Acadia Realty Trust: Q3 2022 Form 10-Q Summary
Business context and reporting period
Acadia Realty Trust is an integrated equity REIT focused on retail properties in densely populated, supply-constrained U.S. markets. Its portfolio includes a Core Portfolio, four opportunity funds and structured-financing investments. The filing covers the three and nine months ended September 30, 2022; prior-year interim amounts were restated.
At September 30, 2022, the Company had interests in 202 properties: 151 Core Portfolio properties and 51 Fund properties. Consolidated operating properties and development assets had 88.5% physical occupancy, while the Company’s share was 89.3%.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $79.9 million, up from $71.9 million | $245.7 million, up from $213.1 million |
| Net income attributable to Acadia | $(55.9) million, or $(0.59) basic EPS | $(39.4) million, or $(0.42) basic EPS |
| Operating income (loss) | $(14.0) million | $51.7 million |
| Operating margin | Approximately (17.5)% | Approximately 21.1%; includes $49.9 million of disposition gains |
| Funds from operations | $24.7 million basic; $23.8 million diluted | $83.5 million basic; $82.6 million diluted |
| Diluted FFO per share and OP unit | $0.24 | $0.82 |
| Net cash provided by operating activities | Not separately reported | $100.5 million, versus $71.4 million |
| Cash and restricted cash | Not separately reported | $30.7 million at September 30, 2022 |
Third-quarter net loss was driven primarily by a $50.6 million loss from unconsolidated affiliates, including a $50.8 million impairment of the 840 N. Michigan Avenue investment, $33.3 million of property impairment charges, lower investment valuation gains and higher interest expense.
Core Portfolio same-property NOI was $29.0 million in the quarter and $89.8 million for the nine months, increasing 5.4% and 6.6%, respectively. Nine-month Core Portfolio NOI was $107.0 million, compared with $94.7 million in the prior-year period.
Balance sheet, debt and liquidity
- Total assets were $4.36 billion, including $3.56 billion of net real estate investments.
- Total indebtedness was $1.82 billion, compared with $1.81 billion at December 31, 2021. Gross consolidated debt before issuance costs and premium was $1.83 billion.
- Debt was 73.2% fixed or effectively fixed and 26.8% variable. The weighted-average effective rates were 4.06% for fixed or effectively fixed debt and 4.61% for variable-rate debt.
- The Company had $207.0 million of additional capacity under existing Core and Fund revolving facilities and $18.1 million of consolidated cash.
- Consolidated debt maturities were $85.3 million for the remainder of 2022 and $302.5 million in 2023, before considering extension options. The Company had options to extend $57.9 million of 2022 maturities and $41.1 million of 2023 maturities.
- Management stated that some maturities will likely require refinancing or other alternatives and cautioned that financing may not be available on acceptable terms.
- The Company paid $55.1 million of dividends and distributions on Common Shares and Preferred OP Units during the first nine months. The quarterly distribution was $0.18 per Common Share and OP Unit.
Material changes versus the prior comparable period
- Revenue increased 11.2% in the third quarter and 15.3% for the nine months, primarily from acquisitions, lease-up activity and development projects placed in service.
- Third-quarter net income attributable to Acadia declined from $12.0 million to a $55.9 million loss. Nine-month results declined from $20.5 million of income to a $39.4 million loss.
- Interest expense increased to $21.2 million in the quarter and $58.3 million year to date, reflecting higher average borrowings and interest rates.
- Property impairment charges increased to $33.3 million in the third quarter and year to date, compared with $9.9 million in the prior-year comparable periods. The 2022 charges related primarily to 146 Geary Street and 717 N. Michigan Avenue.
- Equity losses from unconsolidated affiliates were $50.6 million in the third quarter and $46.2 million year to date, versus income of $0.4 million and $3.2 million, respectively, in the prior-year periods.
- Realized and unrealized investment losses were $7.9 million in the third quarter and $18.4 million year to date, compared with gains of $46.5 million and $53.5 million. The change primarily reflected the decline in the fair value of the Albertsons investment.
- The Company completed $305.9 million of consolidated acquisitions and foreclosure activity, including the Williamsburg Collection, Henderson Avenue Portfolio and 640 Broadway foreclosure. It also sold properties for $192.7 million, recognizing $49.9 million of consolidated gains.
- The Company issued 5.5 million Common Shares through its at-the-market program for $119.5 million of net proceeds. Approximately $222.3 million remained available under the program.
- The Company increased its ownership in Fund II to 61.67% and in Fund II and Mervyns II collectively to 40.00%, investing $24.3 million during the year.
- Operating cash flow increased by $29.1 million, but investing cash use increased by $63.3 million because of higher property acquisitions and investments in unconsolidated affiliates.
Guidance, outlook, commentary and risks
The filing does not provide formal full-year earnings or FFO guidance. Management characterized its strategy as continuing to focus on Core Portfolio acquisitions, value creation through development and re-tenanting, opportunistic Fund investments and maintaining balance-sheet flexibility.
- Management reported that inflation, rising interest rates, supply-chain disruption, the war in Ukraine and recessionary financial-market conditions increased volatility. Tenant recoveries of operating expenses partially mitigate inflation, but current inflation exceeded contractual rent increases.
- A 100-basis-point increase in interest rates would increase annual interest expense by approximately $4.5 million on expected refinanced debt and approximately $4.9 million on existing variable-rate debt, before noncontrolling interests.
- One Core Portfolio note receivable totaling $21.6 million including accrued interest was in default. Management believes the collateral is sufficient to cover the carrying value.
- The Company had approximately $37.2 million of construction and development commitments and estimated remaining project costs of $57.7 million to $74.9 million through 2025, with an estimated Company share of approximately $35.5 million to $45.0 million.
- Fund V’s investment period was extended to August 25, 2023. The Company’s remaining share of Fund capital commitments was $44.8 million.
- The Company’s disclosure controls were not effective as of September 30, 2022 because of a previously reported material weakness involving the improper consolidation of two less-than-wholly-owned Fund investments. Remediation was underway but was not complete.
- The Company identified continuing exposure to tenant credit and lease-renewal risk, property valuation risk, joint-venture and noncontrolling-interest risks, environmental and catastrophic-event risks, cybersecurity risks, REIT qualification requirements and the discontinuation of USD LIBOR.
- Subsequent to quarter end, the Company sold a Henderson Avenue land parcel for $3.0 million, Fund IV sold an unconsolidated property for $46.1 million, and Fund IV extended a $25.5 million mortgage to April 28, 2023.
Most important facts for investors to verify
- Whether the material weakness in financial reporting is remediated and whether future filings require additional restatements.
- The refinancing plan and available liquidity for the $85.3 million of remaining 2022 maturities and $302.5 million of 2023 maturities.
- The performance and valuation of 840 N. Michigan Avenue, Albertsons and other unconsolidated investments after the recorded impairments and valuation losses.
- The sustainability of the $0.18 quarterly distribution relative to recurring cash flow, FFO and capital requirements.
- Actual tenant occupancy, rent collections, lease renewals and same-property NOI trends, particularly in lower-occupancy markets and Fund II’s City Point portfolio.
- The recoverability of the $21.6 million defaulted note receivable and the Company’s maximum exposure under the City Point Loan and other guarantees.
- The effect of higher interest rates and LIBOR-to-SOFR transition on borrowing costs, debt covenants and refinancing availability.