Acadia Realty Trust — Form 10-Q Summary
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 urban, street-retail and suburban markets, primarily along the East Coast and in Chicago. The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
At March 31, 2014, the Company had interests in 80 Core Portfolio properties and 39 Fund properties, or 119 properties in total. Core Portfolio physical occupancy was 95.6% and leased occupancy was 96.8%.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $46.7 million | $42.3 million | +$4.4 million |
| Operating income | $14.7 million | $16.5 million | -$1.7 million |
| Income from continuing operations | $19.1 million | $9.6 million | +$9.6 million |
| Net income attributable to common shareholders | $21.6 million | $9.6 million | +$12.0 million |
| Basic and diluted EPS | $0.38 | $0.18 | +$0.20 |
| Funds from operations | $18.9 million | $16.8 million | +$2.1 million |
| Diluted FFO per share | $0.32 | $0.31 | +$0.01 |
| Net cash from operating activities | $22.2 million | $4.2 million | +$18.0 million |
| Cash and cash equivalents at period-end | $72.8 million | $81.8 million | -$9.0 million |
Revenue increased primarily from acquisitions and leasing activity. Rental income rose to $33.8 million from $28.8 million, and expense reimbursements increased to $8.8 million from $7.3 million. Operating expenses increased faster than revenue, principally because of acquired properties, redevelopment activity, higher snow-related costs and increased depreciation. The reported operating margin was approximately 31.5%, compared with approximately 38.9% in the prior-year quarter.
Results benefited materially from a $12.4 million gain on the foreclosure of the Walnut Hill property. The Company also recorded $3.0 million of equity earnings from unconsolidated affiliates and a $0.2 million loss on debt extinguishment. FFO, which excludes the property gain and depreciation-related items, increased more modestly than GAAP earnings.
Core Portfolio same-store NOI increased 4.3% to $15.9 million, driven primarily by contractual rent increases and occupancy gains. Six new and renewal leases covering 23,939 square feet produced reported cash rent growth of 73.7% and straight-line rent growth of 100.4%; the small lease sample should be considered when interpreting these figures.
Balance sheet, debt and liquidity
- Total assets were $2.35 billion at March 31, 2014, compared with $2.26 billion at December 31, 2013.
- Mortgage and other notes payable increased to $1.108 billion from $1.040 billion. Including the nearly fully repurchased convertible notes, total debt was approximately $1.107 billion net of unamortized premium.
- Approximately 71.4% of debt was fixed-rate, including interest-rate swaps, and 28.6% was floating-rate. The weighted average rates were approximately 5.06% on fixed-rate debt and 2.11% on floating-rate debt.
- Debt maturities in 2014 totaled approximately $74.4 million, including $3.7 million of scheduled amortization. The filing states that the Company may need to refinance at least part of this amount or pursue alternatives.
- Credit facilities totaled $300.0 million, with $198.8 million available at March 31, 2014, including $122.5 million under the unsecured revolving facility and $76.3 million under the Fund IV subscription line.
- Restricted cash was $94.7 million, largely related to City Point construction funding. The Company reported $125.1 million of construction commitments.
- The Company issued approximately 1.1 million common shares through its ATM program during the quarter, generating approximately $27.5 million of net proceeds.
Cash used in investing activities was $120.3 million, including $90.5 million for real estate acquisitions and $37.5 million for redevelopment and property improvements. Financing activities provided $91.7 million, resulting in a $6.4 million decrease in cash during the quarter.
Material changes, outlook and unusual items
- The Company acquired four Core Portfolio properties for an aggregate $90.6 million and acquired a 50% interest in the Broughton Street Portfolio through Fund IV.
- Fund IV contributed $6.3 million of equity to the Broughton Street joint venture and had funded $15.3 million of a potential $29.4 million loan commitment at March 31, 2014.
- During March 2014, Walnut Hill was foreclosed upon by its lender, eliminating $22.9 million of non-recourse debt and producing the $12.4 million gain.
- The Company early adopted ASU 2014-08 regarding discontinued operations on a prospective basis. Prior-period discontinued-operation presentation may therefore not be fully comparable for future transactions.
- As of April 30, 2014, the Company reported five acquired properties through the year for an aggregate $128.5 million. Subsequent events also included a $20.2 million Fund III property sale, a $38.0 million acquisition of retail condominium units in Manhattan funded partly through cancellation of a note receivable, and repayment of two non-performing notes for $10.3 million.
- Redevelopment commitments included approximately $363.2 million of costs incurred across eight projects, with additional costs for certain projects estimated in the filing. City Point construction was expected to be completed in 2015, while other completion dates and costs remained to be determined.
Risks and contingencies
- Interest-rate risk remains material. A 100-basis-point increase in rates on refinanced debt could increase annual interest expense by approximately $3.1 million; a 100-basis-point LIBOR increase on consolidated variable-rate debt, after existing swaps, could increase annual interest expense by approximately $3.2 million.
- The Company held five non-performing notes totaling $15.9 million and maintained an allowance of approximately $2.0 million at March 31, 2014. Several loans were secured by real estate collateral and some were non-performing.
- Two legal matters were disclosed: a flood-related lawsuit seeking damages exceeding $9.0 million and a City Point contractor dispute seeking approximately $8.5 million. The Company believes it has meritorious defenses; the outcome of the contractor matter could not be estimated.
- Other risks include real estate market conditions, tenant creditworthiness, acquisition and redevelopment execution, leverage and refinancing risk, limited control over joint ventures, environmental and uninsured losses, REIT distribution requirements and dependence on key personnel.
- Management stated that it expects to refinance at least a portion of 2014 debt maturities, subject to market conditions. No formal earnings guidance was provided in the filing.
Investor verification checklist
- Reconcile the $12.4 million Walnut Hill foreclosure gain and assess its effect on GAAP earnings, EPS and FFO.
- Review same-store NOI trends, occupancy and lease spreads using a larger period of leasing activity than the six leases reported for the quarter.
- Evaluate the $74.4 million of 2014 debt maturities, available credit capacity and refinancing assumptions.
- Assess funding requirements and completion risks for City Point and the other redevelopment projects, including the $125.1 million of construction commitments.
- Monitor non-performing notes, reserve adequacy and the subsequent repayment of two notes disclosed after quarter-end.
- Track dilution from ATM share issuance, incentive awards and OP-unit conversions.
- Follow the disclosed litigation and the Company’s exposure to joint-venture debt and other off-balance-sheet obligations.