Business Context and Reporting Period
Acadia Realty Trust filed its Form 10-K for the fiscal year ended December 31, 2019. The company is a fully integrated U.S. retail REIT focused on high-barrier-to-entry, supply-constrained metropolitan markets. It operates through a Core Portfolio, institutional-investor Funds, and a Structured Financing segment. The company controlled approximately 95% of its operating partnership at year-end and consolidated its Funds.
At December 31, 2019, the company had interests in 186 properties: 129 Core Portfolio properties and 57 Fund properties. Core properties totaled approximately 5.6 million square feet and were 93.4% occupied; Fund properties totaled approximately 7.5 million square feet and were 88.6% occupied, excluding properties under development or redevelopment.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $295.3 million | $259.7 million | +$35.6 million |
| Net income | $21.2 million | $(15.7) million | Improved $36.9 million |
| Net income attributable to Acadia | $53.0 million | $31.4 million | +$21.6 million |
| Basic and diluted EPS | $0.62 | $0.38 | +$0.24 |
| Funds from operations attributable to common shareholders and OP unitholders | $126.9 million | $118.9 million | +$8.0 million |
| Diluted FFO per share and OP unit | $1.41 | $1.35 | +$0.06 |
| Net cash provided by operating activities | $127.2 million | $96.1 million | +$31.1 million |
| Net cash used in investing activities | $(397.1) million | $(136.6) million | Higher investment spending |
| Net cash provided by financing activities | $265.0 million | $(10.3) million | +$275.3 million |
| Cash dividends declared per common share | $1.13 | $1.09 | +$0.04 |
Rental income was $291.2 million, compared with $254.5 million in 2018. Operating expenses were $253.0 million, including $125.4 million of depreciation and amortization, $35.4 million of general and administrative expense, $39.3 million of real estate taxes, $51.2 million of property operating expense, and a $1.7 million impairment charge.
Core Portfolio NOI increased to $140.2 million from $133.5 million. Core same-property NOI increased 3.9% to $123.9 million. The company reported 5.0% cash-basis and 15.5% straight-line rent growth on 42 comparable new and renewal leases covering approximately 507,000 square feet.
Total assets were $4.31 billion at year-end, including $3.61 billion of net real estate, $305.1 million of investments in unconsolidated affiliates, and $114.9 million of notes receivable. Acadia shareholders’ equity was $1.54 billion and total equity was $2.19 billion.
Debt, Liquidity and Capital Resources
- Total debt before unamortized costs and premiums was $1.72 billion, compared with $1.56 billion at December 31, 2018.
- Fixed or effectively fixed-rate debt was $1.40 billion, or 81.7% of total debt; variable-rate debt was $314.6 million, or 18.3%.
- Variable-rate debt exposure declined from $558.7 million, or 35.8% of debt, in 2018. A 100-basis-point increase in interest rates would increase annual interest expense on variable-rate debt by approximately $7.5 million before considering other effects.
- The senior unsecured revolving facility was increased to $250.0 million, and available consolidated revolving debt capacity was $326.0 million at year-end.
- Cash and cash equivalents were $15.8 million, with restricted cash of $14.2 million.
- Common shares issued through the ATM program totaled 5.16 million, generating $147.7 million of gross proceeds and $145.5 million net of issuance costs. No shares were repurchased in 2019.
- Debt principal payments and maturities totaled $437.3 million in 2020 and $287.7 million in 2021. Approximately $240.0 million of Fund II debt was being actively refinanced, and $121.5 million of 2020 debt had one-year extension options.
- The company had $86.1 million of its share of remaining Fund capital commitments and estimated its share of remaining development and redevelopment costs at approximately $93.0 million to $111.1 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by Fund acquisitions, Core Portfolio acquisitions, lease-up at City Point, a property placed into service, and accelerated below-market lease amortization.
- Net income attributable to Acadia increased substantially, helped by $30.3 million of property disposition gains versus $5.1 million in 2018. The 2019 amount included a $16.8 million gain on the sale of Pacesetter Park.
- FFO increased 6.7%, while diluted FFO per share increased from $1.35 to $1.41 despite additional equity issuance.
- Investing cash outflows increased materially because of acquisitions, investments in unconsolidated affiliates, and development spending.
- Fund revenue increased $29.3 million, but the Funds reported a $12.0 million net loss attributable to Acadia before noncontrolling interest allocations, reflecting investment and financing costs, depreciation, and development activity.
- The company adopted ASC 842 lease accounting in 2019. The filing states that adoption did not require a cumulative-effect adjustment, although internal leasing costs were expensed rather than capitalized.
Outlook, Risks, Contingencies and Unusual Items
- Management’s strategy remains focused on acquiring, developing, re-tenanting, and selectively disposing of retail properties while maintaining access to equity and debt capital.
- Key risks include tenant bankruptcies, e-commerce pressure, anchor tenant departures and co-tenancy provisions, lease rollover, competition, geographic concentration, development cost overruns, joint venture risks, property impairment, and limited real estate liquidity.
- The 20 largest retail tenants represented approximately 37.8% of portfolio annualized base rent; Target was the largest individual tenant at 5.1% of base rent. Greater New York and Chicago represented 36.2% and 27.6%, respectively, of Core Portfolio annual base rent.
- Acadia Brandywine Holdings’ $26.3 million mortgage had been in default since 2016. In February 2020, the Delaware Superior Court found Brandywine Holdings and the Operating Partnership liable for the outstanding loan balance. The company stated that it intends to appeal. The lender had alleged approximately $33.0 million of liability as of November 9, 2017, excluding accruing interest, default interest, fees, and costs.
- The company recognized a $1.7 million impairment charge related to Fund IV condominium units and $6.9 million of other income, including $5.0 million from the expiration of obligations under a New Market Tax Credit transaction.
- Management expects to refinance at least part of the 2020 and 2021 maturities but cautioned that acceptable financing may not be available. LIBOR discontinuation after 2021 could affect borrowing costs and derivative contracts.
- Subsequent to year-end, the company acquired two properties for approximately $18.9 million and made a $54.0 million preferred equity investment and a $5.0 million mezzanine loan.
Most Important Facts for Investors to Verify
- Ability to refinance the $437.3 million of 2020 consolidated debt maturities, particularly the $240.0 million Fund II obligation.
- Ultimate outcome and financial exposure from the Brandywine litigation and defaulted mortgage.
- Tenant concentration, lease expirations, anchor performance, and re-leasing spreads in the Core Portfolio and Funds.
- Actual progress, costs, stabilization timing, and funding requirements for development and redevelopment projects.
- Whether FFO growth and same-property NOI growth continue after adjusting for acquisitions, dispositions, lease amortization, tax-credit income, and other unusual items.
- Impact of additional equity issuance, Fund capital calls, variable-rate debt, LIBOR transition, and future refinancing rates on per-share cash flow and distributions.