ACADIA REALTY TRUST quarterly report, Q3 FY2020

Acadia Realty Trust — Q3 2020 Form 10-Q Summary

Business context and reporting period

Acadia Realty Trust is an integrated equity REIT focused primarily on retail properties in high-barrier, supply-constrained U.S. metropolitan markets. As of September 30, 2020, it had interests in 187 properties: 131 Core Portfolio properties and 56 properties held through opportunity funds. The unaudited filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.

Financial performance and key metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Total revenue	$51.3 million	$73.3 million	$186.5 million	$217.5 million
Operating income (loss)	$(14.0) million	$21.3 million	$(66.1) million	$44.6 million
Net income (loss)	$(38.3) million	$8.8 million	$(33.4) million	$6.5 million
Net income (loss) attributable to Acadia	$(9.0) million	$10.5 million	$2.0 million	$31.7 million
EPS	$(0.10)	$0.12	$0.02	$0.38
FFO attributable to common shareholders and OP unit holders	$15.6 million	$31.0 million	$88.4 million	$97.6 million
Diluted FFO per share/unit	$0.17	$0.34	$0.96	$1.09

Q3 revenue declined 30.0% year over year, while nine-month revenue declined 14.3%. Q3 operating margin was approximately negative 27.3% versus 29.0% in the prior-year quarter; the nine-month operating margin was approximately negative 35.5% versus 20.5%. Q3 net loss attributable to Acadia represented approximately 17.6% of revenue; the nine-month attributable net income margin was approximately 1.1% versus 14.6% in 2019.

Same-property Core NOI declined 21.4% in Q3 and 13.9% for the first nine months.
COVID-19-related credit loss and straight-line rent reserves, rent abatements and impairments materially reduced results. The company reported $24.0 million of consolidated COVID-related earnings impacts in Q3 and $92.5 million for the nine-month period, before noncontrolling-interest allocations and other adjustments.
Nine-month impairment charges were $51.5 million, all recorded in the first quarter and primarily related to Fund III and Fund IV assets.
Nine-month realized and unrealized investment gains were $79.3 million, including gains associated with the Albertsons public offering and subsequent mark-to-market accounting. Q3 included a $7.9 million unrealized holding loss on the Albertsons investment.

Cash flow, balance sheet, debt and liquidity

Net cash provided by operating activities was $81.1 million for the first nine months, down from $95.2 million in 2019.
Net cash used in investing activities was $92.9 million, compared with $359.6 million in 2019, reflecting substantially lower acquisition, development and investment activity.
Net cash provided by financing activities was $11.6 million, compared with $290.6 million in 2019. Cash and restricted cash totaled $29.8 million at September 30, 2020, compared with $61.0 million at September 30, 2019.
Total assets were $4.25 billion and total equity was $2.05 billion at September 30, 2020.
Total indebtedness was $1.79 billion, compared with $1.71 billion at December 31, 2019. Approximately 75.8% of debt was fixed or effectively fixed through swaps, while 24.2% was variable-rate debt.
The company had $112.1 million available under its $250 million Core revolving facility and approximately $269.4 million of additional capacity under existing Core and Fund revolving facilities.
Scheduled consolidated debt principal repayments were $88.4 million for the remainder of 2020 and $455.1 million in 2021, before available extensions. The company stated that it expects to refinance at least part of these maturities, but provided no assurance that financing will be available on acceptable terms.
Five Fund mortgages totaling $177.7 million had not met debt-yield and/or debt-service-coverage requirements and could be subject to cash sweeps.

Material changes versus the prior comparable period

Retail operating performance deteriorated substantially because of COVID-19 closures, rent concessions, tenant bankruptcies and lower rent collections.
Core and Fund revenues decreased by $3.3 million and $18.8 million, respectively, in Q3; nine-month revenue declines were $14.0 million for Core and $17.1 million for Funds.
Acadia consolidated Town Center after exchanging a $38.7 million note receivable plus accrued interest for the remaining ownership interest. Fund IV also consolidated two Broughton Street properties after acquiring the venture partner’s interest.
The company acquired approximately $172.2 million of properties and conversions in 2020, but cash acquisition spending was only $21.2 million because portions of consideration included noncash exchanges and existing interests.
Common-share distributions were suspended beginning in the second quarter of 2020, compared with quarterly distributions of $0.28 to $0.29 per share during the 2019 period. The company repurchased 1.2 million shares for $22.4 million during the first quarter.
Variable-rate debt increased from $314.6 million at year-end 2019 to $435.1 million at September 30, 2020, increasing exposure to interest-rate changes.

Guidance, outlook, commentary, risks and unusual items

The company withdrew its 2020 guidance and placed certain development and construction projects on hold. It expects reduced acquisition and disposition activity for the remainder of 2020.
At September 30, 2020, stores representing 86% of Core annualized base rent and 88% of Fund annualized base rent were open or partially open. Collections of pre-COVID billings for Q3 were 85% for Core and 77% for Funds as of September 30.
As of October 31, 2020, Core and Fund tenant operating rates were 86% and 87%, respectively; Q3 pre-COVID billing collections were 87% and 79%. October collections were 90% for Core and 81% for Funds.
The company had executed 237 rent-concession agreements through September 30, including 210 deferrals and 27 abatements. Deferred receivables included in rents receivable totaled $7.5 million, and proportionate-share rent abatements totaled $1.5 million.
Management expected to reinstate quarterly common distributions in the first quarter of 2021 if operating conditions remained favorable, subject to board approval. This was not a commitment.
Two notes receivable totaling $31.6 million, including accrued interest, were in default at September 30. Management believed the related collateral and/or personal assets were sufficient, but recovery timing and amounts remain uncertain.
The Brandywine loan litigation was settled on October 30, 2020 for a $30 million payment, below the September 30 carrying value, which was expected to produce a fourth-quarter gain. The settlement postdates the reporting period.
Subsequent to quarter-end, two consolidated Fund loans totaling $96.2 million before principal reductions and one unconsolidated Fund loan of $15.3 million were extended. Fund II also modified a $33.6 million note receivable, reducing the balance by $10.0 million and extending maturity to April 2021.
Principal risks include prolonged COVID-19 effects, tenant defaults and bankruptcies, lower occupancy and rents, debt refinancing and covenant compliance, interest-rate and LIBOR transition risk, property impairments, liquidity constraints, joint-venture dependence, litigation and REIT qualification.

Most important facts for investors to verify

Whether rent collections, tenant openings and occupancy continued to improve after October 31, 2020.
The timing and terms of the $88.4 million 2020 and $455.1 million 2021 consolidated debt maturities, including the availability and exercise of extension options.
Compliance with Fund-level debt covenants and the potential effect of cash sweeps on liquidity.
The recoverability of the $31.6 million of defaulted notes receivable and the outcome of any further tenant bankruptcies.
The accounting impact of the Brandywine settlement and whether the expected fourth-quarter gain was realized.
Whether common distributions were actually reinstated in the first quarter of 2021.
The sustainability of FFO and Core same-property NOI after excluding temporary COVID-related concessions, reserves, impairments and investment-mark gains.