Acadia Realty Trust — 2Q18 Form 10-Q Summary
Business context and reporting period
Acadia Realty Trust is an integrated equity REIT focused on acquiring, developing, owning and managing retail properties in supply-constrained, densely populated U.S. metropolitan areas. The company reports three segments: Core Portfolio, Funds and Structured Financing. As of June 30, 2018, it had interests in 172 properties, including 118 Core Portfolio properties and 54 Fund properties. The unaudited reporting period covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial performance and key metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $63.6 million | $59.5 million | $126.7 million | $121.5 million |
| Operating income | $6.3 million | $6.7 million | $13.0 million | $16.6 million |
| Net income attributable to Acadia | $7.7 million | $12.1 million | $15.1 million | $27.7 million |
| Basic and diluted EPS | $0.09 | $0.14 | $0.18 | $0.33 |
| FFO attributable to common shareholders and OP unitholders | $29.9 million | $33.3 million | $59.0 million | $68.7 million |
| Diluted FFO per share/OP unit | $0.34 | $0.37 | $0.67 | $0.77 |
Revenue increased 6.8% in the second quarter and 4.3% for the first half. Operating margins were approximately 9.9% in the second quarter and 10.3% for the first half, compared with approximately 11.3% and 13.7%, respectively, in the prior-year periods. Interest expense rose to $16.9 million in the second quarter and $32.8 million for the first half, compared with $12.8 million and $24.2 million, respectively, in 2017.
Core Portfolio same-property NOI was $31.6 million in the second quarter, up 0.8%, and $62.4 million for the first half, down 0.1%. Core Portfolio occupancy was 94.3%; Fund Portfolio occupancy was 83.1%; combined occupancy was 89.3% at June 30, 2018. Core new and renewal lease spreads were 8.7% on a cash basis and 16.3% on a straight-line basis in the second quarter.
Net cash provided by operating activities was $49.0 million for the first half, down from $68.9 million. Cash used in investing activities was $22.5 million, compared with $103.1 million in 2017. Cash used in financing activities was $81.1 million, compared with $7.3 million provided in 2017. Cash and restricted cash declined to $31.1 million at June 30, 2018, from $85.7 million at December 31, 2017.
Balance sheet, debt and liquidity
- Total assets were $3.88 billion and net investments in real estate were $3.17 billion at June 30, 2018.
- Total indebtedness was $1.46 billion, compared with $1.42 billion at December 31, 2017. Gross consolidated debt was $1.47 billion, with 67.0% fixed or effectively fixed and 33.0% variable-rate.
- The company entered into a $500.0 million senior unsecured Credit Facility in February 2018, consisting of a $150.0 million revolver and a $350.0 million term loan. Revolver availability was $123.7 million at June 30, 2018.
- Additional capacity under Core and Fund revolving facilities was $253.5 million. The company also reported 68 unleveraged consolidated properties with aggregate carrying value of approximately $1.5 billion.
- Debt principal maturities and scheduled amortization totaled $50.8 million during the remainder of 2018 and $207.9 million in 2019. Management expects to refinance at least part of these obligations but cautioned that acceptable financing may not be available.
- At June 30, 2018, the company had $17.3 million of cash, $129.7 million of its share of unfunded Fund commitments, and $93.3 million of construction commitments.
Material changes versus the prior comparable period
- Net income attributable to Acadia declined 36.4% in the second quarter and 45.5% for the first half; FFO declined 10.1% and 14.2%, respectively.
- Interest income fell by $4.9 million in the second quarter and $10.2 million for the first half, primarily reflecting note repayments and conversion of a note receivable into a greater real estate interest.
- Equity earnings from unconsolidated affiliates declined $10.3 million for the first half, largely because 2017 included significant gains on property dispositions.
- Fund revenue increased following acquisitions and development projects placed in service, but higher depreciation, operating costs and interest expense reduced Fund profitability.
- Core revenue declined because of lower real estate tax recoveries and occupancy pressure from tenant bankruptcies; lower tax expense and increased equity earnings partly offset the impact.
- The company acquired the $45.3 million Trussville Promenade shopping center through Fund V, sold Sherman Avenue for $26.0 million, and exchanged $22.0 million of notes receivable plus accrued interest for an additional 14.11% interest in Town Center.
- The company repurchased 2.29 million common shares for $55.1 million during the first half under a $200.0 million authorization; approximately $145.0 million remained available at June 30.
- Common shares outstanding declined to 81.5 million from 83.7 million at December 31, 2017.
Guidance, outlook, risks and unusual items
- The filing does not provide formal earnings or FFO guidance.
- Management continues to emphasize Core Portfolio growth, Fund acquisitions, development and re-tenanting, while maintaining balance-sheet flexibility and access to capital.
- A $26.3 million Core mortgage was in default and subject to litigation at June 30, 2018. The loan bears 6.0% interest plus 5.0% default interest and is collateralized by a property in which the company holds a controlling interest.
- Interest-rate exposure remains material. A 100-basis-point increase in LIBOR would increase annual interest expense on variable-rate debt by approximately $4.8 million before noncontrolling interests. A 1% increase in market rates was estimated to reduce the fair value of consolidated debt by approximately $15.4 million.
- Tenant bankruptcies, occupancy declines, property-level operating costs, refinancing conditions, development execution, joint-venture performance and retail-sector conditions are key risks.
- The company recorded no impairment charges during the first half. It recognized a $33,000 gain on the Sherman Avenue disposition.
- Subsequent to quarter-end, Fund V acquired Elk Grove Commons for $59.3 million plus a potential earnout of up to $0.8 million, and the company entered into $125.0 million of interest-rate swaps effective in 2020.
- Management stated that previously disclosed risk factors were not materially changed and that disclosure controls were effective as of June 30, 2018.
Most important facts for investors to verify
- Whether 2018 and 2019 debt maturities can be refinanced on acceptable terms without materially increasing interest expense.
- The status and potential financial effect of the defaulted $26.3 million mortgage and related litigation.
- Core Portfolio occupancy, tenant bankruptcies, same-property NOI and leasing spreads.
- The sustainability of FFO and dividends given lower first-half FFO, reduced operating cash flow and substantial capital commitments.
- Fund V acquisition and development performance, including remaining commitments and expected funding requirements.
- The effects of continued share repurchases, interest-rate movements and the company’s unconsolidated joint-venture debt exposure.