22/03/2024 - Acadia Realty Trust: 2023 Annual Report

March 22, 2024

Dear Fellow Shareholders:

2023 was another year of significant transition for retail real estate. After near-constant headwinds over the prior five years - the "retail Armageddon," COVID lockdowns, remote work, civil unrest and rising interest rates, last year we saw the beginning of what we believe to be longer-term tailwinds for open air retail generally. The overall open air U.S. shopping center market ended 2023 the way it started with resilient demand outpacing subdued new supply. According to Cushman & Wakefield, the year-end national vacancy rate for shopping centers decreased to 5.3%, the lowest rate since 2007. And for the reasons I will discuss further below, our Street and Urban focused portfolio is particularly well-positioned to benefit from this environment.

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, and these distinctions have served us well through cycles in terms of growth, opportunistic investing, and sourcing capital.

First, with respect to our portfolio differentiation, we focus on owning in 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. These high-density assets represent 70% of our Core Portfolio. Our street retail assets are clustered in affluent, in-fill submarkets of gateway cities and include a highly concentrated presence on walkable areas such as SoHo in Manhattan, 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.

Our second area of differentiation is our operating model, which we refer to as a "dual platform" to reflect our Core Portfolio, inclusive of the assets described above, and our Strategic Capital Platform. Within our Strategic Capital Platform, we, along with private institutional partners, invest in assets across the capital stack and our wide range of investments have included taking positions in retailer restructurings. Our Strategic Capital Platform leverages our experience and skill set across retail formats while utilizing third- party capital including discretionary fund vehicles. This dual platform structure allows us to access private capital when it is more advantageous to do so and invest opportunistically to the benefit of both our institutional private capital partners and our public shareholders.

Fundamentals and Macro Backdrop

As we collectively pulled out of COVID, we witnessed a slow return to work in the office, the exploration of hybrid work, and a continued elevation of interest rates to the highest levels in over 20 years. Simultaneously, we experienced a strong rebound in retail fundamentals. Here is why:

1. Resilient consumers drove solid retail sales.

• Consumer spending has proven to correlate to jobs, and the job market is strong.
• Inflation continues to force some consumer purchasing trade-offs, but, overall, retail sales were solid and remain well above pre-pandemic levels.

1. Retailers demand physical stores to drive profitability.
2. • Retailer demand for space remained strong, and that was the case even before the odds of a recession started declining later in the year. In discussions with our retailers, it is clear that they were not ignoring economic data, but instead they were looking past the potential for headwinds. Why?
   • • With few exceptions, most retailers expected volatility and choppiness from consumers, and in general, were more focused on how their top line and bottom line compared to their 2019 pre-COVID performance (where the comps are significantly positive), rather than comparisons of quarter-over-quarter and year- over-year.
     • But retailer demand is not simply correlated to consumer demand. There has been a continued shift in focus and attention from on-line back to bricks-and- mortar.
     • The threat of the so-called "retail Armageddon" has subsided, and retailers recognize that in an omni-channel world, the store is the most profitable channel, causing our retailers to push their physical store demands ahead. This realization that the physical store remains the most profitable channel is a shift we saw as early as 2019. But when COVID hit, an online business was mission critical to maintain brand relevance. And now, retailers are making up for lost time.
   • Tenant categories demanding more space range from luxury retailers, who have doubled down on key streets in mission critical corridors, to the discounters. There are many examples across the spectrum. Among luxury retailers: Cartier, Celine and Balenciaga (Kering) opened stores in Chicago's Gold Coast; Ferrari and Cartier are new entrants to SoHo; and Dion Lee is a new entrant in the Miami Design District, where Bottega Veneta (Kering), Brunello Cucinelli, and Saint Laurent (Kering) all expanded stores. And there is plenty of activity outside of luxury: Frame Denim, with only 14 stores in the U.S. currently, expects to have 25 by the end of 2025; Alo Yoga is planning to more than double its store fleet, Blue Mercury has committed to adding 30 new stores, and Bloomingdales plans to add 15 new stores; Target will be adding 300 new stores and plans to remodel 2,000; highly successful off-price chains Ross Stores, T.J. Maxx and Burlington collectively anticipate adding more than 300 stores; and Walmart has committed to 150 new namesake stores and 30 new Sam's Clubs.
3. Demand for quality space exceeded supply, leading to net effective rental growth.
4. • As stronger sales fueled higher demand for quality retail stores, we also saw the following trends:
   • • Migration of brands out of department stores into their own brick and mortar locations to control the customer experience;
     • Relocation out of underperforming enclosed malls; and
     • Lack of new development.
   • All of this has amounted to the healthiest supply/demand dynamic for open-air storefronts in over a decade, translating to net effective rental growth for the vast majority of our portfolio.
   • High-growthmarkets like SoHo, Armitage Avenue and the Gold Coast of Chicago, M Street in Georgetown and Melrose Place in Los Angeles, have seen double-digit rent growth over the last two years.
   • The scarcity of space should also continue to accelerate the rebound of traditionally high- growth markets that have been slower to recover, like Madison Avenue in the 70s in Manhattan, North Michigan Avenue in Chicago, and eventually San Francisco.

4. But, there were still headwinds for retail real estate investors:

• Masking the significant recovery and resilience, interest rates rose 500 bps over the last 24 months, and investors stepped to the sidelines, unwilling to accept negative leverage for most asset classes, including retail.
• A wide bid-ask spread made it difficult to be a seller of assets, and it was almost as frustrating on the buy side.
• We navigated headwinds by being patient on acquisitions and disciplined in our dispositions.

Our Anticipated Multi-YearAbove-Trend Growth is Here, Driven by Street Retail

Our existing Core Portfolio is projected to deliver attractive, multi-year internal NOI growth over the next several years. The headwinds from our long-discussed tenant move-outs are finally behind us. Yet even while working through this anticipated tenant churn, we have delivered same property NOI growth averaging 6.5% over the past eleven quarters.

Our Street Portfolio is still in the early stages of recovery, and, thus has upside. 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 89% occupied and 91.5% 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 rent bumps than other retail formats - our street portfolio currently has average annual lease bumps of about 3% which is approximately 100-150 bps 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 approximately 14% for a typical suburban lease).
3. Market Rent Growth. Looking forward, while scarcity of space and strong 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.

We remain on track to deliver $30 million to $40 million of incremental NOI, or 20% to 30% above 2023, to our Core Portfolio over the next several years. And we have very high visibility on more than half of that growth right now in our Street Portfolio where we see $18 million to $20 million of growth comprised of:

• $6 million in our Signed Not Open pipeline,
• $6 million from contractual rent steps,
• $3 million to $4 million from mark-to-market on lease expirations, and
• $3 million to $4 million from lease-up of vacancy.

2023 Recap and 2024 Outlook: Top Line Growth is Translating into Bottom Line Earnings

2023 was a very successful year for Acadia operationally, and the Company is well positioned for 2024 and beyond. For the full year 2023:

• Same property NOI was 5.8%, which compared favorably to our shopping center peers.
• Cash rent spreads on comparable new leases were 44%, driven primarily by Street assets.
• We finished the year with a signed not open pipeline in our Core Operating portfolio of $7.0 million or 4.9% of our Core NOI, which, again, compares favorably to our shopping center peers.

In terms of our 2024 outlook, we are expecting the growth in our NOI to continue hitting bottom line earnings. We are expecting Core same-store NOI growth of 5% to 6%, resulting in overall FFO growth of about 5%, or about 7.5% FFO growth if gains/promotes are excluded from both periods.

Balance Sheet ‒ Positioned for Growth

We have a conservative balance sheet with no material scheduled unsecured Core debt maturities until 2026. Our current weighted average interest rate in our Core is 4.6% and substantially all of that debt is fixed through 2026. Thus, our earnings are well protected against the rise in interest rates which sets us up for strong bottom-line earnings growth as we execute on our internal growth for the next several years.

In January, we raised $113 million in an equity offering to better position our balance sheet for growth and in the near-term repay high interest rate debt. As of the end of 2023, our Core debt-to-EBITDA was about 6x after factoring in that equity offering, and our expectation is getting our Core debt-to-EBITDA back in the 5's, which is readily achievable with the expected NOI growth embedded in our portfolio.

Strategic Capital Platform

During 2023, within Fund V, we invested $190 million in three high quality regional power centers, two of which featured grocery anchors. Despite the dislocation in the debt markets, through the depth of our lending relationships, we successfully sourced mortgages on all three assets at an average loan-to-cost of about 63%.

This 2023 investment activity completed the initial capital commitment for Fund V, and here are our reflections on the execution so far for this fund:

• Fund V's thesis centered around the (at the time) contrarian focus on high yielding assets in secondary markets, that when purchased at an 8% cap rate and levered at 4% could generate mid- teens cash-on-cash yields.
• We see these assets performing stronger now than pre-COVID with an average occupancy rate of 96%. We see market rents up 10-15% in certain centers as retailer demand for locations with strong fundamentals continues to grow. And the bottom line is that we have surpassed our mid- teens cash-on-cash yield targets and expect to continue clipping double digit cash-on-cash yields after refinancing upcoming debt maturities.

City Point in Brooklyn NY (Fund II) remains our most exciting and significant asset within our Funds. We anticipate an incremental $0.04 to $0.06 of FFO accretion (3.5% - 5.0%) from the stabilization and potential ownership consolidation at City Point.

• Over the past year, several significant issues that we have been living with - and leasing with - have come to constructive conclusions:
• • Abolitionist Park, right across from our key ground floor street retail, is complete and open to the public.

• • Our neighbor, which is the tallest residential tower in New York outside of Manhattan, is open and residents are starting to move in. The scaffolding is coming down, and we are no longer leasing into a construction zone.
  • Live Nation will be opening its 2,000-seat theater directly across the street from City Point, which will undoubtedly increase foot traffic.
• City Point is currently 74% occupied and 84% leased and we are very optimistic about the future direction of leasing momentum and rents:
• • The retail space on our upper floors and concourse level are spoken for with best- in-class anchors, including Target, Primark, Alamo Drafthouse and Trader Joe's.
  • 2023 featured a wave of leasing on the ground floor, and we successfully anchored both ends of the Prince Street corridor with Fogo de Chão on the north and Sephora to the south.
  • Most important for the short run, we have strategically held back the best space opposite the park to capture what we anticipate will be premium rents.
  • In the long run, we think this is only the beginning of the story at City Point where we expect positive mark-to-market opportunities for years to come.

We expect that our activity within our Strategic Capital Platform will likely have different vehicles for different strategies as opposed to a 'one size fits all fund'. Nevertheless, we will rely on many of the same types of institutional partners that we have been utilizing in the Funds. Our experienced and cycle-tested management team has a proven track record of raising, managing and profitably deploying institutional third-party capital. We have built deep trust-based relationships from a wide variety of investors, whether it be institutional investors, family offices or high-net-worth individuals. Our long-standing successful history of managing capital in the private markets has greatly benefitted our investors and public shareholders and we consider this to be a core competency of Acadia.

External Growth

This is an exciting time for Acadia, and the prospect of overlaying our solid internal growth, which we have been delivering now for two years, with external growth, has the team energized. The team sees light at the end of tunnel with respect to the potential to commence deploying capital in this phase of the cycle for the following reasons:

• Capital Markets, both debt and equity, are becoming more supportive of transactions in general, giving us better visibility on locking-in blended cost of capital on potential deployments. Additionally, with more liquidity in the debt markets, sellers also have more visibility on where borrowing rates are for potential buyers and are becoming more realistic on pricing. These are positive steps towards narrowing what is still a wide bid-ask spread.
• As it relates in particular to street retail, we believe we have an advantage in underwriting given our knowledge of the depth of retailer demand for these unique markets and of the degree to which market rents have moved dramatically in select cases, allowing us to project overall growth appropriately.

The investment opportunity set has expanded considerably, and we are starting to see attractive entry points.

Here is how we are currently viewing investment opportunities:

• Street Retail: We believe the current landscape in street retail presents a large disconnect between very strong fundamentals yet weakness in the capital markets. Why? The combined effects of COVID and increased interest rates (which disproportionately impacted lower cap rate

assets) have decreased the potential buying pool for these assets. However, the street retail fundamentals (i.e., increasing tenant sales, decreasing vacancy in most corridors, and strong rent growth) are better than pre-COVID - a fact not widely known amongst general commercial real estate investors. We believe that street retail can be acquired at cap rates right on top of grocery- anchored centers despite a long-term history of trading 150-200 bps inside and of about 2x the growth rate. This disconnect presents interesting opportunities for a company like ours with the experience and relationships to be a consolidator in this fragmented asset class.

• Power Centers: The strategy that worked very well for most of Fund V - buying out-of-favor but well-located power centers with 300-400 bps of positive leverage - will no longer deliver low-to-mid-teenscash-on-cash returns due to increased interest rates. But strong fundamentals in the power center space (i.e., high tenant demand, historically low supply, and pricing below replacement cost) still present an attractive investment opportunity where we can deliver core plus returns on stabilized centers or value-add returns where we can execute a business plan encompassing some combination of lease-up, repositioning and/or redevelopment. We found some of these opportunities in Fund V and are continuing to do so.
• Special Situations with Retail-DominantComponent: With the volatility of the financing markets, retail real estate owners are facing refinancing pressures from their lenders. This should present opportunities to deploy preferred equity/mezz capital with equity-like returns at a safer position in the capital stack. We are also seeing an increasing number of non-performing loans secured by retail assets or mixed-use assets where retail is the predominant value driver. We are confident we can deliver outsized returns in these investments as it speaks to our core competencies.

Corporate Governance, Environmental Sustainability & Social Responsibility

We strive to conduct our business in a socially responsible manner that balances consideration of environmental and social issues with creating long-term value for our Company and our shareholders. Our Nominating and Corporate Governance Committee oversees our environmental, social and governance ("ESG") efforts. As tasked in its charter, our Nominating and Corporate Governance is responsible for periodically reviewing our Company's ESG strategy, practices and policies, and receives updates from management regarding our ESG activities. The Nominating and Corporate Governance Committee reports to our Board on our ESG strategy, practices and policies for further discussion and evaluation by the Board, as needed and appropriate. We are proud to share some of our most notable recent ESG developments and accomplishments:

• Corporate Governance

• Our Board of Trustees is committed to ongoing Board refreshment and seeks to maintain a diverse Board primarily comprised of independent Trustees who represent a mix of varied experience, backgrounds, tenure and skills to ensure a broad range of perspectives is represented. In 2021, our Nominating and Corporate Governance Committee formally committed in its charter to seek to include candidates with a diversity of race, ethnicity and gender in the pool from which it selects Trustee candidates.
• Since 2021, we have added three independent Trustees to the Board, two of whom represent gender or racial and/or ethnic diversity. Currently two of our seven independent Trustees standing for election represent gender diversity and one independent Trustee represents racial and/or ethnic diversity.
• Received the 2023 NAREIT Investor CARE Award for the 6th consecutive year.

• Environmental Sustainability

• • Completed energy efficiency upgrades to LED lighting and smart lighting controls, and water conservation upgrades to smart irrigation controls, at substantially all properties with landlord-controlled exterior common areas.
  • Named a Green Lease Leader Gold for 2022-2024 by the Institute for Market Transformation/the U.S. Dept of Energy's Better Building Alliance.
  • Outstanding Achievement in Land Use Award by the Green Business Partnership awarded to the Company's headquarters.
  • We have established a Greenhouse Gas (GHG) reduction goal and demonstrated that we are on-track to accomplish a 20% reduction by end of 2024 (with a 2019 baseline).
• Social Responsibility
• • I signed the CEO Action Pledge for Inclusion and Diversity in 2020.
    Diversity, equity and inclusion are fundamental values of our business, and I believe that our potential for success is maximized by having a diverse workforce that is reflective of our society and the communities we serve. We are focused on fostering a professional environment that fully embraces individuals with varied backgrounds, cultures, races, identities, ages, perspectives, beliefs, and values.
  • We were named a Great Place to Work® in 2024 for a fifth consecutive year.
  • Our current goals are to:
  • • Enhance employee satisfaction, engagement and wellness through annual program assessment, and promote employee advancement.
    • Promote employee belonging and inclusivity through company initiatives and programs.
    • Diversify our workforce by striving to diversify our summer internship program, which provides an opportunity for full-time employment.
    • Increase the diversity of the vendors and contractors engaged in the operation of our properties.
  • Watching our team members advance is, by far, the best part of my job. As a testament to the strength and depth of our senior and junior management team, we had eleven promotions earlier this year spanning several departments and functional disciplines. We had one promotion to Executive Vice President, two to Vice President, two to Director, two to more senior property management positions (Senior Regional PM and Regional PM), one to manger and three to administrative and operational positions. I would like to highlight three promotions in particular:
  • • Reggie Livingston has been promoted to Executive Vice President, Chief Investment Officer and will continue to drive the Company's external growth by developing investment strategies and leading the sourcing, underwriting and execution of new investments.
    • Samantha Stapleton has been promoted to Vice President, Asset Management. In her role, Ms. Stapleton will be responsible for developing and executing Acadia's long-term asset management strategy, with a focus on identifying and implementing value creation solutions that optimize portfolio performance. Notably, Ms. Stapleton initially joined the Company as an intern in 2013.
    • Christina Lamendola has been promoted to Vice President, Strategic Lease Management. Ms. Lamendola will continue to oversee her team while taking on the responsibilities of implementing the Company's tenant payment portal, negotiating deals with in-place tenants, as well as enhancing the Company's billing and collection strategies.

At this time, I want to extend my appreciation to our entire team of approximately 115 people and our Board, who have all worked hard this past year on behalf of all our company's stakeholders.

In Conclusion

To sum up, as we look to 2024 and beyond: the retail leasing momentum we saw last year is continuing; the positive shift in retailer sentiment and retailer activity feels more secular than cyclical and thus more long-lasting than just a rebound; and investor interest in retail is growing. Going forward, we will remain disciplined in our investments and capital recycling and look forward to capitalizing on renewing investor interest in retail.

I along with the team are committed to working hard on the fundamentals that we control, and I am optimistic that the broader public markets will better recognize our embedded growth and value.

Thank you for your continued support, and healthy regards,

Kenneth F. Bernstein

President & CEO

March 2024

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

• ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2023

or

• TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from			to
	Commission File Number 001-12002
	ACADIA REALTY TRUST
	(Exact name of registrant in its charter)
Maryland				23-2715194
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
	411 Theodore Fremd Avenue, Suite 300 Rye, NY 10580
	(Address of principal executive offices)
	(914) 288-8100
	(Registrant's telephone number, including area code)
Title of class of registered securities	Trading symbol	Name of exchange on which registered
Common shares of beneficial interest, par value	AKR	The New York Stock Exchange
$0.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES ☒

NO ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES ☐

NO ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒

NO ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☒

NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐	Emerging Growth Company	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) YES ☐ NO ☒