Business Context and Reporting Period
Acadia Realty Trust is an integrated equity REIT focused on retail and urban/infill mixed-use properties, primarily in supply-constrained metropolitan areas along the East Coast and in Chicago. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013. The company reported ownership interests in 74 Core Portfolio properties and 32 Opportunity Fund properties, or 106 properties in total.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $40.3 million | $28.8 million | $121.9 million | $81.0 million |
| Operating income | $12.8 million | $7.1 million | $43.5 million | $18.7 million |
| Net income | $9.1 million | $6.7 million | $29.9 million | $20.7 million |
| Net income attributable to common shareholders | $9.5 million | $7.6 million | $27.9 million | $18.4 million |
| Diluted EPS | $0.17 | $0.16 | $0.50 | $0.41 |
| Funds from operations | $17.9 million | $12.7 million | $52.1 million | $34.2 million |
| Diluted FFO per share | $0.32 | $0.27 | $0.94 | $0.75 |
- Operating margin was approximately 31.7% in Q3 and 35.7% for the nine-month period, based on reported operating income and revenue.
- Core Portfolio physical occupancy was 93.7% and leased occupancy was 95.7% at September 30, 2013.
- Core Portfolio same-store NOI increased 4.8% in Q3 and 8.4% for the nine months. Core Portfolio NOI increased to $16.9 million in Q3 and $50.0 million for the nine months.
- Cash flow from operating activities was $41.6 million for the nine months, compared with $36.0 million in the prior-year period.
- Cash and cash equivalents were $88.4 million at September 30, 2013, compared with $91.8 million at December 31, 2012. Restricted cash was $134.4 million, primarily related to City Point construction financing.
- Mortgage and other notes payable totaled $1.004 billion, compared with $603.0 million at year-end 2012. Including swaps, 83.3% of debt was fixed-rate and 16.7% was floating-rate.
- Total credit facilities were $300.0 million, with $229.4 million available and $12.5 million of letters of credit outstanding at September 30, 2013.
- Debt maturities totaled $20.8 million during the remainder of 2013 and $60.8 million during 2014. Contractual obligations included $100.0 million of construction commitments.
Material Changes Versus the Prior Comparable Period
- Revenue increased 39.9% in Q3 and 50.4% for the nine months. Growth primarily reflected the consolidation of the Brandywine Portfolio, 2012 and 2013 acquisitions, higher interest income, and increased expense reimbursements.
- Operating income increased 80.4% in Q3 and 132.4% for the nine months, although depreciation, interest expense, and other costs also increased with portfolio growth and higher borrowings.
- Equity in earnings of unconsolidated affiliates improved to $4.2 million in Q3 from a $2.5 million loss and to $7.3 million for the nine months from $2.0 million. The improvement reflected Fund acquisitions, Self-Storage Management, Mervyns-related activity, and other investment results.
- Discontinued operations declined to $2.8 million in Q3 from $8.1 million, and to $10.3 million for the nine months from $17.6 million, partly because the prior-year period included larger property-sale gains.
- Net cash used in investing activities was $160.2 million, including $140.1 million of real estate acquisitions, $79.5 million of redevelopment and property improvements, and $54.2 million of investments in or advances to unconsolidated affiliates.
- The company issued 2.8 million common shares through its ATM programs for $75.8 million of net proceeds during the nine months. It also received $17.3 million of Opportunity Fund capital contributions and had $455.9 million of unfunded noncontrolling-interest capital commitments.
- Effective January 1, 2013, the company consolidated its 22.22% Brandywine investment following changes in financial and operating controls, materially increasing reported assets, revenue, debt, and expenses.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide explicit full-year earnings or FFO guidance. Management expects to continue funding acquisitions, redevelopment, re-tenanting, Opportunity Fund investments, distributions, and debt obligations through operating cash flow, equity and debt financing, asset sales, and committed capital.
- Management expected the remaining Crossroads Shopping Center re-tenanting costs to range from $7.0 million to $10.0 million, with completion expected during 2014.
- Eight redevelopment projects had aggregate costs to date of $312.9 million. City Point had anticipated additional costs of $66.9 million to $96.9 million and an anticipated 2015 completion date; several other projects had costs or completion dates listed as to be determined.
- City Point had received $197.0 million of EB-5 financing proceeds into restricted cash, of which $62.6 million had been drawn for construction activities.
- The company recorded a $1.5 million impairment charge on Walnut Hill Plaza due to deterioration in the local economic environment. The property secured $23.1 million of non-recourse debt maturing October 1, 2016.
- Six non-performing notes receivable totaled $18.6 million, with a $3.9 million allowance. The filing identifies credit quality, collateral values, borrower performance, and refinancing needs as important considerations.
- Management stated that it might not have sufficient cash to repay all remaining 2013 debt maturities and expected to refinance at least part of that debt or pursue alternatives depending on market conditions.
- Interest-rate risk is mitigated through fixed-rate debt, 11 swaps with $180.5 million of notional value, and four caps with $141.0 million of notional value. A 100-basis-point increase in LIBOR would increase annual interest expense on consolidated variable-rate debt by approximately $1.7 million before noncontrolling interests.
- A lawsuit relating to a 2011 flood at Mark Plaza seeks damages exceeding $9.0 million; management believes the claim is without merit. A City Point construction-related proceeding was dismissed during the third quarter.
- Subsequent to quarter-end, Fund IV acquired 1151 Third Avenue for $18.0 million and Lake Montclair for $19.3 million. The board declared a quarterly dividend of $0.23 per common share payable January 15, 2014.
Facts Investors Should Verify
- Reconcile reported debt growth to the Brandywine consolidation, City Point financing, acquisitions, and other 2013 financings, including the timing and availability of restricted cash.
- Assess refinancing requirements for 2013 and 2014 maturities, projected interest costs, and compliance with credit facility terms.
- Review the collectability and collateral coverage of the $18.6 million of non-performing notes and the adequacy of the $3.9 million allowance.
- Evaluate execution risk, remaining funding needs, and completion timelines for City Point and other redevelopment projects.
- Distinguish recurring operating performance from discontinued operations, property-sale gains, impairment charges, equity-method results, and other unusual items.
- Monitor occupancy, lease commencements, rent spreads, same-store NOI, and tenant credit quality as indicators of portfolio performance.
- Confirm the impact of ATM equity issuance and noncontrolling interests on per-share FFO, ownership, and future distributions.