Acadia Realty Trust — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Acadia Realty Trust is an integrated equity REIT focused primarily on retail properties in densely populated, supply-constrained U.S. markets. 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 months ended March 31, 2018, with comparative results for the three months ended March 31, 2017. At March 31, 2018, the company had interests in 175 Core Portfolio and Fund properties, with 10.6 million square feet and 90.5% operating occupancy. The Core Portfolio occupancy was 94.0%; the Fund portfolio occupancy was 86.1%.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $63.1 million | $62.0 million | +$1.1 million |
| Operating income | $6.7 million | $9.9 million | -$3.2 million |
| Net income attributable to Acadia | $7.4 million | $15.6 million | -$8.2 million |
| Basic and diluted EPS | $0.09 | $0.18 | -$0.09 |
| Funds from operations attributable to common shareholders and OP unitholders | $29.1 million | $35.5 million | -$6.4 million |
| Diluted FFO per share/OP unit | $0.33 | $0.40 | -$0.07 |
| Cash flow from operating activities | $22.9 million | $24.5 million | -$1.6 million |
Rental income increased to $50.8 million from $48.6 million, while expense reimbursements declined to $11.2 million from $12.3 million. Operating expenses increased to $56.4 million from $52.1 million, primarily due to higher depreciation and amortization and property operating expenses. The operating margin declined to approximately 10.6% from 16.0%.
Net loss before noncontrolling interests was $4.2 million, compared with net income of $20.0 million in the prior-year quarter. Results benefited from a $11.6 million allocation of losses attributable to noncontrolling interests, resulting in $7.4 million of net income attributable to Acadia. The prior-year period included significant gains from unconsolidated property dispositions and higher structured-financing interest income.
Core Portfolio NOI was $33.1 million, essentially flat with $33.1 million in the prior-year quarter. Same-property NOI declined 1.0% to $30.9 million. Core Portfolio lease renewals and new leases produced cash-basis rent growth of 15.3% and straight-line rent growth of 23.3% on 65,540 square feet.
Balance Sheet, Debt, and Liquidity
- Total assets were $3.94 billion at March 31, 2018, compared with $3.96 billion at December 31, 2017.
- Net investments in real estate increased to $3.17 billion from $3.13 billion.
- Total indebtedness, net of issuance costs and including unamortized premium, increased to $1.46 billion from $1.42 billion. Consolidated debt before these adjustments was $1.47 billion.
- Approximately 62.4% of debt was fixed or effectively fixed at a weighted-average rate of 3.77%; 37.6% was variable-rate debt at a weighted-average rate of 3.71%. Interest-rate swaps and caps covered $529.6 million and $143.8 million of variable-rate debt, respectively.
- Cash and cash equivalents were $39.3 million, and total cash plus restricted cash was $51.9 million at quarter-end, down from $85.7 million at December 31, 2017.
- The company had approximately $189.2 million of additional capacity under existing revolving debt facilities, including $123.7 million available under the $150.0 million Core revolving facility after borrowings and letters of credit.
- Operating cash flow covered the $22.6 million of dividends and distributions paid during the quarter, but cash flow after investing and financing activities was negative.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but operating income, net income attributable to Acadia, EPS, FFO, and operating cash flow declined.
- Funds segment revenue increased $3.9 million due to 2017 and 2018 acquisitions and development projects placed in service, but higher depreciation, operating expenses, and interest expense reduced segment performance.
- Equity earnings from unconsolidated affiliates fell to $1.7 million from $12.7 million, principally because Q1 2017 included approximately $11.5 million of the Funds’ share of gains from property sales.
- Interest income declined to $3.7 million from $9.0 million following the monetization and repayment of structured-financing investments.
- Interest expense increased to $15.9 million from $11.5 million due to higher borrowings and rates and lower capitalized interest.
- The company acquired the $45.3 million Trussville Promenade property in Fund V and acquired a Bedford Green land parcel for $1.3 million. It also exchanged $22.0 million of a note receivable plus accrued interest for an additional 14.11% interest in Town Center.
- The company entered into a new $500.0 million senior unsecured credit facility, consisting of a $150.0 million revolving facility and a $350.0 million term loan, refinancing prior facilities and term loans.
- The company repurchased 1.3 million common shares for $32.0 million under a new $200.0 million authorization.
Outlook, Commentary, Risks, and Unusual Items
Management continues to emphasize acquisitions and value creation in the Core Portfolio, opportunistic investments through its Funds, development and re-tenanting, and maintaining balance-sheet flexibility. The filing does not provide a formal quantitative earnings or FFO forecast.
- Consolidated debt maturities and scheduled repayments include approximately $52.4 million during the remainder of 2018 and $208.0 million in 2019. Management expects to refinance at least part of these obligations, but cautions that financing may not be available on acceptable terms.
- A $26.3 million Core Portfolio mortgage was in default at March 31, 2018. The lender has sued for approximately $32.9 million, including principal, interest, penalties, and fees. Management believes the loan is non-recourse to the company and that the lawsuit is without merit.
- Development and construction commitments totaled approximately $87.1 million. Estimated total costs to complete six properties under development and two redevelopment projects through 2020 were $99.9 million to $135.9 million, with the company’s share estimated at $50.3 million to $68.4 million.
- The company had $131.9 million of remaining capital commitments to its Funds, primarily related to Fund V.
- Interest-rate exposure remains material: a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $5.4 million on variable-rate debt before noncontrolling interests. A 1% increase in market rates was estimated to reduce the fair value of consolidated debt by approximately $15.0 million.
- Core Portfolio results were affected by tenant bankruptcies and lower occupancy, while the prior-year period benefited from real estate tax reassessments and property-disposition gains.
- Subsequent to quarter-end, Fund II sold the Sherman Avenue property for $26.0 million, and the company repurchased an additional 936,541 shares for $21.8 million through April 30, 2018.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states that there were no material changes to the risk factors disclosed in the 2017 Form 10-K.
Investor Verification Priorities
- Verify refinancing plans, covenant compliance, and liquidity for 2018 and 2019 debt maturities.
- Monitor the status and potential financial exposure of the Brandywine Holdings mortgage default and related litigation.
- Assess whether Fund V acquisitions and development activity generate sufficient occupancy, NOI, and FFO growth to offset higher depreciation and interest costs.
- Review the effect of tenant bankruptcies and occupancy changes on Core Portfolio same-property NOI.
- Track remaining Fund capital commitments, development commitments, letters of credit, and other off-balance-sheet obligations.
- Evaluate the pace and funding impact of the $200.0 million share repurchase authorization alongside dividend requirements and cash balances.
- Reconcile non-GAAP FFO with GAAP earnings and consider the effect of prior-period disposition gains and structured-financing repayments on comparability.