Acadia Realty Trust — Form 10-Q Summary
Business context and reporting period
Acadia Realty Trust is a fully integrated equity REIT focused on retail properties in supply-constrained, densely populated U.S. metropolitan areas. 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, 2023, compared with the corresponding 2022 periods. At June 30, 2023, the Company had interests in 200 properties: 149 Core Portfolio properties and 51 Fund properties. Consolidated and Fund properties had 90.9% physical occupancy; the Company’s share of occupancy was 91.0%.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues | $89.9 million | $84.3 million | $171.8 million | $165.8 million |
| Operating income | $19.7 million | $25.6 million | $31.8 million | $65.7 million |
| Net income | $2.8 million | $(15.8) million | $24.8 million | $28.3 million |
| Net income attributable to Acadia | $9.3 million | $(0.4) million | $22.6 million | $16.5 million |
| Diluted EPS | $0.09 | $0.00 | $0.23 | $0.17 |
| Net cash from operating activities | Not provided quarterly | Not provided quarterly | $89.5 million | $64.8 million |
| FFO attributable to common shareholders and OP unitholders | $38.2 million | $23.4 million | $78.9 million | $58.8 million |
| Diluted FFO per share/unit | $0.37 | $0.23 | $0.77 | $0.59 |
Approximate operating margins were 21.9% in Q2 2023 versus 30.4% in Q2 2022 and 18.5% for the first six months of 2023 versus 39.6% in the prior-year period. The decline primarily reflects the absence of prior-year property-disposition gains. Approximate net margins attributable to Acadia were 10.3% and 13.2% for Q2 and six months 2023, respectively.
- Rental income increased 9.4% in Q2 and 5.5% for the six-month period.
- Core Portfolio same-property NOI increased 5.0% in Q2 and 5.9% for the six-month period.
- Q2 Core Portfolio new and renewal lease spreads were 13.1% on a cash basis and 21.6% on a straight-line basis. Six-month spreads were 12.3% and 21.7%, respectively.
- Total assets were $4.20 billion at June 30, 2023, compared with $4.30 billion at December 31, 2022. Net investments in real estate were $3.51 billion.
- Cash and cash equivalents were $17.2 million, with restricted cash of $12.3 million. Cash and restricted cash declined by $2.7 million during the first six months.
Debt, liquidity and cash flow
- Consolidated debt totaled $1.775 billion before unamortized debt costs and premium, compared with $1.805 billion at year-end 2022. Total indebtedness after these adjustments was $1.763 billion.
- Approximately 82.1% of debt was fixed or effectively fixed, with $1.458 billion at a weighted-average rate of 4.45%. Variable-rate debt totaled $316.8 million, or 17.9%, at a weighted-average rate of 7.05%.
- The Company had $119.9 million available under its revolving credit facility and approximately $210.9 million of additional capacity under existing Core and Fund revolving facilities.
- Debt maturities, without available extension options, included $154.6 million during the remainder of 2023 and $252.8 million in 2024. The Company’s pro rata share of unconsolidated debt maturities was $46.3 million for the remainder of 2023 and $44.9 million in 2024.
- The Company generated $89.5 million of operating cash flow, used $26.7 million in investing activities, and used $65.5 million in financing activities during the first six months.
- Dividends and distributions declared were $0.18 per common share/OP unit per quarter, or $0.36 for the first six months. Cash dividends paid to common shareholders totaled $34.3 million.
- The Company had approximately $222.3 million of remaining capacity under its $250 million ATM program and $122.5 million remaining under its share repurchase authorization; no ATM issuances or share repurchases occurred during the period.
Material changes versus the prior comparable period
- Revenue increased, supported by leasing activity, tenant lease-up, a $7.8 million acceleration of below-market lease income associated with a bankrupt tenant, and Fund settlement income.
- Operating income declined substantially because the prior-year periods included $12.2 million of Q2 gains and $41.0 million of six-month gains on property dispositions.
- Net income attributable to Acadia improved from a Q2 2022 loss of $0.4 million to $9.3 million and increased from $16.5 million to $22.6 million for the six-month period.
- Interest expense increased $2.9 million in Q2 and $6.5 million for the six-month period, primarily because of higher interest rates and, for the Core Portfolio, higher average borrowings.
- Equity in unconsolidated affiliates shifted to a loss of $1.4 million in Q2 and for the six-month period, compared with earnings of $1.3 million and $4.4 million, respectively, in the prior-year periods.
- Operating cash flow increased $24.7 million, primarily due to a $28.2 million special dividend from the Company’s Albertsons investment.
- The Company directly owned 1.6 million Albertsons shares after the January 2023 distribution of shares by Mervyns II. These securities had a fair value of $35.9 million at June 30, 2023.
Outlook, commentary, risks and unusual items
- The filing does not provide formal full-year earnings or FFO guidance. Management cited continued leasing momentum, development and redevelopment activity, and the leasing pipeline as sources of potential value creation.
- Management reported that inflation, rising interest rates, slower economic growth, geopolitical uncertainty and banking-sector instability increased financing costs. Most operating expenses are recoverable from tenants, but current inflation exceeds contractual rent increases in some cases.
- Bed Bath & Beyond rejected two Core Portfolio leases and one Fund lease following its April 2023 bankruptcy filing. The Company accelerated $8.1 million of below-market lease intangible amortization and signed a new 15-year lease for one Core location. Management stated that no material adverse impact had occurred at the reporting date, but further tenant bankruptcies or nonrenewals could affect cash flow and property values.
- A $19.3 million non-recourse Fund IV loan, representing $4.5 million at the Company’s share, matured on July 15, 2023 and was in default. It accrues default interest at 4.00% above the contractual rate.
- At June 30, 2023, a Fund V mortgage of $29.2 million, or $5.9 million at the Company’s share, did not meet debt-service-coverage requirements. The lender may require a cash sweep unless a waiver is granted.
- The Company had a $21.6 million structured-financing loan, including accrued interest, that had previously matured and remained unpaid. Management believes the collateral is sufficient to cover the carrying value.
- Development and redevelopment projects had estimated remaining costs of $67.0 million to $94.2 million through 2025, with the Company’s estimated share of $42.4 million to $59.4 million.
- LIBOR was discontinued on June 30, 2023. The Company expects to transition affected variable-rate loans to SOFR or another applicable benchmark and uses swaps and caps to manage interest-rate exposure.
- Management stated that disclosure controls and procedures were effective as of June 30, 2023 and that there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Refinancing progress and terms for the $154.6 million of consolidated debt maturing during the remainder of 2023 and the $252.8 million due in 2024.
- Status and resolution of the defaulted Fund IV loan and the Fund V debt-service-coverage shortfall, including any cash sweeps, waivers or additional capital requirements.
- Tenant retention, re-leasing costs and cash-flow effects from Bed Bath & Beyond and other tenant bankruptcies or nonrenewals.
- Sustainability of same-property NOI growth and leasing spreads after excluding the $7.8 million nonrecurring lease-intangible acceleration.
- Cash available for distributions after debt service, capital expenditures, Fund commitments and development spending.
- Valuation volatility and future dividend or mark-to-market effects from the Albertsons investment.
- Exposure to interest-rate increases, including the transition from LIBOR and the effect of refinancing at higher rates.