Business Context and Reporting Period
Acadia Realty Trust is a fully integrated equity REIT focused on retail properties in high-barrier-to-entry, densely populated U.S. markets. The Company operates through Acadia Realty Limited Partnership and reports three segments: Core Portfolio, Funds, and Structured Financing.
This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. At June 30, 2019, the Company had interests in 180 properties, including 123 Core Portfolio properties and 57 Fund properties. Core Portfolio operating occupancy was 93.2% and total Fund Portfolio operating occupancy was 88.9%.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Total revenues | $71.1 million | $63.6 million | $145.9 million | $126.7 million |
| Operating income | $7.1 million | $6.3 million | $23.3 million | $13.0 million |
| Net income attributable to Acadia | $9.1 million | $7.7 million | $21.3 million | $15.1 million |
| Basic and diluted EPS | $0.11 | $0.09 | $0.26 | $0.18 |
| Funds from operations attributable to common shareholders and OP unitholders | $31.8 million | $29.9 million | $66.6 million | $59.0 million |
| Diluted FFO per share and OP unit | $0.36 | $0.34 | $0.75 | $0.67 |
- Rental income increased to $69.9 million in the second quarter and $143.9 million year to date. Expense reimbursements were reclassified into lease revenues following adoption of ASC Topic 842; prior-year classifications were not adjusted.
- Approximate operating margins were 10.0% for the quarter and 16.0% year to date, based on reported operating income and total revenues.
- Consolidated net loss was $5.2 million for the quarter and $2.3 million year to date, primarily because noncontrolling interests received $14.3 million and $23.6 million, respectively, of net income. Acadia’s attributable results were profitable.
- Core Portfolio same-property NOI increased 4.8% in the quarter and 4.7% year to date. Core Portfolio NOI was $35.8 million for the quarter and $69.4 million year to date.
- Core Portfolio new and renewal lease spreads increased 5.7% on a cash basis and 7.8% on a straight-line basis in the quarter; year-to-date increases were 4.9% and 8.2%, respectively.
Cash Flow, Liquidity, Debt and Capital Resources
- Net cash provided by operating activities was $62.2 million for the six months ended June 30, 2019, compared with $49.0 million in the prior-year period.
- Net cash used in investing activities was $233.5 million, reflecting $138.7 million of real estate acquisitions, $55.9 million of development, construction and property improvements, and $99.6 million of investments in unconsolidated affiliates.
- Net cash provided by financing activities was $182.6 million, including $327.3 million of unsecured debt proceeds, $131.5 million of mortgage proceeds, $75.1 million of net ATM equity proceeds, and $32.2 million of noncontrolling-interest contributions.
- Cash and restricted cash totaled $46.2 million at June 30, 2019, including $33.7 million of cash and cash equivalents. The Company reported $105.9 million of additional capacity under existing Core and Fund revolving debt facilities.
- Total consolidated debt was $1.696 billion before debt issuance costs and premiums, compared with $1.560 billion at December 31, 2018. Approximately 70.7% was fixed or effectively fixed and 29.3% was variable rate.
- Debt maturities and scheduled principal payments totaled $165.3 million for the remainder of 2019 and $573.4 million in 2020. Management expects to refinance at least part of this debt but stated that acceptable financing may not be available.
- The Company paid $49.5 million of dividends and distributions during the first six months. The quarterly common share distribution was $0.28 per share.
Material Changes Versus the Prior Comparable Period
- Revenue increased 11.8% in the second quarter and 15.1% year to date, driven by acquisitions, Fund property lease-up, higher Core Portfolio recoveries, a below-market lease write-off, and settlement income from bankrupt tenants.
- Net income attributable to Acadia increased 18.4% in the quarter and 41.0% year to date. FFO per diluted share increased from $0.34 to $0.36 in the quarter and from $0.67 to $0.75 year to date.
- Interest expense increased to $19.8 million in the quarter and $37.6 million year to date from higher average borrowings, higher interest rates, and greater loan-cost amortization.
- Interest and other income decreased year to date, primarily because portions of notes receivable were converted into increased real estate ownership and related structured-financing income declined.
- Investing cash outflows increased substantially because of higher acquisitions and investments in unconsolidated affiliates. Financing cash flow shifted from an $81.1 million use in 2018 to a $182.6 million source in 2019, supported by debt and equity issuance.
- The Company issued 2.7 million common shares through its ATM program for $75.1 million net proceeds during the first six months. No shares were repurchased in 2019; $144.9 million remained available under the repurchase authorization.
- Accumulated other comprehensive income declined to a $29.6 million loss from $0.5 million of income at year-end 2018, primarily because of changes in the fair value of interest-rate swaps.
Outlook, Commentary, Risks and Unusual Items
- No formal earnings or operating guidance was provided in the filing. Management emphasized acquisitions, development, re-tenanting, Fund investment activity, and maintaining balance-sheet flexibility.
- The Company acquired the Soho Portfolio properties for $49.6 million during the period; the remaining three properties, part of an approximately $96.0 million portfolio, were expected to close through early 2020, subject to customary conditions.
- At June 30, 2019, nine consolidated properties were under development or redevelopment. Estimated total completion costs through 2020 were $146.5 million to $183.8 million, with the Company’s estimated share of $65.8 million to $83.2 million.
- The Company recorded a $1.4 million impairment charge related to remaining residential condominium units at 210 Bowery, including $1.1 million attributable to noncontrolling interests.
- A $26.3 million mortgage loan related to Brandywine Holdings was in default and subject to litigation. Management stated that it believes it has valid defenses and intends to defend the matter vigorously.
- Management identified refinancing and interest-rate risk as significant. A 100-basis-point increase in refinancing rates would increase annual interest expense by approximately $7.5 million, with approximately $1.8 million attributable to Acadia after noncontrolling interests. A 100-basis-point increase in LIBOR would increase interest expense on variable-rate debt by approximately $5.0 million before noncontrolling interests.
- The Company had $110.7 million of its share of remaining Fund capital commitments, including $80.7 million related to Fund V, and $52.1 million of construction commitments.
- Subsequent to quarter-end, Funds III, IV and V called capital, with the Company’s aggregate share totaling $17.0 million. The Company sold the Fund IV JFK Plaza property for $7.8 million on July 24, 2019 and repaid $4.3 million of associated debt.
- The Company adopted ASC Topic 842 effective January 1, 2019. The adoption did not require a cumulative-effect adjustment but resulted in recognition of operating and finance lease right-of-use assets and liabilities and changed the presentation of certain tenant reimbursements.
Important Facts for Investors to Verify
- Verify the Company’s ability to refinance $165.3 million of 2019 maturities and $573.4 million of 2020 maturities on acceptable terms.
- Review the status, potential exposure, collateral, and litigation developments related to the $26.3 million Brandywine Holdings mortgage default.
- Assess liquidity after funding Fund commitments, development costs, acquisitions, dividends, and construction commitments.
- Reconcile consolidated net loss with Acadia-attributable income and evaluate the effects of significant noncontrolling interests.
- Confirm the completion and funding requirements for the remaining Soho Portfolio acquisitions and the estimated development costs through 2020.
- Review the sensitivity of earnings, cash flow, swap valuations, and refinancing costs to LIBOR and broader interest-rate changes.
- Evaluate recurring operating performance separately from unusual items, including the $1.4 million impairment, tenant settlement income, lease write-offs, and Fund incentive income.