24/03/2023 - Acadia Realty Trust: 2022 Annual Report

Dear Fellow Shareholders:

This past year, 2022, began with robust tailwinds for the retail REIT sector in terms of both operating fundamentals and a supportive debt and equity market for transactions. Leasing demand showed consistent strength and there was abundant liquidity available in the capital markets for the shopping center space. But last March marked a significant shift in Fed policy when it announced its first rate hike in over four years. This started a slow and steady decline in capital markets conditions. We were nimble prior to the capital markets disruption and raised approximately $125 million of equity and acquired over $600 million (at 100%) in both Core and Fund assets. The forecasted rate hikes elevated real estate investor concerns both due to the impact of increased rates on cash flow and the increased risk that Fed tightening would result in a recession. Notwithstanding these headwinds, the fundamentals of our business remained strong.

Reminder of Who We are and How We are Different

We own and manage a diverse curated portfolio of open-air retail assets. Both our portfolio and our operating model are highly differentiated from other owners of shopping centers. These two levels of differentiation have served us well through cycles in terms of growth, opportunistic investing, and sourcing capital. They also presented challenges during Covid.

First, with respect to our portfolio, while we own a diverse group of properties, we focus on owning high growth, high barrier-to-entry markets where we use our core competencies and deep tenant relationships to grow and harvest value. This strategy has led to the ownership of our attractive portfolio of street retail assets located in the key, must-have urban corridors desired by both tenants and shoppers. Our street retail assets are physical storefronts clustered in affluent, in-fill submarkets of gateway cities and include a highly concentrated presence on well-known walkable areas such as SoHo in New York City, Williamsburg in Brooklyn, Rush & Walton and Armitage in Chicago, Melrose Place in Los Angeles, Henderson Avenue in Dallas and M Street in Georgetown, Washington DC. When compared with other open-air formats, street retail assets have higher embedded contractual growth and typically benefit from higher market rent growth. Approximately half of our Core Portfolio is comprised of street retail properties.

Second, as to our operating model, we own, manage, and operate what we refer to as a "dual platform" which features both our Core Portfolio, which is substantially owned by Acadia, and our Fund Portfolio, which is owned by a series of private investment funds, where Acadia is the managing member and also invests in the Funds alongside of our institutional partners. The Fund Portfolio is also comprised of a relatively diverse group of open-air retail assets that have a value-add and/or opportunistic component, have a shorter hold duration and are operated with higher leverage. The Funds invest in assets across the capital stack and investments have included taking positions in retailer restructurings. Our Fund platform leverages our retail skill set and experience while utilizing discretionary fund vehicles and third-party capital. This structure allows us to access private capital when it is more advantageous to do so and invest opportunistically which benefits both the third-party capital and our public shareholders.

Irrespective of whether it is a Core asset or a Fund asset, in 2022, tenant demand and tenant performance were very strong, and based on current retailer sentiment, our portfolio is on track for strong multi-year growth.

Fundamentals

Our leasing activity in 2022 was strong in terms of both volume and rent levels achieved. Across our Core Portfolio, occupancy increased year-over-year by 270 basis points to 92.7%.

And this momentum continues in 2023. In fact, when looking at our current leasing pipeline, activity remains on track with our prior forecasts, and we have not seen any meaningful fallout in tenant demand.

Our successful leasing wins and occupancy gains have translated into solid internal growth with our 2022 same-store NOI growth coming in at 6.3%, which compares with the average among shopping centers of 4.5%. And given the embedded growth in our Core Portfolio, we are projecting same-store NOI growth in 2023 at 5% - 6%; the midpoint of 5.5% compares with our peer average 2023 guidance of 2.1%.

Our tenants expanding their physical store presence range from luxury to value/off price retailers and from established retailers to new exciting brands. For example, last year we signed two leases with Alo Yoga, a very popular and successful brand. Alo is coming to M Street in Georgetown Washington DC - another positive sign for the resurgence of that corridor. The second lease will bring Alo to 717 North Michigan Avenue in Chicago (a Fund asset) - a positive vote of confidence for that slower-to-recover corridor. On the luxury side, we expanded Watches of Switzerland on Greenwich Avenue in Connecticut. Greenwich Avenue has thrived through and after the COVID crises.

Notwithstanding this progress, we are keeping an eye on the economic data and capital markets sentiment, which has been recently sending mixed signals about the strength and durability of the consumer and thus the impact on our retailors. While we are not (yet) seeing signs of any weakness in our results and tenant performance, we built into our budgets a higher level of tenant disruption in 2023 as compared to what transpired last year. However, this increase is coming off of record low levels, and we expect that our leasing gains will more than compensate for this disruption.

Street Portfolio will be a Unique Growth Driver

While some of our sub-markets and street retail corridors such as Greenwich Avenue benefitted from a "stay-close-to-home COVID boost", other of our markets were hit very hard during the pandemic. Our street assets in major cities such as Downtown Chicago, SoHo in New York City, Melrose Place in Los Angeles, and M Street in Georgetown, Washington DC were all negatively impacted. Thankfully, in 2022, after several challenging years, we saw significant improvements in the majority of the corridors where we are active. In fact, to the surprise of many casual observers, many of our streets are already performing better (in terms of both market rents and tenant performance) than before COVID. People returned to shopping in stores after several years of on-line delivery. And people returned to shopping long before they returned to the office. Furthermore, since we are still in the early stages of a rebound in these locations, we see several years of above-trend growth.

Looking forward, our tenants are not ignoring the potential macro-economic challenges over the next year. But in our conversations with retailers, they indicate they remain committed to their 2024 and 2025 store openings. They are looking past the near-term cyclical headwinds and are executing leases for preferred locations based on their medium-andlong-term expectations. All of this simply reinforces our view that our internal growth forecasts for 2023 and beyond remain on-track and suggests that fundamentals feel more resilient today than at this point in prior cycles. There are a few likely reasons for this:

• First, the headwinds from secular concerns of the so-called Retail Armageddon have passed - during the period from 2016 to 2019 there was a persistent narrative that e-commerce was going to render physical stores irrelevant. The repudiation of this storyline is now a tailwind. While the sentiment is important, the data supports this as well. The Census Bureau reported that, as of the fourth quarter of 2022, e-commerce as a percentage of total sales was at 14.7% - a level which has remained relatively flat over the last couple years and is down from the COVID peak of 16.4% in the second quarter of 2020. As we have been discussing for several years, retailers now universally recognize 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, there is a scarcity of high-quality space. Against the backdrop of a lack of new development, the growth in the importance of direct-to-consumer stores means that retailers are increasingly choosing to add key stores to connect with their customers directly, at the same time that supply is diminishing.
• Third, and 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 will be driven by a combination of occupancy gains, lease structure and market rent improvements:
• 1. Occupancy Gains. All occupancy gains are not created equal. While overall we are about 95% leased in the entire portfolio, within that, our much higher dollar rent and value street and urban portfolio is only 87% occupied and 90% leased. Based on continued leasing momentum, and the early stages of the rebound in our street and urban markets, we are well positioned for multi-year occupancy growth for this portion of our portfolio.
  2. Lease Structure. Street leases typically have higher annual contractual bumps than other retail formats - our street portfolio currently has average annual lease bumps of about 3% which is about 100-150 basis points higher than what is typical for other open air lease formats. This structure results in internal growth over 10 years in a street lease of about 30% versus about 14% for a typical suburban lease.
  3. Market Rent Growth. Looking forward, while scarcity and tenant demand is true throughout the majority of our portfolio, both urban and suburban, the greatest market rent rebound is now occurring in our street and urban corridors, where after several challenging years, prospective tenants are showing up. And given the recovery in sales performance in those corridors, we are once again seeing competition among desirable retailers for the best locations. While retail rents have rebounded to pre-pandemic levels in many of our streets, rents remain well below prior peak levels of five to ten years ago, even though many retailers' sales are starting to approach those prior peaks. In SoHo, for example, market rents have rebounded significantly over the past year, but are still 30%-50% below prior peaks. Our current in-place rents in SoHo are up over 10% from a year ago, and our properties here are 91% leased (up from 76% a year ago). Our new SoHo leases in 2022 included Staud, Outerknown, Restore Wellness, and a long-term extension with Faherty - all exemplifying the sustained recovery in SoHo. Finally, while we are not rooting for a high inflationary environment, to the extent that inflation does run hot, that will be a tailwind for street retail market rent growth.

We Anticipate Multi-YearAbove-Trend Growth

For the reasons listed above, our existing Core Portfolio is projected to deliver attractive, multi-year internal NOI growth ranging from 5% to 10% annually during the period 2023 through 2026. And this growth is after taking into account potential headwinds from anticipated tenant move-outs. Do we see any specific signs of weakness so far in 2023? No, we do not - the leasing pipeline remains robust and tenant collections have not wavered. But we are cognizant of the broader economic cross-currents we read about every day, and we are trying to project conservatively.

Even with this conservatism, we are forecasting FFO growth of 2.1% in 2023 following 7.2% in 2022. And when we step back and look at our normalized earnings growth after excluding the noise of heavy cash collections of prior COVID-period rents in 2022 and 2021, our FFO growth in 2023 would be 5.8% following 7.7% in 2022. In short, while predicting the future feels risky after the last few years, from an