Acadia Realty Trust — Form 10-Q Summary
Business Context and Reporting Period
Acadia Realty Trust is a fully integrated equity REIT focused on retail properties in high-barrier-to-entry, supply-constrained U.S. metropolitan areas. At September 30, 2018, the company had interests in 170 properties across its Core Portfolio and opportunity funds, plus structured-financing investments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the respective 2017 periods.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $66.1 million | $62.7 million | $192.8 million | $184.2 million |
| Operating income | $6.9 million | $5.7 million | $19.9 million | $22.4 million |
| Net income attributable to Acadia | $9.2 million | $12.9 million | $24.3 million | $40.6 million |
| EPS | $0.11 | $0.15 | $0.29 | $0.48 |
| FFO attributable to common shareholders and OP unitholders | $30.1 million | $32.9 million | $89.1 million | $101.6 million |
| Diluted FFO per share/unit | $0.35 | $0.37 | $1.01 | $1.14 |
| Cash flow from operations | Not separately presented for the quarter | $67.2 million | $87.2 million |
Q3 operating margin was approximately 10.5%, compared with 9.2% in the prior-year quarter. Nine-month operating margin was approximately 10.3%, compared with 12.2% in 2017. Net income attributable to Acadia margins were approximately 14.0% and 20.5% for Q3 2018 and Q3 2017, respectively.
- Same-property Core Portfolio NOI increased 3.4% in Q3 and 1.1% for the nine-month period.
- Core Portfolio occupancy was 94.4% at September 30, 2018; total Core and Fund occupancy was 90.4%.
- Core Portfolio new and renewal lease spreads were 8.0% on a cash basis and 15.5% on a straight-line basis in Q3; nine-month spreads were 9.4% and 17.0%, respectively.
- Net investments in real estate were $3.22 billion, compared with $3.13 billion at December 31, 2017.
- Cash and cash equivalents were $9.5 million, with restricted cash of $12.5 million, at September 30, 2018.
- Total consolidated debt was $1.49 billion before unamortized debt costs and premiums, compared with $1.44 billion at December 31, 2017. Approximately 64.9% was fixed or effectively fixed and 35.1% was variable rate.
- Available capacity under existing Core and Fund revolving facilities was $216.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5.4% in Q3 and 4.7% for the first nine months, primarily from Fund acquisitions, expense reimbursements and development projects placed in service.
- Net income attributable to Acadia declined 28.3% in Q3 and 40.1% for the nine-month period. The principal comparison effects were lower gains on property dispositions, lower interest income, lower equity earnings from unconsolidated affiliates and higher interest expense.
- Q3 2017 included a $13.0 million gain on dispositions and a $3.8 million impairment charge; Q3 2018 included a $5.1 million gain and no impairment charge.
- Nine-month 2017 included approximately $14.8 million of gains from dispositions by unconsolidated affiliates and $3.8 million of impairment expense, while 2018 included no comparable impairment and materially lower disposition gains.
- Interest expense increased to $18.1 million in Q3 from $15.4 million and to $50.9 million for nine months from $39.7 million, reflecting higher rates and debt-related changes.
- Interest income decreased to $3.5 million in Q3 from $6.5 million and to $10.5 million for nine months from $23.6 million, reflecting note repayments and the conversion of part of a note receivable into a greater real-estate interest.
- The company acquired two Fund V shopping centers for an aggregate $104.6 million and sold six Fund properties for an aggregate sales price of approximately $64.5 million during the nine months.
- The company entered into a new $500.0 million Core credit facility, including a $150.0 million revolver and a $350.0 million term loan, and repurchased 2.3 million common shares for $55.1 million.
Liquidity, Debt, Outlook and Risks
The company paid approximately $72.0 million of dividends and distributions during the nine months and had $67.2 million of operating cash flow. Investing activities used $76.3 million, while financing activities used $54.5 million, resulting in a $63.6 million decrease in cash and restricted cash.
Debt maturities and scheduled principal payments were $38.9 million for the remainder of 2018, $192.8 million in 2019 and $468.2 million in 2020. Management stated that available cash may not be sufficient to repay maturing debt and expects to refinance at least part of these obligations or pursue alternatives, with no assurance that financing will be available on acceptable terms. A $26.3 million Core mortgage was in default and subject to litigation at September 30, 2018.
Management disclosed no formal earnings or FFO guidance in the provided filing text. The company expects to adopt the new lease standard on January 1, 2019. It expects limited change to lessor revenue timing but anticipates recording right-of-use assets and lease liabilities for approximately $204.0 million of lessee obligations.
- Interest-rate exposure remains material: a 100-basis-point increase in LIBOR would increase annual interest expense on variable-rate debt by approximately $5.2 million before noncontrolling interests.
- Development and construction commitments totaled approximately $73.0 million; estimated costs to complete seven development or redevelopment projects were $71.7 million to $106.7 million, with the company’s share estimated at $35.5 million to $53.4 million.
- The company had $119.0 million of remaining capital commitments to its funds and a $4.3 million Fund II distribution subject to possible re-contribution through April 2021.
- Unconsolidated affiliates had approximately $406.1 million of mortgage debt, and the Operating Partnership’s pro-rata share of unconsolidated debt was $162.9 million.
- Management stated that ordinary-course litigation is not expected to materially affect financial position, results or liquidity, and reported no material changes to previously disclosed risk factors.
Subsequent to quarter-end, Fund IV acquired substantially all third-party equity in 11 Broughton Street properties for nominal consideration, and Fund V acquired Hiram Pavilion in Georgia for $44.4 million.
Investor Verification Checklist
- Verify the refinancing plan and available liquidity for 2018–2020 maturities, particularly the $468.2 million scheduled for 2020.
- Assess the status, collateral and potential exposure associated with the $26.3 million mortgage in default and litigation.
- Reconcile consolidated debt with pro-rata unconsolidated debt and review covenant compliance, variable-rate exposure and hedge effectiveness.
- Evaluate whether the decline in FFO and earnings is primarily timing-related from dispositions and financing changes or reflects deterioration in recurring operations.
- Review tenant bankruptcies, occupancy trends and the sustainability of Core Portfolio same-property NOI growth.
- Confirm the funding requirements and expected returns of the $119.0 million fund commitments and development commitments.
- Review the 2019 lease-accounting adoption impacts, including the expected recognition of approximately $204.0 million of lessee lease liabilities.