Business Context and Reporting Period
Acadia Realty Trust is an integrated equity REIT focused on acquiring, owning, managing, and redeveloping retail properties in high-barrier-to-entry metropolitan markets along the East Coast and in Chicago. The company operates through Acadia Realty Limited Partnership and had interests in 84 Core Portfolio properties and 54 Fund properties, or 138 properties in total, as of September 30, 2014. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $47.7 million, versus $41.1 million | $143.9 million, versus $124.2 million |
| Operating income | $15.2 million, versus $13.1 million | $48.8 million, versus $44.4 million |
| Net income attributable to common shareholders | $28.6 million, versus $9.5 million | $61.6 million, versus $27.9 million |
| Diluted earnings per share | $0.47, versus $0.17 | $1.04, versus $0.50 |
| Funds from operations | $18.7 million, versus $17.9 million | $58.7 million, versus $52.1 million |
| Diluted FFO per share | $0.30, versus $0.32 | $0.97, versus $0.94 |
| Net cash provided by operating activities | Not separately provided | $61.7 million, versus $41.6 million |
Revenue increased 16.0% in the third quarter and 15.8% for the first nine months. Operating margins were approximately 31.9% in the quarter and 33.9% year to date, compared with approximately 32.0% and 35.8%, respectively, in the prior-year periods. The year-to-date margin decline primarily reflects higher general and administrative, property operating, and depreciation expenses.
- Core Portfolio physical occupancy was 96.0% and leased occupancy was 97.0% at September 30, 2014.
- Core Portfolio same-property NOI increased 7.7% in the third quarter and 5.6% for the first nine months, driven primarily by contractual rent increases and occupancy gains.
- Core Portfolio rent spreads for the first nine months were 18.7% on a cash basis and 31.4% on a straight-line GAAP basis.
- Cash and cash equivalents were $131.1 million, compared with $79.2 million at December 31, 2013. Cash in escrow was $26.8 million and restricted cash was $49.3 million.
- Mortgage and other notes payable were $1.141 billion, compared with $1.040 billion at year-end 2013. Total assets increased to $2.455 billion from $2.265 billion.
- Approximately 71.5% of debt, including interest-rate swaps, was fixed at a weighted average rate of 5.02%; 28.5% was floating at a weighted average rate of 1.92%.
- Available capacity under the disclosed credit facilities was $220.1 million, including $137.5 million under the unsecured revolving facility and $82.6 million under the Fund IV subscription facility.
Material Changes Versus the Prior Comparable Period
- Third-quarter and year-to-date net income benefited substantially from a $102.9 million gain on the disposition of properties held through unconsolidated affiliates, primarily the Fund III and Fund IV Lincoln Road portfolios. The company’s share of equity earnings from unconsolidated affiliates increased to $110.2 million for the first nine months from $7.3 million.
- Year-to-date net income also included a $13.1 million gain on dispositions of property, including a $12.4 million gain related to the foreclosure of Walnut Hill Plaza.
- Revenue growth reflected property acquisitions, Fund re-tenanting, and increased occupancy. The company acquired eight Core Portfolio properties for an aggregate purchase price of $243.7 million and Fund IV acquired properties for $59.2 million.
- General and administrative expense increased to $20.9 million from $17.3 million for the first nine months, partly due to higher stock compensation, legal costs, and Fund-related legal and tax expenses.
- Common shares outstanding increased to 60.1 million from 55.6 million at year-end 2013. The company issued approximately 4.3 million shares through its ATM program for approximately $114.9 million of net proceeds.
- Cash flow from investing activities improved to a use of $59.0 million from a use of $160.2 million, primarily because of proceeds from property dispositions and unconsolidated affiliate sales. Financing cash flow decreased to $49.2 million from $115.2 million, largely because of substantially higher distributions to noncontrolling interests.
- The company early adopted ASU 2014-08 concerning discontinued operations. Normal-course property sales are generally no longer reported as discontinued operations unless they represent a strategic shift with a major effect on operations and financial results.
Outlook, Commentary, Risks, and Unusual Items
Management’s stated strategy is to pursue disciplined acquisitions, redevelopment, re-tenanting, and Fund investments while maintaining a flexible balance sheet. No formal earnings or operating guidance was provided in the filing. Management identified an acquisition pipeline of approximately $154.4 million, subject to customary closing conditions.
- Redevelopment and construction projects had incurred $418.8 million of costs to date and had estimated additional costs of $73.8 million to $130.8 million. The Operating Partnership’s estimated share of additional costs was $13.8 million to $25.0 million.
- Construction commitments totaled $99.4 million, and unfunded capital commitments from Fund noncontrolling investors totaled $405.0 million.
- Debt maturities totaled $120.0 million within one year, including $20.0 million maturing in 2014 at a weighted average rate of 7.25%. Management expected to refinance at least part of this debt or pursue alternatives based on market conditions.
- A 100-basis-point increase in rates on refinanced debt would increase annual interest expense by approximately $2.8 million, with approximately $0.8 million attributable to the company after noncontrolling interests. A 100-basis-point increase in LIBOR would increase annual interest expense on net variable-rate debt by approximately $3.3 million, with approximately $0.7 million attributable to the company.
- Three non-performing notes receivable totaled $7.9 million at September 30, 2014; the allowance for notes receivable was $0.1 million.
- Material litigation included a claim exceeding $9.0 million relating to a 2011 flood and an approximately $8.5 million contractor claim relating to City Point. Management stated that it believes the claims have meritless or defensible positions, but the outcomes could not be determined.
- The filing identifies risks from economic conditions, tenant demand and creditworthiness, real estate markets, leverage, development and acquisition execution, interest rates, joint-venture control limitations, REIT requirements, uninsured losses, and environmental or governmental matters.
- Subsequent to quarter-end, the company acquired Shops at Grand Avenue for $56.0 million, Fund IV acquired two Manhattan properties for an aggregate $47.3 million, and the company issued approximately 3.9 million common shares for approximately $114.8 million of net proceeds.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the unusually large Lincoln Road disposition gains and other property-sale gains when assessing earnings quality.
- Review debt maturities, refinancing plans, interest-rate exposure, and the available capacity under credit facilities.
- Evaluate the funding requirements, completion risks, and expected returns of City Point and the other redevelopment projects.
- Assess the effect of substantial equity issuance and Fund-level noncontrolling interests on per-share results and cash distributions.
- Monitor the performance and collectability of the non-performing notes receivable and the status of pending litigation.
- Confirm post-quarter-end acquisitions and the October equity offering when updating valuation, leverage, and share-count analyses.