Business Context and Reporting Period
Acadia Realty Trust is a fully integrated equity REIT focused primarily on retail properties in supply-constrained, densely populated U.S. metropolitan areas. The company operates through Acadia Realty Limited Partnership and reports three segments: Core Portfolio, Funds, and Structured Financing.
This unaudited Form 10-Q covers the three and six months ended June 30, 2017. At June 30, 2017, Acadia had interests in 183 properties, including 116 Core Portfolio properties and 54 Fund properties, with consolidated operating portfolio occupancy of 89.4% and Core Portfolio occupancy of 94.2%.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $59.5 million, versus $43.9 million | $121.5 million, versus $92.0 million |
| Operating income | $6.7 million, versus $9.4 million | $16.6 million, versus $19.3 million |
| Operating margin | 11.3%, versus 21.5% | 13.7%, versus 21.0% |
| Net income attributable to Acadia | $12.1 million, versus $17.9 million | $27.7 million, versus $46.8 million |
| Basic and diluted EPS | $0.14, versus $0.24 | $0.33, versus $0.64 |
| FFO attributable to common shareholders and OP unitholders | $33.3 million, versus $29.2 million | $68.7 million, versus $60.3 million |
| Diluted FFO per share/unit | $0.37, unchanged | $0.77, versus $0.78 |
Six-month operating cash flow was $60.2 million, compared with $42.8 million in the prior-year period. Investing activities used $95.7 million, primarily for real estate acquisitions, development, and property improvements. Financing activities provided $7.2 million. Cash and cash equivalents declined to $43.4 million from $71.8 million at December 31, 2016.
Same-property Core Portfolio NOI increased 1.8% in the second quarter and 1.1% for the six-month period. Core Portfolio new and renewal lease rent spreads were 9.5% on a cash basis and 14.6% on a straight-line basis for the quarter, and 8.1% and 17.8%, respectively, for the six months.
Balance Sheet, Debt, and Liquidity
- Total assets were $4.05 billion at June 30, 2017, including $3.17 billion of net real estate investments and $249.8 million of notes receivable.
- Total indebtedness was $1.54 billion, compared with $1.49 billion at December 31, 2016. Consolidated debt before issuance costs and premiums was $1.56 billion.
- Approximately 57.7% of debt was fixed-rate or effectively fixed-rate, while 42.3% was variable-rate. Variable-rate exposure was hedged with interest-rate swaps and caps.
- Consolidated debt maturities and scheduled principal payments totaled $214.7 million during the remainder of 2017 and $122.8 million in 2018. Management expects to refinance at least part of the 2017 maturities but cautions that financing may not be available on acceptable terms.
- The company had $235.8 million of additional capacity under existing revolving debt facilities and $43.4 million of cash at June 30, 2017.
- At June 30, 2017, two mortgage loans were in default: a $26.3 million Core mortgage and a $14.3 million Fund II mortgage subject to a breached liquidity covenant.
Material Changes Versus the Prior Comparable Period
- Revenue increased 33.2% in the second quarter and 32.1% for the six months, primarily from 2016 and 2017 acquisitions and the placement of substantially all of the City Point development project into service.
- Operating income declined despite higher revenue because depreciation and amortization, property expenses, and interest expense increased. The company recorded $2.0 million of accelerated depreciation related to a demolished building under development.
- Net income and EPS declined substantially because the prior-year periods included $16.6 million of second-quarter gains and $82.0 million of six-month gains on property dispositions. The 2017 periods had no consolidated property disposition gains.
- Equity earnings from unconsolidated affiliates increased to $17.0 million for the six months from $3.7 million, primarily from gains on dispositions by Fund III and Fund IV.
- Structured Financing interest income increased by $5.1 million for the six months, including $3.6 million of default interest recognized on a previously past-due note.
- FFO increased for the quarter and six-month period, although diluted FFO per share was broadly stable because of a larger share and OP-unit base.
- The company acquired consolidated properties for approximately $79.7 million during the first half of 2017 and invested $46.3 million in development and property improvements.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific earnings or FFO guidance. Management’s strategy remains focused on acquiring and developing Core Portfolio assets, pursuing opportunistic Fund investments, maintaining liquidity, and funding distributions and capital commitments.
- Fund commitments attributable to Acadia totaled approximately $149.9 million at June 30, 2017. Development projects had estimated remaining costs of $102 million to $144 million, with Acadia’s share estimated at $34.1 million to $38.9 million.
- Construction commitments were approximately $103.7 million, and letters of credit totaled $11.3 million.
- Acadia could be required to fund its pro rata share of obligations of unconsolidated joint ventures, totaling approximately $162.3 million.
- A lender sued in April 2017 concerning the $26.3 million Brandywine Holdings mortgage and alleged approximately $31.0 million of principal, interest, penalties, and fees. Management believes the loan is non-recourse to Acadia and that the lawsuit is without merit.
- Interest-rate sensitivity is material: a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $6.6 million on the variable-rate debt portfolio, before noncontrolling-interest effects.
- Subsequent events include an anticipated approximately $4.0 million impairment charge in the third quarter of 2017 related to the planned sale of City Point Tower I, repayment of a $28.6 million Core mortgage, and a $44.0 million Fund V acquisition.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing states that previously disclosed risk factors had not materially changed.
Facts Investors Should Verify
- Refinancing plans and availability of acceptable financing for the $214.7 million of consolidated debt due during the remainder of 2017.
- Status and potential liability associated with the two mortgage defaults, particularly the Brandywine Holdings litigation.
- Whether the anticipated $4.0 million City Point Tower I impairment is ultimately recorded and whether the planned disposition closes as expected.
- Execution of the $102 million to $144 million development cost program and Acadia’s remaining Fund capital commitments.
- Core Portfolio occupancy, same-property NOI growth, leasing spreads, and the effect of higher property and interest expenses on recurring cash flow.
- Cash available for distributions after debt service, capital expenditures, development spending, and required Fund contributions.