Acadia Realty Trust — Form 10-Q Summary
Business Context and Reporting Period
Acadia Realty Trust is an integrated equity REIT focused on retail, urban/infill mixed-use and self-storage properties, primarily in high-barrier markets along the U.S. East Coast and in Chicago. The filing covers the quarter and six months ended June 30, 2011; results are unaudited. At quarter-end, the Company had interests in 84 properties across its Core Portfolio and three Opportunity Funds and controlled approximately 99% of its Operating Partnership.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| 2011 revenue | $38.8 million | $77.3 million |
| 2010 revenue | $35.5 million | $71.6 million |
| 2011 operating income | $5.4 million | $18.4 million |
| 2010 operating income | $13.1 million | $24.0 million |
| Net income attributable to common shareholders | $30.2 million | $39.7 million |
| Basic EPS | $0.75 | $0.98 |
| Funds from operations | $7.0 million; $0.17 per diluted share | $20.6 million; $0.50 per diluted share |
- Revenue increased 9.4% in the quarter and 7.9% year to date, driven primarily by higher rental income from redevelopment projects, new acquisitions and improved self-storage occupancy. Interest income declined because of note repayments.
- Operating margin was approximately 13.9% in the quarter and 23.8% year to date, compared with approximately 37.0% and 33.5%, respectively, in the prior comparable periods. The declines reflect a $6.9 million impairment charge, higher depreciation and operating costs, and other expense changes.
- Quarterly net income attributable to common shareholders benefited from a $28.6 million gain on the sale of Ledgewood Mall. Year-to-date results also included a $3.9 million gain on the sale of a Neiman Marcus leasehold interest.
- Net cash provided by operating activities was $20.2 million for the six months, essentially unchanged from $20.2 million in 2010. Investing cash flow was an outflow of $45.0 million, while financing cash flow was an inflow of $53.0 million, producing a $28.3 million increase in cash.
- Cash and cash equivalents were $148.9 million at June 30, 2011, compared with $120.6 million at December 31, 2010. Total assets were $1.61 billion and total equity was $654.3 million.
- Mortgage notes and convertible notes payable totaled $870.5 million, including $831.3 million of mortgage debt and approximately $39.7 million of convertible notes at face value. Approximately 45.4% of debt was fixed-rate, including swaps, and 54.6% was floating-rate.
- The Company had approximately $58.9 million of capacity under existing debt facilities. Noncontrolling interests had unfunded capital commitments of approximately $21.4 million for Fund II and $287.6 million for Fund III.
- The Company paid approximately $14.9 million of dividends and distributions on common shares and common OP units during the first six months. The declared dividend was $0.36 per common share for the period.
Material Changes Versus the Prior Comparable Period
- The Company acquired five properties through Fund III for an aggregate purchase price of $93.3 million, including assumed debt of $20.6 million. It also acquired two Core Portfolio properties for $33.2 million and additional properties in New York and Chicago during the quarter.
- Rental income increased, particularly in the Opportunity Funds, from redevelopment projects at Canarsie, Pelham Manor and 161st Street and from the Heritage Shops at Millennium Park acquisition.
- Operating expenses increased to $33.4 million in the second quarter from $22.3 million, primarily because of the $6.9 million Granville Centre impairment, higher depreciation and increased property expenses.
- Net income attributable to common shareholders rose to $30.2 million from $12.8 million in the quarter, but FFO declined to $7.0 million from $17.6 million because the prior-year period included a $33.8 million bargain-purchase gain and the current period included the impairment charge and other operating-cost increases.
- Six-month FFO declined to $20.6 million, or $0.50 per diluted share, from $27.8 million, or $0.68 per diluted share.
- The Company sold Ledgewood Mall for $37.0 million in May 2011, recording a $28.6 million gain, and sold a Fund II leasehold interest for $8.2 million in January 2011, recording a $3.9 million gain.
- The Company purchased $10.0 million face amount of convertible notes for $10.1 million and had purchased $75.3 million face amount cumulatively through June 30, 2011.
Outlook, Risks, Contingencies and Unusual Items
- No formal earnings or FFO guidance is provided in the filing. Management expects to use Fund III and potentially new funds as primary vehicles for future acquisitions and investments.
- The Company had purchase and sale agreements for 26 additional properties with an aggregate purchase price of $103.3 million. Planned funding included assumed debt of $33.3 million, $15.0 million of OP units and $55.0 million of cash; completion remained subject to customary conditions and was not assured.
- Debt maturities ranged from August 2011 through November 2032. Approximately $310.7 million of debt was scheduled to mature in 2011, including $195.4 million of Fund III subscription-line borrowings payable from capital calls. Management expected to refinance at least part of maturing debt or pursue alternatives based on market conditions.
- Future debt maturities and interest obligations totaled approximately $871.0 million and $110.0 million, respectively; total contractual obligations, including operating leases and construction commitments, were approximately $1.17 billion.
- A 100-basis-point increase in rates on refinanced debt could increase annual interest expense by approximately $4.5 million; a 100-basis-point increase in LIBOR on variable-rate debt, after existing swaps, could increase annual interest expense by approximately $4.8 million before noncontrolling-interest effects.
- The Granville Centre impairment was based on projected cash flows that were insufficient to recover the property’s carrying value. Management stated that it did not believe other portfolio properties were impaired as of June 30, 2011.
- Other risks include economic and real estate market conditions, tenant demand and credit, acquisition and redevelopment execution, leverage and refinancing risk, limited control over joint ventures, REIT distribution requirements, environmental requirements and potential uninsured losses.
- The Company reported no material changes to previously disclosed legal proceedings or risk factors, no defaults upon senior securities and effective disclosure controls as of June 30, 2011.
Investor Verification Checklist
- Verify the sustainability of operating cash flow and FFO excluding property-sale gains, the prior-year bargain-purchase gain and the current-period impairment.
- Review near-term debt maturities, refinancing plans and the availability and timing of Fund III capital calls.
- Assess exposure to floating interest rates, covenant requirements, swap maturities and potential refinancing costs.
- Confirm completion, funding and expected returns for the 26 pending property acquisitions and the remaining redevelopment commitments.
- Evaluate Granville Centre and other property valuations, including assumptions regarding rents, occupancy, capitalization rates and projected cash flows.
- Reconcile consolidated debt and liquidity with pro-rata debt of unconsolidated affiliates, which totaled approximately $77.2 million at the Company’s share.
- Confirm dividend coverage and the portion of earnings and cash flow attributable to common shareholders versus noncontrolling interests.