ACADIA REALTY TRUST annual report, FY2014

Acadia Realty Trust — FY2014 Form 10-K Summary

Business context and reporting period

Acadia Realty Trust is an integrated U.S. retail REIT focused on acquiring, owning, redeveloping and managing high-quality retail properties in supply-constrained, densely populated metropolitan markets. Operations are conducted primarily through Acadia Realty Limited Partnership under an UPREIT structure. The filing covers the fiscal year ended December 31, 2014; fourth-quarter information is included where disclosed.

At year-end, the Company operated 143 properties across its Core Portfolio and Funds.
The Core Portfolio comprised 87 properties totaling approximately 5.4 million square feet and was 96% occupied.
Fund operating properties comprised approximately 3.0 million square feet and were 85% occupied; 31 additional properties were under redevelopment.
Minimum rents, percentage rents and expense reimbursements represented approximately 91% of 2014 revenue.

Financial performance and key metrics

Metric	2014	2013	Change
Revenue	$195.0 million	$168.3 million	+15.9%
Operating income	$66.3 million	$55.9 million	+18.6%
Net income attributable to common shareholders	$71.1 million	$40.1 million	+77.2%
Diluted EPS	$1.18	$0.72	+63.9%
Funds from operations	$78.9 million	$67.2 million	+17.5%
Diluted FFO per share	$1.26	$1.20	+5.0%
Net cash provided by operating activities	$82.5 million	$65.2 million	+$17.3 million
Cash and cash equivalents at year-end	$217.6 million	$79.2 million	+$138.4 million

Operating income margin was approximately 34.0% in 2014 versus 33.2% in 2013. Net income and EPS benefited substantially from property disposition gains, particularly a $102.9 million gain from unconsolidated Fund III and Fund IV property sales and a $13.1 million gain on disposition of properties. FFO, which excludes such gains and real estate depreciation, provides a more recurring-operating-oriented measure.

Core Portfolio NOI increased to $81.3 million from $67.6 million; same-property NOI increased 5.2% to $62.3 million.
New and renewal Core Portfolio leases generated 14.4% cash rent growth and 28.7% straight-line rent growth across 324,132 square feet.
Total assets increased to $2.73 billion from $2.26 billion; total equity increased to $1.44 billion from $1.12 billion.
Common dividends declared increased to $1.23 per share from $0.86. The fourth-quarter dividend was $0.54 per share, including a $0.30 special dividend related primarily to taxable capital gains from property dispositions.

Capital investment, debt and liquidity

Core Portfolio acquisitions totaled $473.2 million, and Fund IV acquired four properties for $106.6 million.
Redevelopment and leasing expenditures totaled $144.0 million, including $140.1 million for redevelopment and re-tenanting, primarily City Point.
Structured financing investments totaled $31.2 million during 2014; the year-end portfolio was $102.3 million, with accrued interest of $9.8 million.
Mortgage, convertible and other notes payable totaled $1.13 billion, including a $2.9 million unamortized premium. Approximately 71% of debt was fixed-rate, including debt fixed through swaps; 29% was variable-rate.
Debt maturities and scheduled amortization totaled $271.9 million in 2015 and $326.8 million in 2016. Management expected to exercise extension options on $119.4 million of 2015 maturities but stated that remaining maturities may require refinancing or other alternatives.
Available capacity under revolving credit facilities was $210.4 million at year-end. The Operating Partnership facility had $137.5 million available, subject to $12.5 million of letters of credit; Fund IV had $72.9 million available.
2014 financing sources included $357.5 million of net common-share issuance proceeds and $108.0 million of net mortgage borrowings after principal payments, while financing activities provided $324.4 million of cash.

Material changes versus the prior comparable period

Revenue growth reflected acquisitions, re-tenanting and higher expense reimbursements. Core Portfolio rental income increased by $11.9 million, while Fund rental income increased by $10.5 million.
Net income growth was driven primarily by the $102.9 million gain on sales of unconsolidated Fund properties; this item makes GAAP earnings growth materially less representative of recurring operating performance.
Core Portfolio same-property NOI increased 5.2%, indicating underlying portfolio improvement apart from acquisitions and dispositions.
Variable-rate debt increased from $224.0 million, or 22% of consolidated debt, at year-end 2013 to $326.2 million, or 29%, at year-end 2014.
Common shares outstanding increased from approximately 55.6 million to 68.1 million, reflecting significant equity issuance used to fund acquisitions and growth.
Walnut Hill Plaza was foreclosed upon in March 2014, with a $12.4 million gain recognized because the related non-recourse debt exceeded the property's carrying value.

Fourth-quarter activity, outlook and unusual items

Fourth-quarter 2014 revenue was $51.2 million, compared with $44.1 million in fourth-quarter 2013.
Fourth-quarter net income attributable to common shareholders was $9.4 million, or $0.15 diluted EPS; fourth-quarter continuing-operations income attributable to common shareholders was $9.3 million.
Management emphasized continued acquisition, redevelopment, re-tenanting and Fund growth, but the filing does not provide formal earnings or FFO guidance.
A contract was signed in December 2014 to acquire a San Francisco Bay-area retail property for $155.0 million; closing remained subject to conditions and was not assured.
At December 31, 2014, eight Fund redevelopment projects comprising 31 properties had approximately $474.9 million of costs incurred. Several projects had material additional costs that were estimated or identified as to-be-determined.
Fund III had $93.4 million of unfunded committed capital and Fund IV had $400.4 million of unfunded committed capital at year-end, subject to the applicable fund terms and investment requirements.
Subsequent events included Fund IV's January 2015 acquisition of 1035 Third Avenue for $51.0 million and Fund III's January 2015 sale of Lincoln Park Centre for $64.0 million.

Risks, contingencies and other matters

Retail performance depends on tenant credit quality, anchor tenants, lease renewals, consumer spending and the continuing effects of e-commerce.
Revenue and property values are geographically concentrated: the greater New York and Chicago metropolitan areas represented approximately 44% and 24% of Core Portfolio annual base rents, respectively.
Interest-rate exposure is material. A 100-basis-point increase in rates would increase annual interest expense by approximately $3.3 million on variable-rate debt; refinancing 2015 and 2016 maturities at rates 100 basis points higher could increase annual interest expense by approximately $6.0 million before noncontrolling interests.
Three non-performing notes remained within the structured financing portfolio, although the year-end allowance for notes receivable was reduced to zero following recoveries and charge-offs.
Pending litigation included a former-employee claim of approximately $0.9 million, a Kmart claim seeking more than $9.0 million related to a 2011 flood at Mark Plaza, and a City Point contractor claim of approximately $7.4 million that had been bonded. Management described its defenses as meritorious and did not expect material consolidated exposure, but outcomes were not certain.
The Company reported effective disclosure controls and internal control over financial reporting, and BDO USA, LLP issued unqualified audit opinions.

Most important facts for an investor to verify

Reconcile recurring FFO and same-property NOI with reported GAAP earnings, excluding the substantial 2014 disposition gains.
Review the $271.9 million of 2015 debt maturities, extension options, refinancing plans and available liquidity.
Assess City Point and other redevelopment projects against remaining costs, funding sources, construction schedules and leasing assumptions.
Evaluate the impact of significant equity issuance on per-share growth and dilution.
Monitor tenant concentration, lease expirations and occupancy, particularly in the New York and Chicago markets.
Review the structured financing portfolio, collateral values, non-performing notes and recovery assumptions.
Track the pending litigation, the San Francisco acquisition contract and the January 2015 transactions disclosed as subsequent events.