Business Context and Reporting Period
Acadia Realty Trust filed its Form 10-K for the fiscal year ended December 31, 2016. The company is a fully integrated REIT focused on owning, acquiring, developing and managing retail properties in high-barrier-to-entry, densely populated U.S. metropolitan areas. Operations are conducted primarily through Acadia Realty Limited Partnership under an UPREIT structure.
At year-end, Acadia operated 182 properties across its Core Portfolio and Funds, with three reportable segments: Core Portfolio, Funds and Structured Financing. The Core Portfolio contained 116 operating properties totaling approximately 6.3 million square feet and was 96% occupied. Fund operating properties totaled approximately 3.0 million square feet and were 81% occupied.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $189.9 million | $199.1 million | Down 4.6% |
| Operating income | $21.9 million | $44.5 million | Down 50.8% |
| Net income | $134.6 million | $150.0 million | Down 10.3% |
| Net income attributable to Acadia | $72.8 million | $65.7 million | Up 10.8% |
| Basic and diluted EPS | $0.94 | $0.94 | Unchanged |
| FFO attributable to common shareholders and OP unit holders | $117.1 million | $111.6 million | Up 4.9% |
| Diluted FFO per share and OP unit | $1.44 | $1.53 | Down 5.9% |
| Same-property Core Portfolio NOI | $95.7 million | $92.5 million | Up 3.4% |
| Cash flow from operating activities | $111.8 million | $113.6 million | Down $1.8 million |
| Cash flow used in investing activities | $611.0 million | $354.5 million | Higher investment spending |
| Cash flow from financing activities | $498.2 million | $96.1 million | Higher equity and capital contributions |
| Cash and cash equivalents | $71.8 million | $72.8 million | Down $1.0 million |
Minimum rents, percentage rents and expense reimbursements represented approximately 97% of total revenue. No individual property contributed more than 10% of revenue, and no individual retail tenant represented more than 4.7% of base rent.
Balance Sheet, Debt and Liquidity
- Total assets increased to $4.0 billion from $3.0 billion, while total equity increased to $2.2 billion from $1.5 billion.
- Net investments in real estate increased to $3.1 billion from $2.4 billion.
- Consolidated indebtedness was $1.49 billion, compared with $1.36 billion in 2015. Gross mortgage and other debt before debt costs and premiums was $1.51 billion.
- Fixed or effectively fixed-rate debt totaled $860.5 million, or 57.1% of debt, at a weighted-average rate of 4.08%. Variable-rate debt totaled $645.2 million, or 42.9%, at a weighted-average rate of 2.68%.
- Existing revolving facilities provided $212.9 million of additional capacity, and cash on hand at consolidated subsidiaries was $71.8 million.
- Debt principal maturities totaled $396.0 million in 2017, including $312.4 million related to Fund debt. Management expected to refinance at least part of these maturities, but stated that acceptable financing may not be available.
- A Fund IV term loan was not in compliance with a liquidity covenant at year-end. The company expected to cure the violation by repaying debt in the first quarter of 2017 and subsequently extended the loan maturity to August 2017.
- Interest expense on variable-rate debt would increase by approximately $6.4 million annually for a 100-basis-point increase in LIBOR, before noncontrolling-interest effects.
Material Changes Versus the Prior Comparable Period
- Acadia acquired 22 properties for an aggregate purchase price of $864.3 million, including $519.6 million of consolidated Core acquisitions, $107.4 million of unconsolidated Core acquisitions and $237.3 million of Fund IV acquisitions.
- The company sold two Fund III properties for $153.8 million and recognized $82.0 million of consolidated gains. It also recognized a $36.0 million gain on the sale of Fund III’s remaining interest in Cortlandt Town Center.
- Core Portfolio same-property NOI rose 3.4%, primarily from contractual rent increases and lease renewals at higher rents, despite lower consolidated revenue following the deconsolidation of the Brandywine Portfolio.
- Revenue declined because of Fund property dispositions and the Brandywine deconsolidation. Operating expenses rose because of increased depreciation, general and administrative costs and transaction expenses.
- General and administrative expense increased by $10.3 million, including $4.2 million of accelerated equity compensation associated with executive retirements and $5.0 million related to the Long-Term Investment Alignment Program.
- Interest income increased $9.2 million to $25.8 million, primarily from growth in the Structured Financing portfolio and a $3.4 million reserve recapture.
- Acadia issued approximately 12.9 million common shares and generated approximately $452.4 million of net equity proceeds. It also issued $31.4 million of Common and Preferred OP Units in connection with property acquisitions.
- The regular quarterly dividend increased to $0.26 per share late in 2016, and a $0.15 per-share special dividend was declared. Total dividends and distributions to common and OP unit holders were $98.7 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No specific earnings or FFO guidance was provided in the filing. Management’s strategy remained focused on growing the Core Portfolio, expanding the Fund platform and maintaining a flexible balance sheet.
- Fourteen development properties were in progress at year-end. Estimated total costs to complete were $118.1 million to $179.3 million, with Acadia’s share estimated at approximately $28.8 million to $44.1 million.
- Remaining Acadia capital commitments to the Funds totaled $155.9 million, including $104.5 million committed to newly launched Fund V.
- The company had $276.2 million of notes receivable, including one $12.0 million non-performing note. Management stated that collateral value exceeded the carrying value; a subsequent bankruptcy auction produced a winning bid above carrying value and management expected full recovery of principal and accrued interest.
- Retail-property performance remains exposed to tenant bankruptcies, anchor vacancies, co-tenancy provisions, e-commerce adoption, consumer spending, rent renewals and market-specific conditions. Core Portfolio base rents were concentrated in the New York and Chicago metropolitan areas.
- Development and acquisition risks include construction delays, cost overruns, permitting, lease-up shortfalls and the possibility that properties will not achieve projected returns.
- Subsequent to year-end, Fund III sold Arundel Plaza for $28.8 million and Fund IV sold 2819 Kennedy Boulevard for $19.0 million.
- The filing disclosed a $4.2 million net reduction to 2016 income from non-cash out-of-period adjustments related to lease accounting and interest expense, of which $1.6 million was attributable to noncontrolling interests.
- No 2016 impairment charge was recorded; however, a $5.0 million impairment had been recorded in 2015 for a property affected by the loss of a key anchor tenant. The related $26.3 million mortgage remained in default at year-end.
- Management and the independent auditor reported effective disclosure controls and internal control over financial reporting. The financial statement audit opinion was unqualified.
Important Facts for Investors to Verify
- Verify the refinancing plan and covenant cure for the $396.0 million of consolidated debt maturing in 2017, particularly Fund IV obligations.
- Assess whether the 96% Core Portfolio occupancy and 3.4% same-property NOI growth offset the lower Fund occupancy and expected lease expirations.
- Review the sustainability of FFO and dividends excluding gains from property dispositions and other nonrecurring items.
- Evaluate exposure to variable interest rates, including the effect of a 100-basis-point LIBOR increase.
- Review the $155.9 million of Fund capital commitments and $118.1 million to $179.3 million of remaining development costs.
- Monitor tenant concentration, anchor-tenant stability, 2017 Core and Fund lease expirations, and the effects of e-commerce on retail tenants.
- Confirm recovery of the $12.0 million non-performing note and the outcome of the property’s bankruptcy proceedings.
- Reconcile consolidated debt, unconsolidated joint-venture debt and contingent funding obligations, including the $165.7 million pro-rata exposure to certain joint-venture lenders.