ACADIA REALTY TRUST annual report, FY2018

Acadia Realty Trust — FY2018 Form 10-K Summary

Business context and reporting period

Acadia Realty Trust is a fully integrated U.S. REIT focused on owning, acquiring, developing and managing retail properties in supply-constrained, densely populated metropolitan markets. The Company operates through an UPREIT structure and reports three segments: Core Portfolio, Funds and Structured Financing. This filing covers the fiscal year ended December 31, 2018; fourth-quarter information is included where disclosed.

At year-end, the Core Portfolio included 113 operating properties totaling approximately 5.8 million square feet, with 93.9% occupancy.
The Funds included 51 operating properties totaling approximately 5.4 million square feet, with 86.6% occupancy.
Acadia controlled approximately 94% of the Operating Partnership.

Financial performance and key metrics

Metric	2018	2017	Change
Total revenue	$262.2 million	$250.3 million	Up $11.9 million
Operating income	$27.5 million	$17.3 million	Up $10.2 million
Net income attributable to Acadia	$31.4 million	$61.5 million	Down $30.0 million
Basic and diluted EPS	$0.38	$0.73	Down $0.35
Funds from operations attributable to common shareholders and OP unitholders	$118.9 million	$134.7 million	Down $15.8 million
Diluted FFO per share and OP unit	$1.35	$1.51	Down $0.16
Cash flow from operating activities	$96.1 million	$114.7 million	Down $18.6 million
Dividends declared per common share	$1.09	$1.05	Up $0.04

Revenue consisted primarily of rental income of $208.8 million and expense reimbursements of $48.3 million. Minimum rents, percentage rents and expense reimbursements represented approximately 98% of total revenue. The reported GAAP operating margin was approximately 10.5%, calculated as operating income divided by total revenue.

Fourth-quarter revenue was $69.4 million, consolidated net loss was $6.7 million, net income attributable to Acadia was $7.1 million and diluted EPS was $0.09. The fourth quarter included a $0.28 per-share cash dividend.

Balance sheet, debt and liquidity

Total assets were $4.0 billion and total equity was $2.1 billion at December 31, 2018.
Total consolidated debt was $1.560 billion before unamortized costs and premiums, compared with $1.438 billion at year-end 2017. Net indebtedness was $1.551 billion.
Approximately 64.2% of debt was fixed or effectively fixed at a weighted-average rate of 3.85%; 35.8% was variable-rate debt at a weighted-average rate of 4.11%.
Variable-rate debt totaled $558.7 million. A 100-basis-point increase in rates would increase annual interest expense by approximately $5.6 million before considering noncontrolling interests.
Cash and cash equivalents were $21.3 million, with restricted cash of $13.6 million. The Company reported approximately $200.0 million of additional capacity under existing Core and Fund revolving facilities.
Debt maturities and scheduled principal payments totaled $219.1 million in 2019 and $527.3 million in 2020. Management expects to refinance at least a portion of these obligations, but stated that acceptable financing may not be available.
A $26.3 million Core mortgage was in default and subject to litigation at year-end. Management stated that it believes it has valid defenses and intends to defend the matter.

Material changes versus the prior comparable period

Core Portfolio revenue declined $2.1 million, primarily due to tenant bankruptcies and a prior-year real estate tax reassessment. Core segment net income attributable to Acadia was essentially unchanged.
Funds revenue increased $14.0 million due primarily to acquisitions and development projects placed in service, but Funds segment net income attributable to Acadia declined $13.6 million. The Funds reported a net loss largely because of depreciation on pre-stabilized assets.
Interest income declined $15.9 million, mainly because of note repayments and the conversion of a note receivable into an increased real estate interest.
Gain on disposition of properties declined to $5.1 million from $48.9 million in 2017. The Company recorded no impairment charge in 2018 versus $14.5 million in 2017.
Core same-property NOI increased 1.8% to $126.2 million. New and renewal Core lease spreads were 9.0% on a cash basis and 16.4% on a straight-line basis.
Cash flow from operating activities decreased 16.2%, while investing activities used $136.6 million compared with $4.1 million of cash provided in 2017.
The Company repurchased 2.3 million common shares for $55.1 million under a $200.0 million authorization. Approximately $144.9 million remained available at year-end.

Acquisitions, dispositions and capital activity

Fund V acquired three shopping centers for an aggregate purchase price of $149.0 million: Trussville Promenade in Alabama, Elk Grove Commons in California and Hiram Pavilion in Georgia.
Fund IV consolidated 11 previously unconsolidated Broughton Street properties for nominal consideration.
The Company sold Fund properties and retail condominium units for aggregate stated proceeds of approximately $76.6 million; consolidated dispositions totaled $66.5 million and produced a $5.1 million gain.
Capitalized development costs were $45.9 million. The Company had six development or redevelopment projects at year-end, with estimated total remaining project costs ranging from $62.9 million to $90.8 million and Acadia’s estimated share ranging from $28.8 million to $43.4 million.
Acadia’s remaining capital commitments to Funds III, IV and V totaled $119.0 million at year-end.

Outlook, management commentary, risks and unusual items

Management’s strategy remains focused on high-quality urban and suburban retail assets, disciplined acquisitions through the Core Portfolio and Funds, development and re-tenanting, and maintaining conservative leverage with access to multiple sources of capital. The filing does not provide a formal quantitative earnings or FFO outlook.

Major risks include tenant bankruptcies, anchor tenant vacancies, e-commerce competition, lease rollover, retail demand, geographic concentration and competition for acquisitions.
Core Portfolio annual base rent was concentrated in the New York metropolitan area and Chicago metropolitan area, representing 36.4% and 28.0%, respectively, of Core annual base rent.
Five institutional shareholders owned 59.3% of common shares in aggregate, creating ownership concentration and potential governance considerations.
The Company’s REIT status requires compliance with complex income, asset, ownership and distribution tests; it distributed sufficient taxable income for 2018 and reported no federal income or excise taxes for the year.
The filing describes environmental, insurance, climate, cyber-security, litigation, development and interest-rate risks. Management was not aware of any environmental condition expected to have a material adverse effect, but no assurance was provided.
The Company adopted several accounting updates in 2018 and adopted the amended lease standard effective January 1, 2019. Management expected little change in the timing of lease revenue recognition but anticipated that a significant portion of internal leasing costs would no longer be capitalized.
Subsequent to year-end, Fund V called $33.2 million of capital, the Company entered into $100.0 million of 10-year interest-rate swaps, and Fund III sold its 3104 M Street property for $10.5 million.

Most important facts for investors to verify

Refinancing plans and available liquidity for the $219.1 million of 2019 and $527.3 million of 2020 consolidated debt maturities.
Status and potential exposure from the $26.3 million mortgage default and related litigation.
Tenant credit quality, bankruptcy exposure and lease rollover, particularly for major anchors and the 2019–2023 expiration periods.
Progress, leasing and final costs for the development and redevelopment pipeline.
Performance and remaining commitments of Funds III, IV and V, including the $119.0 million of Acadia capital commitments.
Underlying operating performance versus GAAP results, with particular attention to same-property NOI, FFO, noncontrolling interests and gains from property dispositions.
Effects of interest-rate movements on variable-rate debt and the effectiveness and counterparty exposure of interest-rate swaps and caps.