Acadia Realty Trust — Q3 2016 Form 10-Q Summary
Business context and reporting period
Acadia Realty Trust is an integrated equity REIT focused on acquiring, owning, redeveloping and managing primarily retail properties in supply-constrained, densely populated U.S. markets. The filing covers the three and nine months ended September 30, 2016. The company reported interests in 175 properties: 116 in its Core Portfolio and 59 held through opportunity funds. Core Portfolio physical and leased occupancy were 96.3% and 96.5%, respectively.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $51.1 million, versus $56.9 million | $155.1 million, versus $162.5 million |
| Operating income | $8.5 million, versus $18.9 million | $39.8 million, versus $47.1 million |
| Net income attributable to common shareholders | $6.1 million, versus $13.8 million | $53.0 million, versus $56.8 million |
| Basic and diluted EPS | $0.08, versus $0.20 | $0.71, versus $0.82 |
| FFO attributable to common shareholders and OP unit holders | $22.8 million, or $0.27 per diluted share/unit | $83.2 million, or $1.05 per diluted share/unit |
| Same-property Core Portfolio NOI | $24.0 million, up 4.2% | $71.6 million, up 3.3% |
Quarterly operating margin was approximately 16.6%, compared with 33.3% in the prior-year quarter. The nine-month operating margin was approximately 25.7%, compared with 29.0%. The declines primarily reflect lower rental income following the Brandywine deconsolidation and Fund property dispositions, higher general and administrative costs, and higher acquisition-related expenses.
For the nine months, net cash provided by operating activities was $56.5 million, compared with $85.3 million. Investing activities used $375.7 million, primarily for acquisitions, redevelopment, investments in unconsolidated affiliates and new notes receivable. Financing activities provided $295.7 million, supported by equity issuances and noncontrolling-interest contributions. Cash and cash equivalents declined to $49.2 million from $72.8 million at December 31, 2015.
At September 30, 2016, total assets were $3.58 billion and total equity was $2.01 billion. Consolidated debt totaled $1.31 billion before unamortized costs and premiums, or $1.30 billion net. Approximately 61.6% of debt was fixed-rate, including swaps, and 38.4% was variable-rate. The company had $132.5 million available under its unsecured revolving facility and $198.3 million of total availability under listed credit facilities.
Material changes versus the prior comparable period
- The company acquired 10 Core Portfolio properties for an aggregate purchase price of $487.2 million and Fund IV acquired three properties for $50.4 million.
- The company disposed of interests in Cortlandt Town Center and Heritage Shops, generating an aggregate reported gain on disposition of $82.0 million during the nine-month period. The prior-year period included $89.1 million of property-sale gains and $24.0 million of gains from unconsolidated affiliates.
- Brandywine was deconsolidated and the company’s 22% interest is now accounted for under the equity method. Related non-recourse debt of $140.0 million was repaid, and the company provided a $153.4 million loan to partners in the resulting tenancy-in-common structure.
- Interest income increased to $19.3 million from $13.1 million, primarily due to new structured-financing investments and the recapture of previously established reserves.
- General and administrative expense increased to $30.7 million from $23.1 million for the nine months, partly due to accelerated equity-based compensation associated with executive retirements and other incentive compensation.
- The company formed Fund V with $520.1 million of total equity commitments from 12 institutional investors. No Fund V capital had been contributed or invested as of September 30, 2016.
- Common shares outstanding increased to 80.9 million from 70.3 million at year-end 2015. The company raised $156.8 million net through its ATM program and $172.1 million net through an August public offering; it also partially settled a forward sale agreement.
- Same-property Core Portfolio NOI increased despite lower consolidated rental income, supported by contractual rent increases and leasing of previously below-market space. Nine-month cash and straight-line rent spreads were 14.0% and 28.2%, respectively.
Outlook, risks, contingencies and unusual items
- The filing does not provide formal earnings or FFO guidance. Management describes its strategy as continued acquisition and redevelopment of high-quality retail assets, growth through institutional opportunity funds, and maintenance of a flexible balance sheet.
- The company had $140.6 million of acquisitions under contract, including approximately $60.0 million of mortgage debt expected to be assumed. Closing remained subject to customary conditions.
- As of September 30, 2016, debt maturities totaled $412.1 million within one year, including $191.9 million of consolidated debt maturing in 2016 as discussed in the liquidity section. Management stated that available cash might not be sufficient to repay all maturities and expected to refinance at least part of the debt or pursue other alternatives.
- One $26.3 million non-recourse mortgage loan collateralized by a property in which the company owns approximately 22% was in default and maturity default. Management stated that it did not believe other property carrying values were impaired.
- The structured financing portfolio was $266.8 million, with one non-performing note. No reserve was recorded because management believed the collateral value supported the carrying amount.
- The company had 10 redevelopment projects with $639.8 million of costs incurred and estimated additional costs of $98.7 million to $150.4 million. The Operating Partnership’s estimated share of additional costs was $34.1 million to $51.7 million.
- Interest-rate risk remains material. Management estimated that a 100-basis-point increase in rates on refinanced debt would increase annual interest expense by approximately $4.4 million, while a 100-basis-point increase in indices on variable-rate debt would increase annual interest expense by approximately $5.0 million, before noncontrolling-interest effects.
- Other risks include real estate market conditions, tenant demand and creditworthiness, leverage and refinancing, development execution, joint-venture control limitations, uninsured losses, REIT requirements, environmental matters and information-security threats.
- In October 2016, Fund IV acquired a seven-property, 1.1 million-square-foot portfolio for $83.4 million. The company also reported that Fund II’s $25.0 million credit facility was repaid after the quarter ended.
Most important facts for investors to verify
- Reconcile recurring operating performance with reported earnings, given that nine-month net income included $82.0 million of property-disposition gains and prior-year results included significant sale gains.
- Assess liquidity and refinancing capacity for near-term debt maturities, including the defaulted $26.3 million loan and the Fund II facility that matured shortly after quarter-end.
- Evaluate the credit quality, collateral and repayment prospects of the $266.8 million structured financing portfolio, including its non-performing note.
- Review the effect of equity issuance, the unsettled forward sale and OP units on per-share results and future dilution.
- Monitor execution, funding requirements and returns from the $98.7 million to $150.4 million of estimated remaining redevelopment costs and the $140.6 million acquisition pipeline.
- Confirm the impact of Brandywine’s deconsolidation, related-party financing and unconsolidated joint ventures on reported revenue, debt and cash flow.