back toward that, we should stay more focused on 5 and 10-year borrowing costs, than short-term. There will remain very limited new development which is dependent on short-term interest rates. Much more will be stabilized retail with superior growth to other asset classes. I expect institutional capital to start gravitating toward that. Now, Craig, I’ll defer to you and economists as to where borrowing costs will end up over a 5 or 10-year fixed-rate period. We’re starting to see spreads come in. I think you can have some level of confidence that once we get through whatever 2023 has in store, you will see a normalization of the spread. There are also a lot of smart people who are debating whether the 10-year Treasury is going to be with a three-handle or a four-handle. Again, I’ll let them defer or I’ll defer to them on that. But you will see the bid and ask spread narrow, once there’s better clarity as to what 5 and 10-year borrowing costs will be. Remind everyone, if we’re in an environment where borrowing costs for two-thirds mortgage financing, which drives the majority of retail investment, if two-thirds financing is at 5% or even 6%, that’s not the end of our industry. So capital will start coming back. It’s a bit frozen now. Some buyers and owners have been hesitant, but my guess is in the next few months there will be much better clarity and then better deals will.

Our next question comes from the line of Ki Bin Kim with Truist.

Just had a couple of development questions. Going back to the 555 9th Street, can you just talk a little bit more about the redevelopment plans for that asset? When you look at Google Street View, it's probably hard to appreciate what the ultimate outcome could be.

Yes. We’ll post some better rendering shortly because it is hard to describe, but I appreciate you asking the question, and I will take a stab at it. Right now, all of the access to the retailers is at the street level, whether you’re going into a Bed Bath & Beyond or a Trader Joe’s. Part of our vision is to have a very dynamic street-level retail shopping experience, but then have that somewhat separate from the second level, which has historically just been overflow parking. People would park up there and then walk downstairs. With the addition, first and foremost of Container Store as the first anchor on the upper level, open-air parking, pedestrian access, people will be able to drive up there and walk into all of the second-floor stores. That is predicated on us getting back at least half of the Bed Bath & Beyond space. We have tried desperately to get back one of the two levels, if not both, of that very important Bed Bath & Beyond space, and they were unwilling to do so. I think they’re much more open-minded now to say the least. If we can then add that second anchor on the upper level, plus shops in between, it will be and feel like a more typical open-air community center. On the street level, we have a very strong, recently expanded Trader Joe’s. We will lease the street-level retail off of that. Think of it almost as two connected, but different shopping centers. I think that will much better serve the needs of those shoppers. The final point, though, is our Bed Bath & Beyond rent is low enough that we get to make money in this process.

And on 717 North Michigan Avenue, you guys signed can you just help us understand what the lease and demand pipeline might look like for that asset? And your supplemental $116 million of incurred costs, is that just your kind of building basis or what does that represent?

Yes, so that's building basis. The demand, thankfully, is starting to come back on North Michigan Avenue. I don't want to pretend that it's easy or mission accomplished, but we're having retailers now show up that a year ago we wouldn't have thought of. Aritzia was probably the first mover, not with us, but just down the street. Now with Alo, who has been pursuing North Michigan Avenue for the last six to twelve months, we were able to get the space available for them and in relatively short order, signed a lease with them. Their business is booming. They wanted a flagship location. Notwithstanding all of the challenges that Chicago has gone through, North Michigan Avenue, while it’s going to take some work, is starting to attract those tenants again. So good positive sign, step in the right direction, and plenty more work to do on North Michigan Avenue to get it back to where it needs to be. But equally surprising, one block away on Rush, Walton, Gold Coast, Oak Street, those businesses, those tenant sales are already stronger than pre-COVID. While everyone is complaining about Chicago, a bunch of our retailers are pretty happy. And when they're happy, we tend to be happy.

And just high level, I know a lot of the projects are still not completely finalized and a lot are TBDs, but how should we think about the yield expectations from your redevelopment and development pipeline?

John?

Yes, it’s going to depend asset by asset for sure. I think if we look at City Center and 555 9th, I would say it’s going to be in the upper single digits.

Upper single digits there. Some of the others are going to be much higher. That’s something it's worth us compiling as we get a little bit further along. But thankfully, as I'm running through in my head the list of them, the vast majority feel accretive.

Our next question comes from the line of Michael Mueller with JP Morgan.

John, I think you talked about a $6.5 million NOI FFO ramp. I think that's a cash comment. So how much isn't already straight-lined into FFO, and what does the ramp on that remaining piece look like?

So the $6.5 million is cash, Mike. I just want to clarify how much of that has already been straight-lined. Is that what you're asking?

Yes. From an FFO standpoint, how much is in the current FFO run rate already or is that all incremental?

Pausing to think through the question. So I would say not a big chunk of that is already commenced. I would say, Mike, maybe 25%, if not less than that. But let me compute that. But it's not as big as a number as it was last year, given some of the bigger chunkier higher dollar leases. So I don't think it's going to be the same phenomena this year.

Got it. Okay. And then Ken, I think in your opening comments you talked about, you said retailers for the most part were looking past the environment. I guess, what's an example of a retailer that's not looking past it and is maybe pausing?

We had the benefit a couple of weeks ago of getting together with a big chunk of our retailers for meetings on the West Coast. There are some retailers that got a huge COVID boost and probably are pausing, think of some of the online home furnishing retailers and others. But for the most part, retailers in terms of their long-term expansion plans are full speed ahead. The struggles for the retailers are getting stores open, getting HVAC units, and dealing with supply chain issues. That was really more of their concern than slowing down openings. If I were to guess where you might see some of that slow down, it could be in home furnishings, possibly electronics. But then there are a lot of other folks showing up.

Our next question comes from the line of Craig Mailman with Citi.

John, I just want to confirm a couple of things. So you said 125 basis points for Bed Bath and Regal, right above and beyond the 150. If Regal was already kind of money good, it seems like that 125 relates to just the 555 9th location. Is that a fair way to think about it?

Yes. What I would say is, when we look through all of our, and I wanted to make it simple, if we look at all known exposures, we look at inclusive of the 555 9th, known exposures throughout our entire portfolio would make up that 125 on top of just the general reserve. So inclusive of the 555 9th plus those in our portfolio. For instance, Wilmington, Delaware, John still will have, even though we have a signed lease, Craig, we're going to have downtime. And that's part of that number.

To be clear, just to make things a bit foggier, it's not just Bed Bath & Beyond. We have a de minimus amount, but it adds up of Circuit City and others. I don't think it would be productive, John. You can take a stab at it, but I don't think it's productive to point to just one or two of the properties. It's spread, it's managed, and thankfully, as evidenced by Brandywine, we have backup leases into it.

Well, I guess I'm just getting at Ken, what's the breakout? Is it like 70:30, 60:40 between the 2.2 of ABR in those two leases for Bed Bath specifically?

John, if you want, I don't know that we want to get into that level of color bigger than a bread box. How do you…

Yes, not just being elusive. I would just say that within the 275, we view that as very conservative between the two because we really don’t know in terms of when we're getting it back. We've said if we get it back, we will not be adjusting our guidance forward. I think we’ll, rather than getting into lease by lease, we're very comfortable at the 275 all-in.

You should assume we have a conservative outlook, meaning we're going to recapture Brandywine as soon as we can. We are going to recapture the upper level, if not the entirety of 555 9th. Those are in our forecast. If there are unforeseen bankruptcies, that's a different story. We have 150 basis points, whether it's mom-and-pop stores or otherwise. We think we're prepared for whatever the next few quarters have in store.

Not to beat a dead horse, I'm just trying to come out from a different angle, in same-store. Just trying to think of the headwind from bad debt. The 4.150 generic is baked in. You said kind of think about 200 totals. So that means 50 basis points in for the balance, right? Of the above and beyond, which you would think is mostly Wilmington. But I guess not 100%. But I'm just trying to think of if you get it through the first half of the year, you're losing the back half 50 basis points. Can we assume the majority of that is Wilmington?

I think as I highlight on Floris' question roughly 275 total is everything, and about 200 same-store with a current expectation that Bed Bath, Wilmington, we get that back in at the end of June. But again, that's a guesstimate, but that's our current expectation. Call that about 50 basis points for Bed Bath. So I think you're thinking about it correctly.

That's helpful. I didn't mean to get too in the weeds there. Okay. Then just separately on the leasing in front, Ken, you talked about some of these urban markets coming back, but I guess just higher level, as you think about the ease of backfilling, Wilmington versus San Francisco, right? Those are two polar opposites in terms of where they are today. What's the depth of the demand pool for some of those not quite recovered urban areas versus first-ring suburbs or like a Greenwich you highlighted a couple of times that's more of a suburban, kind of street retail? Can you just go through the difference in the depth of demand for those two types of products?

Yes. It’s also worth not ignoring what we'll call second-ring suburbs. There are markets that pre-COVID, we really weren't sure that our retailers really wanted to be in, and they got a COVID lift because of work remote. How long that holds, we’ll have to see. But there still seems to be decent demand even in secondary, tertiary. As you’ve seen in other companies’ performance, you see that to the extent that some of our Fund V assets fall into that category. There’s no doubt that the Greenwich's of the world benefited, and I'd say right now, this week, it's a bit easier probably to lease space if there’s any worthwhile vacancy in Greenwich, than it is in San Francisco, since San Francisco is still in the earlier stages of that recovery. I’m encouraged whether it’s North Michigan Avenue with Alo Yoga, or 555 9th, or elsewhere, that our retailers are saying, you know what? We are seeing our shoppers coming back. Retailers have to think one, three, five years ahead, not necessarily where they are right now. The final point is, we need to be prepared for the Midtown Manhattans of the world, and the places that do not have a strong residential footprint short-term, those are going to be the hardest sells, because it’s going to take a while for people to get back in the office. They will. New York especially, the neighborhood is doing just fine. But those properties will take longer. Thankfully, that is an insignificant amount of our portfolio, and the pluses outweigh the minuses. Each of those different markets will rebound differently. As I said, secondary, tertiary got a nice COVID lift. The primary suburbs certainly did well and I think could hold on. Final point that everyone needs to keep in mind, though, is the cost of putting tenants in business; what we talk about is net effective rent impacts properties very differently. You might like those secondary, tertiary markets and our retailers do, but if the rents in those markets are $12 or $14, the payback period could be much longer than in some of these street retail markets where the rents are 10x and 20x that, and the payback period is shorter. We’re going to have to watch carefully where net effective rents are, and that would lead us to be more encouraged by our higher rent earlier recovery properties, notwithstanding everything I just said.

That concludes today's question-and-answer session. I'd like to turn the call back to Ken Bernstein for closing remarks.

Great. Thank you all for joining us. We look forward to seeing you in the not distant future and hope everyone stays well.

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