Acadia Realty Trust — Form 10-Q Summary
Business Context and Reporting Period
Acadia Realty Trust is an integrated equity REIT focused primarily on acquiring, redeveloping, owning and managing retail properties in high-barrier-to-entry, densely populated U.S. markets. This filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015.
At March 31, 2016, the Company had interests in 151 properties, including 92 Core Portfolio properties and 59 properties held through its opportunity funds. Core Portfolio physical occupancy was 96.3% and leased occupancy was 96.6%.
Financial Highlights
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $52.7 million | $52.5 million | Up $0.2 million |
| Operating income | $14.5 million | $15.1 million | Down $0.7 million |
| Net income | $73.9 million | $38.5 million | Up $35.3 million |
| Net income attributable to common shareholders | $28.9 million | $16.5 million | Up $12.4 million |
| Basic and diluted EPS | $0.40 | $0.24 | Up $0.16 |
| FFO attributable to common shareholders and OP unitholders | $31.1 million | $23.0 million | Up $8.1 million |
| Diluted FFO per share/unit | $0.41 | $0.32 | Up $0.09 |
| Net cash provided by operating activities | $18.0 million | $26.6 million | Down $8.6 million |
Reported operating margin was approximately 27.5%, compared with 28.9% in the prior-year quarter. Net income and EPS were materially affected by a $65.4 million gain on the sale of a 65% interest in Cortlandt Town Center; therefore, FFO provides a more useful recurring-performance comparison.
Balance Sheet, Debt and Liquidity
- Total assets were $3.15 billion at March 31, 2016, compared with $3.03 billion at December 31, 2015.
- Cash and cash equivalents were $84.9 million, up from $72.8 million at year-end 2015. Cash in escrow was $23.2 million and restricted cash was $10.8 million.
- Total debt principal was $1.306 billion, compared with $1.369 billion at December 31, 2015. Debt, net of unamortized costs and premiums, was $1.297 billion.
- Debt was 64.6% fixed-rate, including swaps, with $844.1 million fixed at a weighted-average rate of 5.16%; $461.9 million, or 35.4%, remained floating-rate at a weighted-average rate of 2.29%.
- Credit facilities had $214.7 million of stated availability at quarter-end, subject to applicable conditions and borrowing capacity.
- The Company paid $37.6 million of dividends and distributions on common shares, Common OP Units and LTIP Units during the quarter, including an $18.8 million special dividend related to prior property dispositions.
Material Changes Versus the Prior Comparable Period
- Rental income increased modestly, primarily from Core Portfolio acquisitions, while Fund rental income and expense reimbursements declined following property dispositions.
- Interest income increased $1.2 million to $4.6 million, reflecting new structured-finance investments.
- Property operating and other operating expenses declined, but general and administrative expense increased $1.8 million to $9.4 million, including $1.5 million of compensation expense related to the Long Term Investment Alignment Program.
- Depreciation and amortization increased $3.2 million to $16.8 million, primarily due to Core Portfolio acquisitions.
- Equity in earnings of unconsolidated affiliates fell to $2.0 million from $6.6 million, largely because the prior-year period included additional distributions in excess of basis from the RCP Venture.
- Core Portfolio same-property NOI increased 3.6% to $24.2 million, driven principally by contractual rent increases and the realization of below-market rents.
- Cash flow from investing activities changed from a $235.1 million use in Q1 2015 to a $72.8 million source in Q1 2016, primarily because of lower acquisitions and higher property-sale proceeds.
- Financing cash flow changed from a $110.5 million source to a $78.7 million use, reflecting substantially higher debt repayments.
Transactions, Outlook and Unusual Items
- The Company acquired two Core Portfolio properties for an aggregate purchase price of $116.3 million and Fund IV acquired two properties for $13.8 million.
- Fund III sold a 65% interest in Cortlandt Town Center for $107.3 million, producing the $65.4 million gain recognized in the quarter.
- The acquisition pipeline under contract was $156.3 million, including $59.7 million of mortgage debt expected to be assumed; closing remained subject to customary conditions.
- The Company had 10 redevelopment projects with $587.3 million of costs incurred and estimated additional costs of $133.4 million to $196.4 million. The Operating Partnership’s expected share of additional costs was estimated at $33.0 million to $48.9 million.
- No formal earnings or operating guidance was provided in the filing. Management emphasized continued Core Portfolio acquisitions, redevelopment, Fund investments and balance-sheet flexibility.
- Debt maturities were significant: approximately $449.0 million was scheduled to mature during 2016, and total contractual debt maturities were $557.1 million within one year. Management stated that it expected to refinance at least part of this debt or pursue other alternatives based on market conditions.
- One non-recourse mortgage loan in the Brandywine portfolio was in default; the underlying $26.3 million loan matured July 1, 2016. Management stated that it did not believe other properties were impaired at March 31, 2016.
- One structured-finance note was non-performing at quarter-end, although no reserve was established based on the collateral value.
- Subsequent to quarter-end, the Company announced a 3.6 million-share forward sale and underwritten offering expected to generate approximately $125.0 million of gross proceeds, borrowed $130.0 million under its unsecured credit facility, repaid $140.0 million of secured debt and completed additional structured-finance transactions.
Principal Risks and Contingencies
- Refinancing risk and exposure to higher interest rates, particularly as substantial debt matured in 2016 and 2017.
- Real estate market conditions, tenant demand, tenant creditworthiness, competition and the ability to lease or redevelop properties.
- Execution, funding and completion risks associated with the redevelopment pipeline and acquisition pipeline.
- Limited control over joint ventures and unconsolidated affiliates, including the Company’s share of their debt and derivative obligations.
- Interest-rate risk: a 100-basis-point increase in refinancing rates was estimated to increase annual interest expense by approximately $6.8 million before noncontrolling interests; a 100-basis-point increase in indices on net variable-rate debt was estimated to increase annual interest expense by approximately $4.6 million.
- REIT qualification and distribution requirements, leverage, uninsured losses, environmental requirements and broader economic risks.
Investor Verification Checklist
- Verify the refinancing or repayment plan for the $449.0 million of debt maturing in 2016 and the status of the Brandywine default.
- Assess recurring operating performance using FFO, same-property NOI, occupancy and leasing spreads rather than reported net income, which benefited from the Cortlandt Town Center gain.
- Review the funding requirements and completion assumptions for the $133.4 million to $196.4 million of estimated additional redevelopment costs.
- Confirm the timing, settlement terms and dilution effects of the April 2016 forward equity sale and public offering.
- Monitor the non-performing structured-finance note, unconsolidated affiliate exposures and related-party or joint-venture cash flows.
- Evaluate liquidity after dividends, redevelopment spending, debt repayments and the Company’s reliance on property sales, equity issuance and refinancing.