ACADIA REALTY TRUST annual report, FY2015

Acadia Realty Trust — FY2015 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2015. Acadia is a fully 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 through the Operating Partnership under an UPREIT structure.

Three reportable segments: Core Portfolio, Funds and Structured Financing.
At year-end, the Core Portfolio included 90 operating properties totaling approximately 5.6 million square feet and 96% occupancy.
Fund operating properties totaled approximately 2.3 million square feet and 83% occupancy, excluding 30 properties under redevelopment.
Core and Fund properties were geographically concentrated, particularly in the New York and Chicago metropolitan areas.

Key financial metrics

Metric	2015	2014	Change
Revenue	$217.3 million	$195.0 million	+11.4%
Operating income	$62.7 million	$66.3 million	-5.4%
Operating margin	Approximately 28.9%	Approximately 34.0%	Lower
Net income	$150.0 million	$152.1 million	-1.4%
Net income attributable to common shareholders	$65.7 million	$71.1 million	-7.5%
Diluted EPS	$0.94	$1.18	-20.3%
FFO attributable to common shareholders and Common OP Unit holders	$111.6 million	$78.9 million	+41.5%
Diluted FFO per share/unit	$1.53	$1.26	+21.4%
Net cash provided by operating activities	$113.6 million	$82.5 million	+$31.1 million
Cash and cash equivalents	$72.8 million	$217.6 million	-$144.8 million

Revenue growth was driven principally by Core Portfolio acquisitions and higher Structured Financing interest income. Reported net income benefited materially from property disposition gains, including an $89.1 million gain on dispositions and a $24.0 million gain from unconsolidated affiliates. FFO increased substantially because it excludes gains on sales, depreciation and certain impairment effects.

Core Portfolio NOI increased to $102.3 million from $81.3 million; same-property NOI increased 4.0% to $73.6 million.
New and renewal Core Portfolio leases produced cash rent growth of 10.5% and straight-line rent growth of 18.8%; average lease term was 6.4 years.
Common dividends declared were $1.22 per share, including a $0.25 special dividend in the fourth quarter.
Total assets were $3.03 billion; total equity was $1.52 billion, including $420.9 million of noncontrolling interests.

Material changes versus the prior comparable period

Core Portfolio revenue increased from $125.0 million to $150.0 million, primarily due to 2014 and 2015 acquisitions.
Fund revenue declined from $54.7 million to $49.1 million due to dispositions and vacancy associated with redevelopment at 161st Street, partly offset by acquisitions.
Structured Financing revenue increased from $15.3 million to $18.2 million, reflecting additional loan originations and collections of previously reserved interest.
Core Portfolio operating expenses increased, including higher property expenses, real estate taxes, general and administrative costs and depreciation from acquisitions.
Reported operating income declined despite revenue growth, in part because of higher depreciation and a $5.0 million impairment charge.
2015 acquisitions included $204.2 million of Core Portfolio properties, $100.8 million for an additional City Point Tower I interest and $146.1 million of Fund IV properties.
2015 dispositions generated aggregate sales proceeds of approximately $327.9 million and reported gains of approximately $113.1 million before applicable noncontrolling interests and other adjustments.
Net debt increased. Gross mortgage and other debt was approximately $1.369 billion at year-end versus $1.128 billion at December 31, 2014; 59% was fixed-rate and 41% was variable-rate after swaps.
Variable-rate exposure increased from $326.2 million in 2014 to $560.3 million in 2015, increasing sensitivity to interest-rate changes.

Liquidity, debt and capital commitments

Cash and cash equivalents were $72.8 million, with $197.8 million of availability under existing credit facilities.
Debt maturities and scheduled amortization totaled $578.5 million in 2016, including $573.5 million of maturities and $5.0 million of scheduled principal amortization.
Management stated that available cash may not be sufficient to repay 2016 maturities and expects to refinance at least part of the obligations or pursue other alternatives.
Fund III and Fund IV had remaining unfunded capital commitments of $62.5 million and $361.2 million, respectively; the Operating Partnership’s available liquidity sources also included future asset sales and operating cash flow.
Construction commitments totaled $85.8 million at year-end. Redevelopment projects had substantial additional estimated costs, including $48.1 million to $68.1 million for the remaining City Point phases.
A 100-basis-point increase in rates would increase annual interest expense on variable-rate debt by approximately $5.6 million. Refinancing 2016 and 2017 maturities at rates 100 basis points higher would increase annual interest expense by approximately $7.9 million before noncontrolling interests.

Outlook, commentary, risks and unusual items

Management’s strategy emphasizes Core Portfolio acquisitions and redevelopment, opportunistic Fund investments, disciplined leverage and access to multiple capital sources.
Key unusual items included significant property disposition gains, a $5.0 million impairment related to a Brandywine property after the loss of a key anchor tenant, and settlements of litigation matters.
The Brandywine property was subject to $26.3 million of non-recourse debt maturing July 1, 2016 and was in default at year-end.
Retail exposure creates risks from tenant bankruptcies, anchor departures, co-tenancy provisions, lease expirations, e-commerce and changing consumer spending.
Concentration risk is material: the greater New York and Chicago metropolitan regions represented 41% and 23% of Core Portfolio annual base rents, respectively.
Redevelopment risks include construction delays, cost overruns, permitting, lease-up uncertainty, financing availability and delayed cash returns.
The Structured Financing portfolio totaled $147.2 million, with one non-performing note at year-end. Maturities ranged from April 2016 through November 2020 and effective rates ranged from 2.5% to 18.0%.
Management and BDO USA, LLP reported effective disclosure controls and internal control over financial reporting. The audit opinion on the financial statements was unqualified.
Subsequent events included a $39.8 million Gotham Plaza interest acquisition, additional Fund II ownership purchased for $18.4 million, a new $50.0 million term loan and additional Fund IV investments.

Most important facts for investors to verify

Timing and terms of refinancing for the $578.5 million of 2016 debt maturities.
Occupancy, anchor-tenant retention and lease rollover performance, especially in the Core Portfolio and Brandywine property.
Actual progress, remaining costs and financing for City Point and other redevelopment projects.
Cash flow available for dividends after debt service, redevelopment spending and required Fund distributions.
Exposure to variable interest rates and the effectiveness and counterparty risk of interest-rate hedges.
Recoverability of the $147.2 million Structured Financing portfolio, including the non-performing note.
Whether future disposition gains, Fund promotes and other nonrecurring items are being distinguished from recurring operating performance.
Reconciliation of consolidated debt presentation, including gross debt of approximately $1.369 billion versus net carrying debt reported on the balance sheet.