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 nine months ended September 30, 2017.
At September 30, 2017, Acadia had interests in 182 properties, including 116 Core Portfolio properties and 53 Fund properties, with total Core and Fund occupancy of 89.6%.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $62.7 million | $43.9 million | $184.2 million | $135.8 million |
| Operating income | $5.7 million | $1.3 million | $22.4 million | $20.5 million |
| Net income attributable to Acadia | $12.9 million | $6.1 million | $40.6 million | $53.0 million |
| Basic and diluted EPS | $0.15 | $0.08 | $0.48 | $0.71 |
| FFO attributable to common shareholders and OP unitholders | $32.9 million | $22.8 million | $101.6 million | $83.2 million |
| Diluted FFO per share/OP unit | $0.37 | $0.27 | $1.14 | $1.05 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $84.4 million | $56.5 million |
Q3 operating margin was approximately 9.2%, compared with 2.9% in the prior-year quarter. The nine-month operating margin was approximately 12.2%, compared with 15.1% in the prior-year period. The filing does not provide a comparable consolidated EBITDA margin.
- Cash and cash equivalents were $48.3 million at September 30, 2017, compared with $71.8 million at December 31, 2016.
- Total indebtedness was $1.60 billion, compared with $1.49 billion at year-end 2016. Consolidated debt before debt costs and premium was $1.62 billion.
- Fixed or effectively fixed-rate debt represented 53.7% of debt; 46.3% was variable-rate debt.
- Net investments in real estate were $3.14 billion, compared with $3.09 billion at December 31, 2016.
- Core Portfolio same-property NOI was $25.7 million in Q3, essentially unchanged from $25.7 million in Q3 2016, and $76.3 million for the first nine months, up 0.7% year over year.
Material Changes Versus the Prior Comparable Period
- Revenue increased 42.9% in Q3 and 35.6% for the first nine months, primarily from 2016 and 2017 acquisitions and placing substantially all of the City Point development into service.
- Q3 net income attributable to Acadia increased 110.5%, while nine-month net income declined 23.4% because the prior-year period included substantially larger property-disposition gains.
- Q3 gain on disposition of properties was $13.0 million, compared with none in Q3 2016. For the first nine months, the gain was $13.0 million versus $82.0 million in 2016.
- Equity in earnings of unconsolidated affiliates increased to $21.0 million for the first nine months from $3.6 million, reflecting property dispositions and distributions exceeding carrying values from certain investments.
- Interest expense increased to $39.7 million for the first nine months from $24.9 million, reflecting higher average borrowings, higher interest rates, reduced capitalized interest, and additional loan costs.
- General and administrative expense declined to $25.3 million from $30.7 million, primarily because 2016 included accelerated equity compensation related to retirements and additional program expense.
- Operating cash flow increased $27.9 million year over year. Investing cash use declined to $146.3 million from $375.7 million, while financing cash inflow declined to $38.3 million from $295.7 million, largely because 2016 included $357.3 million of common equity issuance.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management states that its strategy is to grow the Core Portfolio through acquisitions, development, re-tenanting and asset recycling, while pursuing opportunistic acquisitions through its Funds and maintaining balance-sheet flexibility. The filing does not provide formal earnings or same-property NOI guidance.
- At September 30, 2017, consolidated debt maturities and scheduled principal repayments totaled $174.7 million for the remainder of 2017 and $88.3 million in 2018. Management expects to refinance at least part of these obligations or pursue alternatives, but states that financing may not be available on acceptable terms.
- Two mortgage loans were in default: a $26.3 million Brandywine Holdings mortgage subject to litigation and a $14.3 million Fund II mortgage for breach of a liquidity covenant. Management believes the Brandywine loan is nonrecourse and the lawsuit is without merit.
- City Point Condominium Tower I was classified as held for sale, resulting in a $3.8 million impairment charge. The property was sold on October 13, 2017 for $96.0 million, and $81.0 million of related debt was repaid.
- The company had $93.1 million of construction commitments, $207.7 million of lease obligations, $11.3 million of letters of credit and $149.9 million of its share of remaining Fund capital commitments at September 30, 2017.
- Interest-rate exposure increased: variable-rate debt rose from $645.2 million at year-end 2016 to $749.3 million. A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $7.5 million before noncontrolling interests.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to previously disclosed risk factors.
- Adoption of several new accounting standards is pending. Management generally expects no material impact, but expects lease accounting adoption to add right-of-use assets and to change the treatment of certain internal leasing costs.
Most Important Facts for Investors to Verify
- Verify the refinancing plan and available liquidity for the $174.7 million of debt due during the remainder of 2017 and the $88.3 million due in 2018.
- Monitor the two loan defaults, the Brandywine litigation and any related recourse or collateral consequences.
- Assess Fund property occupancy of 83.5%, including the comparatively low 64.6% occupancy of Fund II properties.
- Separate recurring operating performance from disposition gains, impairment charges and distributions in excess of carrying value when evaluating earnings and FFO.
- Evaluate exposure to variable interest rates, refinancing spreads and the effect of additional Fund borrowing.
- Confirm the completion economics of the October 2017 City Point sale and repayment of its mortgage.
- Review the company’s $149.9 million share of Fund capital commitments and $102 million to $144 million of estimated remaining development costs through 2020.