ACADIA REALTY TRUST quarterly report, Q1 FY2015

Acadia Realty Trust — Form 10-Q Summary

Business Context and Reporting Period

Acadia Realty Trust is a fully integrated equity REIT focused on acquiring, owning, redeveloping and managing retail properties in high-barrier-to-entry, densely populated U.S. metropolitan areas. The filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. At quarter-end, the Company had interests in 145 properties: 89 in the Core Portfolio and 56 across four opportunity funds.

Financial Highlights

Metric	Q1 2015	Q1 2014	Change
Total revenues	$52.5 million	$46.7 million	+12.4%
Operating income	$15.1 million	$14.7 million	+2.9%
Net income	$38.5 million	$19.1 million	+101.6%
Net income attributable to common shareholders	$16.5 million	$21.6 million	-23.4%
Basic and diluted EPS	$0.24	$0.38	Down $0.14
Funds from operations	$23.0 million	$18.9 million	+21.7%
Diluted FFO per share	$0.32	$0.32	Flat
Net cash provided by operating activities	$26.6 million	$22.2 million	+$4.4 million

Revenue growth was driven primarily by property acquisitions and higher expense reimbursements. Operating expenses increased to $37.3 million from $32.0 million, including higher depreciation and amortization, property operating costs, real estate taxes and acquisition-related costs.

Net income included a $27.1 million gain on the sale of Fund III’s Lincoln Park Centre, compared with a $12.4 million property-disposition gain in the prior-year quarter. The higher gain was largely offset for common shareholders by a larger allocation of income to noncontrolling interests, resulting in lower common-shareholder earnings and EPS.

Core Portfolio NOI increased to $23.9 million from $19.2 million. Same-property NOI increased 3.1% to $18.2 million, primarily from contractual rent increases. Core Portfolio physical occupancy was 96.2% and leased occupancy was 97.1% at March 31, 2015. New and renewal lease spreads were 23.3% on a cash basis and 32.1% on a straight-line basis.

Balance Sheet, Debt and Liquidity

Total assets increased to $2.87 billion from $2.73 billion at December 31, 2014, primarily reflecting acquisitions and development activity.
Mortgage and other notes payable increased to $1.305 billion from $1.130 billion.
Cash and cash equivalents were $119.6 million, compared with $217.6 million at year-end 2014. Cash in escrow was $59.5 million.
Debt, excluding the unamortized premium, was approximately $1.302 billion. Approximately 67.9% was fixed-rate, including swaps, and 32.1% was variable-rate.
Credit facilities totaled $400.0 million, with $132.8 million of stated availability at March 31, 2015, subject to applicable conditions and letters of credit.
The Company reported $382.6 million of unfunded capital commitments from noncontrolling interests in its opportunity funds.
Debt maturities in 2015 totaled approximately $310.7 million, with $5.8 million of scheduled principal amortization. Management expected to refinance at least part of the maturities or pursue alternatives based on market conditions.
The Company paid $39.3 million of dividends and distributions to common shareholders, OP unit holders and LTIP holders during the quarter. The quarterly common dividend declared was $0.24 per share.

Cash Flow and Capital Allocation

Operating cash flow was $26.6 million. Investing activities used $235.1 million, including $220.3 million for real estate acquisitions, $40.5 million for redevelopment and property improvements, and $33.0 million placed in escrow for acquisitions; these uses were partly offset by $63.2 million of property-sale proceeds. Financing activities provided $110.5 million, including new debt proceeds and $18.6 million of net common-share issuance proceeds. Cash and cash equivalents declined by $98.0 million during the quarter.

The Company acquired two Core Portfolio properties for an aggregate purchase price of $179.0 million and Fund IV acquired 1035 Third Avenue in New York for $51.0 million. Fund redevelopment and construction projects had $506.3 million of costs incurred and estimated additional costs of $58.1 million to $122.1 million, of which the Operating Partnership’s share was estimated at $11.6 million to $24.4 million.

Material Changes Versus the Prior Comparable Period

Revenue increased 12.4%, mainly from acquisitions completed in 2014 and 2015.
Core Portfolio NOI increased 24.5%, while same-property NOI increased 3.1%.
FFO increased 21.7%, but diluted FFO per share remained $0.32 because the diluted share and OP unit count increased materially.
Common-shareholder net income and EPS declined despite higher consolidated net income, primarily because of the larger noncontrolling-interest allocation and the different composition of property-disposition gains.
Real estate acquisitions increased substantially to $220.3 million from $90.5 million.
Debt increased by approximately $174.3 million, reflecting acquisition and fund financing activity.
The Company issued approximately 0.6 million common shares through its ATM program for approximately $19.5 million of net proceeds.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide formal earnings guidance. Management’s strategy emphasizes continued Core Portfolio acquisitions, redevelopment and re-tenanting, fund investments and maintaining access to capital.

Interest-rate exposure remains material. A 100-basis-point increase in refinancing rates was estimated to increase annual interest expense by approximately $6.2 million, with the Company’s share after noncontrolling interests estimated at $2.3 million.
A 100-basis-point increase in LIBOR was estimated to increase annual interest expense on consolidated variable-rate debt, net of swaps, by approximately $4.2 million, with the Company’s share estimated at $0.7 million.
Three notes receivable were non-performing at March 31, 2015. The structured-financing portfolio totaled $98.6 million and included loans with effective rates ranging from 3.9% to 24.0%.
Material risks include property-market conditions, tenant demand and creditworthiness, acquisition and redevelopment execution, leverage and refinancing risk, interest-rate changes, limited control over joint ventures, REIT distribution requirements, environmental matters and uninsured losses.
Legal contingencies included a claim exceeding $9.0 million related to the 2011 Mark Plaza flood and an approximately $7.4 million bonded contractor claim concerning the City Point project. Management stated that it believes it has meritorious defenses.
Unusual items included the $27.1 million Lincoln Park Centre gain, $2.0 million of disclosed acquisition costs, distributions from the RCP Venture, and a $3.3 million after-tax other comprehensive loss primarily related to interest-rate swap valuations.
Subsequent events included the April 2015 sale of Fund III’s White City property for $96.8 million, Fund IV’s $33.0 million acquisition of 801 Madison Avenue, and the Company’s acquisition of the remaining interest in Route 202 Shopping Center for $5.6 million.

Important Facts for Investors to Verify

Reconcile FFO and same-property NOI to GAAP results and assess the effect of noncontrolling interests and share issuance on per-share performance.
Review the $310.7 million of 2015 debt maturities, refinancing assumptions, available credit and covenant requirements.
Evaluate the funding requirements and execution risk associated with the $506.3 million redevelopment pipeline and estimated remaining costs.
Assess the performance and collectability of the $98.6 million structured-financing portfolio, including the three non-performing notes.
Monitor occupancy, lease spreads, tenant credit quality and the sustainability of the 3.1% same-property NOI increase.
Review the Lincoln Park Centre and subsequent White City disposition proceeds, debt repayments and distributions to fund investors.
Track the Mark Plaza and City Point legal proceedings, along with any changes to the risk factors disclosed in the 2014 Form 10-K.