SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-12002
ACADIA REALTY TRUST
(Exact name of registrant in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
23-2715194
(I.R.S. Employer
Identification No.)
411 THEODORE FREMD AVENUE, SUITE 300, RYE, NY
(Address of principal executive offices)
10580
(Zip Code)
(914) 288-8100
(Registrant’s telephone number, including area code)
Title of class of registered securities
Trading symbol
Name of exchange on which registered
Common shares of beneficial interest, par value $0.001 per share
AKR
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Emerging Growth Company
Non-accelerated Filer
Smaller Reporting Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No ☒
As of October 28, 2022 there were 94,956,716 common shares of beneficial interest, par value $0.001 per share (“Common Shares”), outstanding.
ACADIA REALTY TRUST AND SUBSIDIARIES
INDEX
Item No.
Description
Page
PART I - FINANCIAL INFORMATION
1.
Financial Statements
4
Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021 (As Restated)
5
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021 (As Restated)
6
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021 (As Restated)
7
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021 (As Restated)
9
Notes to Consolidated Financial Statements (Unaudited)
11
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
51
3.
Quantitative and Qualitative Disclosures about Market Risk
65
4.
Controls and Procedures
67
PART II - OTHER INFORMATION
Legal Proceedings
69
1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
5.
Other Information
6.
Exhibits
70
Signatures
71
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q (this “Report”) of Acadia Realty Trust, a Maryland real estate investment trust, (the “Company”) may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by the use of the words such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project,” or the negative thereof, or other variations thereon or comparable terminology. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results and financial performance to be materially different from future results and financial performance expressed or implied by such forward-looking statements, including, but not limited to: (i) the economic, political and social impact of, and uncertainty surrounding the COVID-19 pandemic (the “COVID-19 Pandemic”), including its impact on our tenants and their ability to make rent and other payments or honor their commitments under existing leases; (ii) macroeconomic conditions, such as a disruption of or lack of access to the capital markets and rising inflation; (iii) our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate and integrate diversifying acquisitions and investments; (iv) changes in general economic conditions or economic conditions in the markets in which we may, from time to time, compete, and their effect on our revenues, earnings and funding sources; (v) increases in our borrowing costs as a result of changes in interest rates and other factors, including the discontinuation of USD LIBOR, which is currently anticipated to occur in 2023; (vi) our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due; (vii) our investments in joint ventures and unconsolidated entities, including our lack of sole decision-making authority and our reliance on our joint venture partners’ financial condition; (viii) our ability to obtain the financial results expected from our development and redevelopment projects; (ix) our tenants’ ability and willingness to renew their leases with us upon expiration, our ability to re-lease our properties on the same or better terms in the event of nonrenewal or in the event we exercise our right to replace an existing tenant, and obligations we may incur in connection with the replacement of an existing tenant; (x) our potential liability for environmental matters; (xi) damage to our properties from catastrophic weather and other natural events, and the physical effects of climate change; (xii) uninsured losses; (xiii) our ability and willingness to maintain our qualification as a real estate investment trust (REIT) in light of economic, market, legal, tax and other considerations; (xiv) information technology security breaches, including increased cybersecurity risks relating to the use of remote technology during the COVID-19 Pandemic; (xv) the loss of key executives; (xvi) the accuracy of our methodologies and estimates regarding environmental, social and governance (“ESG”) metrics, goals and targets, tenant willingness and ability to collaborate towards reporting ESG metrics and meeting ESG goals and targets, and the impact of governmental regulation on our ESG efforts; and (xvii) the risk that the determination to restate the Prior Period Financial Statements could negatively affect investor confidence and raise reputational issues.
The factors described above are not exhaustive and additional factors could adversely affect the Company’s future results and financial performance, including the risk factors discussed under the section captioned “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and other periodic or current reports the Company files with the SEC, including those set forth under the headings “Item 1A. Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. Any forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or change in the events, conditions or circumstances on which such forward-looking statements are based.
SPECIAL NOTE REGARDING CERTAIN REFERENCES
All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant referenced in Part I, Item 1. Financial Statements.
3
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
September 30,
December 31,
(dollars in thousands, except per share amounts)
2022
2021
ASSETS
Investments in real estate, at cost
Operating real estate, net
$
3,374,453
3,219,373
Real estate under development
186,360
203,773
Net investments in real estate
3,560,813
3,423,146
Notes receivable, net
123,966
153,886
Investments in and advances to unconsolidated affiliates
317,422
322,326
Other assets, net
234,558
186,509
Right-of-use assets - operating leases, net
38,158
40,743
Cash and cash equivalents
18,068
17,746
Restricted cash
12,635
9,813
Rents receivable, net
46,821
43,625
Assets of properties held for sale
11,057
63,952
Total assets (a)
4,363,498
4,261,746
LIABILITIES
Mortgage and other notes payable, net
945,235
1,140,293
Unsecured notes payable, net
694,310
559,040
Unsecured line of credit
178,287
112,905
Accounts payable and other liabilities
201,033
236,415
Lease liability - operating leases, net
36,157
38,759
Dividends and distributions payable
18,393
14,460
Distributions in excess of income from, and investments in, unconsolidated affiliates
8,880
9,939
Total liabilities (a)
2,082,295
2,111,811
Commitments and contingencies
Redeemable noncontrolling interests
72,352
—
EQUITY
Acadia Shareholders' Equity
Common shares, $0.001 par value, authorized 200,000,000 shares, issued and outstanding 94,951,297 and 89,303,545 shares, respectively
95
89
Additional paid-in capital
1,940,033
1,754,383
Accumulated other comprehensive income (loss)
49,684
(36,214
)
Distributions in excess of accumulated earnings
(287,262
(196,645
Total Acadia shareholders’ equity
1,702,550
1,521,613
Noncontrolling interests
506,301
628,322
Total equity
2,208,851
2,149,935
Total liabilities, equity and redeemable noncontrolling interests
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands except per share amounts)
Revenues
(As Restated)
Rental income
78,453
70,302
238,479
208,369
Other
1,493
1,594
7,233
4,771
Total revenues
79,946
71,896
245,712
213,140
Operating expenses
Depreciation and amortization
33,744
30,064
102,428
91,244
General and administrative
10,170
9,910
32,768
29,555
Real estate taxes
11,749
11,028
34,657
34,448
Property operating
13,810
12,443
40,727
38,288
Impairment charges
33,311
9,925
Total operating expenses
102,784
73,370
243,891
203,460
Gain on disposition of properties
8,885
49,916
10,521
Operating (loss) income
(13,953
(1,474
51,737
20,201
Equity in (losses) earnings of unconsolidated affiliates
(50,579
372
(46,169
3,153
Interest and other income
3,994
2,354
9,890
6,108
Realized and unrealized holding (losses) gains on investments and other
(7,862
46,493
(18,415
53,460
Interest expense
(21,162
(16,614
(58,309
(50,302
(Loss) income from continuing operations before income taxes
(89,562
31,131
(61,266
32,620
Income tax benefit (provision)
17
(59
(7
(399
Net (loss) income
(89,545
31,072
(61,273
32,221
Net loss attributable to redeemable noncontrolling interests
3,193
Net loss (income) attributable to noncontrolling interests
30,461
(19,065
18,653
(11,686
Net (loss) income attributable to Acadia
(55,891
12,007
(39,427
20,535
Basic (loss) income per share
(0.59
0.13
(0.42
0.23
Diluted (loss) income per share
(0.61
(0.43
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Other comprehensive income:
Unrealized gain on valuation of swap agreements
44,114
1,048
96,899
24,535
Reclassification of realized interest on swap agreements
1,518
5,476
10,778
16,016
Other comprehensive income
45,632
6,524
107,677
40,551
Comprehensive (loss) income
(43,913
37,596
46,404
72,772
Comprehensive loss attributable to redeemable noncontrolling interests
Comprehensive loss (income) attributable to noncontrolling interests
23,273
(20,849
(3,126
(20,515
Comprehensive (loss) income attributable to Acadia
(17,447
16,747
46,471
52,257
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended September 30, 2022 and 2021 (As Restated)
Acadia Shareholders
(in thousands, except per share amounts)
CommonShares
ShareAmount
AdditionalPaid-inCapital
AccumulatedOtherComprehensiveLoss
Distributionsin Excess ofAccumulatedEarnings
TotalCommonShareholders’Equity
NoncontrollingInterests
TotalEquity
Redeemable NoncontrollingInterests
Balance at July 1, 2022
94,929
1,895,556
11,240
(214,279
1,692,612
670,606
2,363,218
Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
20
333
(333
Dividends/distributions declared ($0.18 per Common Share/OP Unit)
(17,092
(1,276
(18,368
Acquisition of noncontrolling interest
44,605
(50,435
(5,830
City Point Loan
(65,405
City Point Loan accrued interest
(1,564
Employee and trustee stock compensation, net
2
183
1,997
2,180
Noncontrolling interest distributions
(24,632
Noncontrolling interest contributions
9,572
65,945
Comprehensive income (loss)
38,444
(23,273
(40,720
(3,193
Reclassification of redeemable noncontrolling interests
(76,569
76,569
Reallocation of noncontrolling interests
(644
644
Balance at September 30, 2022
94,951
Balance at July 1, 2021
88,419
88
1,730,686
(47,909
(185,001
1,497,864
619,098
2,116,962
18
288
(288
Cancellation of OP Units
(479
Issuance of Common Shares
13
189
Dividends/distributions declared ($0.15 per Common Share/OP Unit)
(13,268
(1,046
(14,314
225
2,419
2,644
(10,127
9,518
Comprehensive income
4,740
20,849
2,060
(2,060
Balance at September 30, 2021
88,452
1,733,448
(43,169
(186,262
1,504,105
637,884
2,141,989
Nine Months Ended September 30, 2022 and 2021 (As Restated)
AccumulatedOtherComprehensiveIncome (Loss)
Redeemable Noncontrolling Interest
Balance at January 1, 2022
89,304
Issuance of Common Shares, net
5,525
119,479
119,485
1,147
(1,147
Dividends/distributions declared ($0.54 per Common Share/OP Unit)
(51,190
(3,846
(55,036
67,475
(91,811
(24,336
871
7,669
8,540
(72,187
109,422
85,898
3,126
49,597
(3,322
3,322
As Restated
Balance at January 1, 2021
86,269
86
1,683,165
(74,891
(167,321
1,441,039
609,165
2,050,204
44
697
(697
2,085
45,863
45,865
Dividends/distributions declared ($0.45 per Common Share/OP Unit)
(39,476
(3,146
(42,622
54
914
8,866
9,780
(20,158
26,627
31,722
20,515
2,809
(2,809
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Gain on disposition of properties and other investments
(51,389
(10,521
Net unrealized holding losses (gains) on investments
20,786
(55,796
Stock compensation expense
Straight-line rents
(7,246
(4,107
Equity in losses (earnings) of unconsolidated affiliates
46,169
(3,153
Distributions of operating income from unconsolidated affiliates
8,192
2,004
Adjustments to straight-line rent reserves
(79
320
Amortization of financing costs
4,100
3,662
Non-cash lease expense
2,584
2,887
Adjustments to allowance for credit loss
(779
773
Termination of ground lease
(3,615
Other, net
(6,361
(2,259
Changes in assets and liabilities:
Rents receivable
3,523
4,118
Other liabilities
(817
1,748
Accounts payable and accrued expenses
93
489
Prepaid expenses and other assets
1,296
(5,681
Lease liability - operating leases
(2,600
(2,653
Net cash provided by operating activities
100,478
71,386
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of real estate
(242,633
(63,425
Proceeds from the disposition of properties and other investments, net
195,367
63,901
Investments in and advances to unconsolidated affiliates and other
(148,430
(7,032
Development, construction and property improvement costs
(36,863
(25,935
Refund of deposits for properties under contract
350
Change in control of previously unconsolidated affiliate
3,592
Return of capital from unconsolidated affiliates and other
63,661
12,071
Payment of deferred leasing costs
(4,996
(3,191
Acquisition of investment interests
(4,527
Proceeds from notes receivable
29,530
Issuance of notes receivable
(57,957
Net cash used in investing activities
(144,949
(81,568
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from unsecured debt
823,262
211,854
Principal payments on unsecured debt
(621,180
(160,387
Proceeds from the sale of Common Shares
Capital contributions from noncontrolling interests
109,423
Principal payments on mortgage and other notes
(429,301
(69,766
Distributions to noncontrolling interests
(75,796
(22,381
Dividends paid to Common Shareholders
(47,494
(26,208
Proceeds received on mortgage and other notes
202,743
9,664
Deferred financing and other costs
(9,191
(7,296
Payments of finance lease obligations
(63
Net cash provided by financing activities
47,615
7,909
Increase (decrease) in cash and restricted cash
3,144
(2,273
Cash of $17,746 and $18,699 and restricted cash of $9,813 and $11,096, respectively, beginning of period
27,559
29,795
Cash of $18,068 and $16,158 and restricted cash of $12,635 and $11,364, respectively, end of period
30,703
27,522
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental disclosure of cash flow information
Cash paid during the period for interest, net of capitalized interest of $2,331 and $6,270 respectively
41,922
31,807
Cash paid for income taxes, net of (refunds)
253
Supplemental disclosure of non-cash investing and financing activities
Distribution declared and payable on October 14, 2022, and October 15, 2021, respectively
18,372
14,314
Assumption of accounts payable and accrued expenses through acquisition of real estate
4,062
523
Right-of-use assets, operating leases exchanged for operating lease liabilities
412
Issuance of note receivable used as capital contributions from noncontrolling interests
Accrued interest on note receivable recorded to noncontrolling interest
1,564
Reclassification of non-controlling interest in excess of amount paid to additional paid-in capital
Acquisition of real estate through assumption of debt
31,802
Settlement of note receivable through cancellation of OP Units
479
Change in control of previously unconsolidated investment
Increase in real estate
(55,791
Increase in mortgage notes payable
35,970
Decrease in investments in and advances to unconsolidated affiliates
17,822
Decrease in notes receivable
5,306
Decrease in reserve on note receivable
(4,582
Decrease in accrued interest on notes receivable
4,691
Change in other assets and liabilities
176
Increase in cash and restricted cash upon change of control
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
Organization
The Company is a fully-integrated equity REIT focused on the ownership, acquisition, development, and management of retail properties located primarily in high-barrier-to-entry, supply-constrained, densely-populated metropolitan areas in the United States.
All of the Company’s assets are held by, and all of its operations are conducted through, Acadia Realty Limited Partnership (the “Operating Partnership”) and entities in which the Operating Partnership owns an interest. As of September 30, 2022 and December 31, 2021, the Company controlled approximately 95% of the Operating Partnership as the sole general partner and is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners primarily represent entities or individuals that contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common OP Units” or “Preferred OP Units”) and employees who have been awarded restricted Common OP Units (“LTIP Units”) as long-term incentive compensation (Note 13). Limited partners holding Common OP and LTIP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest, par value $0.001 per share, of the Company (“Common Shares”). This structure is referred to as an umbrella partnership REIT or “UPREIT.”
As of September 30, 2022, the Company has ownership interests in 151 properties within its core portfolio, which consist of those properties either 100% owned, or partially owned through joint venture interests, by the Operating Partnership, or subsidiaries thereof, not including those properties owned through its funds (“Core Portfolio”). The Company also has ownership interests in 51 properties within its opportunity funds, Acadia Strategic Opportunity Fund II, LLC (“Fund II”), Acadia Strategic Opportunity Fund III LLC (“Fund III”), Acadia Strategic Opportunity Fund IV LLC (“Fund IV”), and Acadia Strategic Opportunity Fund V LLC (“Fund V” and, collectively with Fund II, Fund III and Fund IV, the “Funds”). The 202 Core Portfolio and Fund properties primarily consist of street and urban retail and suburban shopping centers. In addition, the Company, together with the investors in the Funds, invested in operating companies through Acadia Mervyn Investors I, LLC (“Mervyns I,” which was liquidated in 2018) and Acadia Mervyn Investors II, LLC (“Mervyns II”), all on a non-recourse basis.
The Operating Partnership is the sole general partner or managing member of the Funds and Mervyns II and earns fees or priority distributions for asset management, property management, construction, development, leasing, and legal services. Cash flows from the Funds and Mervyns II are distributed pro-rata to their respective partners and members (including the Operating Partnership) until each receives a certain cumulative return (“Preferred Return”) and the return of all capital contributions. Thereafter, remaining cash flow is distributed 20% to the Operating Partnership (“Promote”) and 80% to the partners or members (including the Operating Partnership). All transactions between the Funds and the Operating Partnership have been eliminated in consolidation.
The following table summarizes the general terms and Operating Partnership’s equity interests in the Funds and Mervyns II (dollars in millions):
Entity
FormationDate
OperatingPartnershipShare ofCapital
Capital Called as of September 30, 2022 (b)
UnfundedCommitment (b, c)
Equity InterestHeld ByOperatingPartnership (a)
PreferredReturn
Total Distributions as of September 30, 2022 (b, c)
Fund II and Mervyns II (c,d)
6/2004
61.67
%
557.3
172.5
Fund III
5/2007
24.54
448.1
1.9
603.5
Fund IV
5/2012
23.12
488.1
41.9
221.4
Fund V (e)
8/2016
20.10
347.9
172.1
79.6
Basis of Presentation
Restatement of Prior Year Amounts
As discussed in the Company's 2021 consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021 (the "Annual Report"), the Company restated each of the quarterly and year-to-date periods ended March 31, 2021, June 30, 2021 and September 30, 2021. Amounts as of or for the period ended September 30, 2021 depicted in these interim consolidated financial statements as "As Restated" are taken from the Company's restatement disclosures in the Annual Report on Form 10-K for the year ended December 31, 2021. See the 2021 consolidated financial statements included in the Annual Report for details of the restatement adjustments.
Segments
At September 30, 2022, the Company had three reportable operating segments: Core Portfolio, Funds and Structured Financing. The Company’s chief operating decision maker may review operational and financial data on a property-level basis and does not differentiate properties on a geographical basis for purposes of allocating resources or capital.
Principles of Consolidation
The interim consolidated financial statements include the consolidated accounts of the Company and its investments in partnerships and limited liability companies in which the Company has control, including where the Company has been determined to be a primary beneficiary of a variable interest entity ("VIE"), in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation” (“ASC Topic 810”). The ownership interests of other investors in these entities are recorded as noncontrolling interests. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company consolidates a VIE in which it is considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The Company assesses the accounting treatment and determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and continuously reconsiders that conclusion. In determining whether the Company is the primary beneficiary, it evaluates its control rights as well as economic interests in the entity held either directly or indirectly by the Company. Each entity is assessed on an individual basis to determine the rights provided to each party and whether those rights are protective or participating. For all VIEs, the Company reviews such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity's economic performance.
For those entities evaluated under the voting interest model, the Company consolidates the entity if it has a controlling financial interest. The Company has a controlling financial interest in a voting interest entity (“VOE”) if it owns a majority voting interest in the entity. Investments in entities for which the Company has the ability to exercise significant influence over, but does not have financial or operating control through its voting interest and entities which are VIEs but where the Company is not the primary beneficiary, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings (or losses) of these entities are included in consolidated net income or loss.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods. Such adjustments consisted of normal recurring items.
These interim consolidated financial statements should be read in conjunction with the Company’s 2021 consolidated financial statements included in the Annual Report.
Variable Interest Entities
The Operating Partnership is considered a VIE in which the Company is the primary beneficiary because the limited partners do not have substantive kick-out or participating rights. As of September 30, 2022 and December 31, 2021, the Operating Partnership held interests in the Funds and two consolidated entities owning properties that were determined to be VIEs in which the Company is the primary beneficiary as it has (i) the power to direct the activities of the entity that most significantly impact the entity's economic performance, and (ii) the obligation to absorb the entity's losses or receive benefits from the entity that could potentially be significant to the entity. The majority of the operations of
12
these VIEs are funded with fees earned from investment opportunities or cash flows generated from the properties. The Company has not provided financial support to any of these VIEs that it was not previously contractually required to provide, which consists primarily of funding any capital commitments and capital expenditures, which are deemed necessary to continue to operate the entity and any operating cash shortfalls the entity may experience.
Since the Company conducts its business through and substantially all of its interests are held by the Operating Partnership, the assets and liabilities on the consolidated balance sheets represent the assets and liabilities of the Operating Partnership. As of September 30, 2022 and December 31, 2021, the consolidated balance sheets include the following assets and liabilities of consolidated VIEs of the Operating Partnership:
(dollars in thousands)
September 30, 2022
December 31, 2021
VIE ASSETS
1,468,831
1,482,636
132,612
161,485
725
241,641
200,827
97,025
94,303
2,636
2,935
14,629
9,761
12,573
9,757
17,076
16,126
Total VIE assets (a)
1,987,023
1,978,555
VIE LIABILITIES
766,935
948,045
49,697
162,828
98,694
96,212
2,764
3,077
Total VIE liabilities (a)
918,090
1,210,162
Use of Estimates
GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the interim consolidated financial statements and accompanying notes. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, revenue recognition and the collectability of notes receivable and rents receivable. Application of these estimates and assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
Recently Adopted Accounting and Reporting Guidance
In August 2020, the FASB issued ASU 2020-06—Debt with conversion and other options (Subtopic 470-20) and derivatives and hedging—contracts in entity's own equity (Subtopic 815-40)—accounting for convertible instruments and contracts in an entity's own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU simplifies accounting for convertible instruments and simplifies the diluted earnings per share (EPS) calculation in certain areas. This ASU is effective for fiscal years beginning after December 15, 2021. Currently, the Company does not have any such debt instruments and, as a result, the implementation of this guidance did not have an effect on the Company’s consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04 Modification of Equity-Classified Written Call Options — Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options — to codify how an issuer should account for modifications made to equity-classified written call options (a
warrant to purchase the issuer’s common stock). The guidance in the ASU requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange whether structured as an amendment or reissuance and is effective for all periods beginning after December 15, 2021 with early application permitted. The Company does not currently have any outstanding equity awards with written call options. As a result, the implementation of this guidance did not have an effect on the Company’s consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05 Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. This Update requires a lessor to classify a lease with entirely or partially variable payments that do not depend on an index or rate as an operating lease if another classification (i.e. sales-type or direct financing) would trigger a commencement date selling loss. The guidance in the ASU is effective for all periods beginning after December 15, 2021 with early application permitted and may be applied either retrospectively or prospectively. The Company does not currently have any sales-type or direct financing leases as lessor. As a result, the implementation of this guidance did not have an effect on the Company’s consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01 Reference Rate Reform (Topic 848) which modifies ASC 848, which was intended to provide relief related to “contracts and transactions that reference LIBOR or a reference rate that is expected to be discontinued as a result of reference rate reform.” ASU 2021-01 expands the scope of ASC 848 to include all affected derivatives and give reporting entities the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by the discounting transition. ASU 2021-01 also adds implementation guidance to clarify which optional expedients in ASC 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. Currently, the Company does not anticipate the need to modify any existing debt agreements as a result of reference rate reform in the current year. If any modification is executed as a result of reference rate reform, the Company will elect the optional practical expedient under ASU 2020-04 and 2021-01, which allows entities to account for the modification as if the modification was not substantial. As a result, the implementation of this guidance is not expected to have an effect on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2022, the FASB issued ASU 2022-01 Derivatives and Hedging (Topic 815) Fair Value Hedging—Portfolio Layer Method. The amendments in this Update allow non-prepayable financial assets also to be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby allowing consistent accounting for similar hedges. The guidance in the ASU is effective for all periods beginning after December 15, 2022 with early application permitted and may be applied prospectively. The Company does not currently utilize the portfolio layer method. As a result, the implementation of this guidance is not expected to have an effect on the Company’s consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02 Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. Rather than applying the recognition and measurement guidance for Troubled Debt Restructurings ("TDRs"), an entity must apply the loan refinancing and restructuring guidance in ASC 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. In addition, this Update requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The guidance in the ASU is effective for all periods beginning after December 15, 2022 with early application permitted and may be applied prospectively. The Company does not currently have any financial instruments that meet the definition of a TDR. As a result, the implementation of this guidance is not expected to have an effect on the Company’s consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03 Fair Value Measurement (Topic 820)—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The guidance in this update clarifies how the fair value of equity securities subject to contractual sale restrictions is determined, and amends ASC 820 to clarify that a contractual sale restriction should not be considered in measuring fair value. It also requires entities with investments in equity securities subject to contractual sale restrictions to disclose certain qualitative and quantitative information about such securities. The guidance in the ASU is effective for all periods beginning after December 15, 2023 with early application permitted and may be applied prospectively. The Company's investment in Albertsons is subject to a contractual sale restriction, however, the Company does not consider this sale restriction in measuring its fair value (Note 8). As a result, the implementation of this guidance is not expected to have an effect on the Company’s consolidated financial statements.
14
2. Real Estate
The Company’s consolidated real estate is comprised of the following for the periods presented (in thousands):
Land
829,313
739,641
Buildings and improvements
2,998,230
2,892,051
Tenant improvements
213,316
199,925
Construction in progress
13,117
11,131
Right-of-use assets - finance leases (Note 11)
25,086
Total
4,079,062
3,867,834
Less: Accumulated depreciation and amortization
(704,609
(648,461
Acquisitions and Foreclosure
During the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company acquired (through purchase, investment or foreclosure) the following consolidated retail properties and other real estate investments (dollars in thousands):
Property and Location
PercentAcquired
Date ofAcquisition
PurchasePrice
2022 Acquisitions and Foreclosure
Core
121 Spring Street - New York, NY
100%
Jan 12, 2022
39,637
Williamsburg Collection - Brooklyn, NY (a)
(a)
Feb 18, 2022
97,750
8833 Beverly Boulevard - West Hollywood, CA
Mar 2, 2022
24,117
Henderson Avenue Portfolio - Dallas, TX (b)
Apr 18, 2022
85,192
Subtotal Core
246,696
640 Broadway - New York, NY (Foreclosure) (c)
Jan 26, 2022
59,207
Subtotal Fund III
Total 2022 Acquisitions and Foreclosure
305,903
2021 Acquisitions
14th Street Portfolio - Washington, DC
Dec 23, 2021
26,320
Fund V
Canton Marketplace - Canton, GA
Aug 20, 2021
50,954
Monroe Marketplace - Selinsgrove, PA
Sept 9, 2021
44,796
Monroe Marketplace (Parcel) - Selinsgrove, PA
Nov 12, 2021
1,029
Midstate - East Brunswick, NJ
Dec 14, 2021
71,867
Subtotal Fund V
168,646
Total 2021 Acquisitions
194,966
15
For the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company capitalized $1.2 million and $3.6 million of acquisition costs in connection with the 2022 Acquisitions and Foreclosure and the 2021 Acquisitions, respectively. In addition, during the nine months ended September 30, 2022, the Company expensed $2.0 million of acquisition costs (including a $1.5 million acquisition fee paid to an affiliate of a joint venture partner). Acquisition costs that were expensed are included in General and administrative expenses in the consolidated statements of operations. During the nine months ended September 30, 2022, the Company assumed a $36.0 million mortgage with the consolidation of 640 Broadway and during the year ended December 31, 2021, the Company assumed a $31.8 million mortgage with the acquisition of Canton Marketplace (Note 7).
Purchase Price Allocations
The purchase prices for the 2022 Acquisitions and Foreclosure and 2021 Acquisitions were allocated to the acquired assets and assumed liabilities based on their estimated fair values at the dates of acquisition. The following table summarizes the allocation of the purchase price of properties acquired during the periods presented (in thousands):
Year Ended December 31,
Net Assets Acquired
119,898
37,290
168,862
134,065
Acquisition-related intangible assets (Note 6)
29,016
39,953
Accounts receivable, prepaids and other assets
4,077
(661
Acquisition-related intangible liabilities (Note 6)
(14,126
(16,342
Net assets acquired
307,066
Consideration
Cash
242,633
161,846
Carrying value of note receivable exchanged in foreclosure (Note 3)
5,416
Existing interest in previously unconsolidated investment (Note 4)
Debt assumed
31,801
Liabilities assumed
1,319
Total consideration
Gain on bargain purchase
1,163
16
Dispositions
During the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company disposed of the following consolidated properties and other real estate investments (in thousands):
Owner
Date Sold
Sale Price
Gainon Sale
2022 Dispositions
NE Grocer Portfolio (Selected Assets) - Pennsylvania
Jan 26, 2022 Mar 4, 2022
45,350
13,784
New Towne (Parcel) - Canton, MI
Feb 1, 2022
2,231
1,776
Cortlandt Crossing - Westchester County, NY
Feb 9, 2022
65,533
13,255
Lincoln Place - Fairview Heights, IL
May 25, 2022
40,670
12,216
Wake Forest Crossing - Wake Forest, NC
Aug 24, 2022
38,919
Total 2022 Dispositions
192,703
2021 Dispositions
60 Orange St - Bloomfield, NJ
Jan 29, 2021
16,400
4,612
654 Broadway - New York, NY
May 19, 2021
10,000
111
NE Grocer Portfolio (Selected Assets) - ME
Jun 18, 2021
39,925
5,064
Total 2021 Dispositions (a)
66,325
9,787
Properties Held for Sale or Sold
At September 30, 2022, the Company had one property under contract for sale with assets totaling $11.1 million, which was probable of disposition. The property was classified as "held for sale" on the Company's consolidated balance sheets at September 30, 2022.
The aggregate rental revenue, expenses and pre-tax income reported within continuing operations for the aforementioned consolidated properties that were sold as well as the lease that was terminated (Note 11) during the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands):
929
4,335
5,429
15,997
Expenses
(620
(3,815
(4,112
(14,658
Net income attributable to noncontrolling interests
(7,069
(401
(39,251
(5,583
Net income attributable to Acadia
2,125
119
11,982
6,277
Real Estate Under Development and Construction in Progress
Real estate under development represents the Company’s consolidated properties that have not yet been placed into service while undergoing substantial development or construction.
Development activity for the Company’s consolidated properties comprised the following during the periods presented (dollars in thousands):
January 1, 2022
Nine Months Ended September 30, 2022
Number ofProperties
CarryingValue
Transfers In
CapitalizedCosts
Transfers Out
42,517
9,610
1,854
53,981
Fund II
35,125
1,487
36,612
1
24,296
1,077
25,373
Fund IV (a)
101,835
82
31,523
70,394
4,500
January 1, 2021
Year Ended December 31, 2021
63,875
1,855
23,213
74,657
3,921
43,453
23,104
1,192
85,565
29,758
2,026
15,514
247,201
8,994
82,180
The number of properties in the tables above refers to projects comprising the entire property under development; however, certain projects represent a portion of a property. At September 30, 2022, consolidated development projects included: a portion of City Center and the Henderson Portfolio for the Core Portfolio, portions of City Point Phase I and II at Fund II, Broad Hollow Commons at Fund III, and a portion of 717 N. Michigan Avenue at Fund IV. In addition, at September 30, 2022, the Company had one Core unconsolidated development project, 1238 Wisconsin Avenue.
During the nine months ended September 30, 2022, the Company:
At December 31, 2021, consolidated development projects included: a portion of City Center for Core, portions of City Point Phase I and II at Fund II, Broad Hollow Commons at Fund III and 717 N. Michigan Avenue at Fund IV. In addition, at December 31, 2021, the Company had one Core unconsolidated development project, 1238 Wisconsin Avenue. During the year ended December 31, 2021, the Company:
Construction in progress pertains to construction activity at the Company’s operating properties that are in service and continue to operate during the construction period.
3. Notes Receivable, Net
The Company’s notes receivable, net are generally collateralized either by the underlying properties or the borrowers’ ownership interests in the entities that own the properties, and were as follows (dollars in thousands):
Number
Maturity Date
Interest Rate
Core Portfolio (a)
124,801
154,332
Apr 2020 - Dec 2027
4.65% - 9.00%
Total notes receivable
159,638
Allowance for credit loss
(835
(5,752
During the year ended December 31, 2021, the Company:
Default
One Core Portfolio note aggregating $21.6 million including accrued interest (exclusive of default interest and other amounts due on the loan that have not been recognized) was in default at September 30, 2022 and December 31, 2021. On April 1, 2020, the loan matured and was not repaid. The Company expects to take appropriate actions to recover the amounts due under the loan and has issued a reservation of rights letter to the borrowers and guarantor, reserving all of its rights and remedies under the applicable loan documents and otherwise. The Company has determined that the collateral for this loan is sufficient to cover the loan’s carrying value at September 30, 2022 and December 31, 2021.
Allowance for Credit Losses
The Company monitors the credit quality of its notes receivable on an ongoing basis and considers indicators of credit quality such as loan payment activity, the estimated fair value of the underlying collateral, the seniority of the Company’s loan in relation to other debt secured by the collateral and the prospects of the borrower.
19
Earnings from these notes and mortgages receivable are reported within the Company’s Structured Financing segment (Note 12). Interest receivable is included in Other assets (Note 5).
The Company’s estimated allowance for credit losses related to its Structured Financing segment has been computed for its amortized cost basis in the portfolio, including accrued interest (Note 5), factoring historical loss experience in the United States for similar loans, as adjusted for current conditions, as well as the Company’s expectations related to future economic conditions. Due to the lack of comparability across the Structured Financing portfolio, each loan was evaluated separately. As a result, there were three non-collateral-dependent loans with a total amortized cost of $111.3 million, inclusive of accrued interest of $10.3 million, for which an allowance for credit losses has been recorded aggregating $0.8 million at September 30, 2022. For two loans in this portfolio, aggregating $27.9 million, inclusive of accrued interest of $4.1 million at September 30, 2022, the Company has elected to apply a practical expedient in accordance with ASC 326 and did not establish an allowance for credit losses because (i) these loans are collateral-dependent loans, which due to their settlement terms are not expected to be settled in cash but rather by the Company’s possession of the real estate collateral; and (ii) at September 30, 2022, the Company determined that the estimated fair value of the collateral at the expected realization date for these loans was sufficient to cover the carrying value of its investments in these notes receivable. Impairment charges may be required if and when such amounts are estimated to be nonrecoverable upon a realization event, which is generally at the time a loan is repaid, or in the case of foreclosure, when the underlying asset is sold; however, non-recoverability may also be concluded if it is reasonably certain that all amounts due will not be collected.
4. Investments in and Advances to Unconsolidated Affiliates
The Company accounts for its investments in and advances to unconsolidated affiliates primarily under the equity method of accounting as it has the ability to exercise significant influence, but does not have financial or operating control over the investment, which is maintained by each of the unaffiliated partners who co-invest with the Company. The Company’s investments in and advances to unconsolidated affiliates consist of the following (dollars in thousands):
Ownership Interest
Portfolio
Property
Core:
840 N. Michigan Avenue (a)
88.43%
341
51,513
Renaissance Portfolio
20%
28,904
28,466
Gotham Plaza
49%
29,666
29,187
Georgetown Portfolio (b)
50%
4,109
4,089
1238 Wisconsin Avenue (b)
80%
10,993
5,895
74,013
119,150
Mervyns II:
KLA/ABS (c)
36.7%
102,368
124,316
Fund III:
Self Storage Management (b)
0%
207
640 Broadway (d)
17,825
18,032
Fund IV:
Fund IV Other Portfolio
98.57%
11,877
12,675
650 Bald Hill Road
90%
10,220
11,677
Paramus Plaza
1,022
1,975
23,119
26,327
Fund V:
Family Center at Riverdale (a)
89.42%
11,852
12,449
Tri-City Plaza
8,983
6,827
Frederick County Acquisitions
13,096
10,748
Wood Ridge Plaza
13,289
La Frontera Village
21,097
Shoppes at South Hills
45,436
113,753
30,024
Various:
Due from (to) Related Parties
175
666
Other (e)
3,811
Investments in and advances tounconsolidated affiliates
Crossroads (f)
Distributions in excess of income from,and investments in, unconsolidated affiliates
21
Fees from Unconsolidated Affiliates
The Company earned property management, construction, development, legal and leasing fees from its investments in unconsolidated partnerships totaling $0.1 million, $0.3 million, $0.1 million and $0.4 million for each of the three and nine months ended September 30, 2022 and 2021, respectively, which are included in Other revenues in the consolidated statements of operations.
In addition, the Company's joint ventures paid to certain unaffiliated partners of its joint ventures, $0.5 million, $1.1 million, $0.3 million and $1.0 million for the three and nine months ended September 30, 2022 and 2021, respectively, for leasing commissions, development, management, construction and overhead fees.
22
Summarized Financial Information of Unconsolidated Affiliates
The following combined and condensed Balance Sheets and Statements of operations, in each period, summarize the financial information of the Company’s investments in unconsolidated affiliates that were held as of September 30, 2022, and accordingly exclude the results of any investments disposed of or consolidated prior to that date (in thousands):
Combined and Condensed Balance Sheets
Assets:
Rental property, net
681,799
631,661
14,387
8,112
Other assets
133,731
78,300
Total assets
829,917
718,073
Liabilities and partners’ equity:
Mortgage notes payable
624,043
571,461
99,566
69,166
Partners’ equity
106,308
77,446
Total liabilities and partners’ equity
Company's share of accumulated equity
145,270
113,285
Basis differential
53,061
66,031
Deferred fees, net of portion related to the Company's interest
3,674
4,071
Amounts receivable/payable by the Company
Investments in and advances to unconsolidated affiliates, net of Company's share of distributions in excess of income from and investments in unconsolidated affiliates
202,180
184,053
Investments carried at fair value or cost
106,362
128,334
Company's share of distributions in excess of income from and investments in unconsolidated affiliates
Combined and Condensed Statements of Operations
25,096
18,974
72,167
59,090
Operating and other expenses
(8,443
(7,174
(23,768
(21,584
(7,130
(4,978
(18,458
(15,799
(9,708
(6,785
(24,867
(23,154
Impairment of Investments
(57,423
Gain on disposition of properties (a)
3,206
Net (loss) income attributable to unconsolidated affiliates
(57,608
37
(52,349
1,759
Company’s share of equity in net (loss) income of unconsolidated affiliates
(50,331
910
(45,416
4,951
Income attributable to unconsolidated affiliates recently sold or consolidated
(283
(845
Basis differential amortization
(248
(255
(753
(953
Company’s equity in (losses) earnings of unconsolidated affiliates
23
5. Other Assets, Net and Accounts Payable and Other Liabilities
Other assets, net and accounts payable and other liabilities are comprised of the following for the periods presented:
Other Assets, Net:
Lease intangibles, net (Note 6)
110,620
108,918
Deferred charges, net (a)
26,899
28,438
Derivative financial instruments (Note 8)
56,578
Prepaid expenses
17,077
17,230
Accrued interest receivable (Note 3)
15,098
21,148
Due from seller
3,036
3,364
Income taxes receivable
1,826
2,279
Other receivables
1,527
1,830
Corporate assets, net
1,376
1,648
Deposits
521
1,647
(a) Deferred Charges, Net:
Deferred leasing and other costs
60,695
58,281
Deferred financing costs related to line of credit
9,502
9,953
70,197
68,234
Accumulated amortization
(43,298
(39,796
Deferred charges, net
Accounts Payable and Other Liabilities:
80,544
76,778
62,984
56,580
Deferred income
36,073
38,373
Tenant security deposits, escrow and other
14,509
13,045
Lease liability - finance leases, net (Note 11)
6,917
6,612
45,027
24
6. Lease Intangibles
Upon acquisitions of real estate (Note 2), the Company assesses the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above- and below-market leases, including below-market options and acquired in-place leases) and assumed liabilities. The lease intangibles are amortized over the remaining terms of the respective leases, including option periods where applicable.
Intangible assets and liabilities are included in Other assets, net and Accounts payable and other liabilities (Note 5) on the consolidated balance sheet and summarized as follows (in thousands):
Gross CarryingAmount
AccumulatedAmortization
Net CarryingAmount
Amortizable Intangible Assets
In-place lease intangible assets
303,140
(199,808
103,332
290,819
(189,981
100,838
Above-market rent
24,064
(16,776
7,288
24,191
(16,111
8,080
327,204
(216,584
315,010
(206,092
Amortizable Intangible Liabilities
Below-market rent
(181,202
101,018
(80,184
(171,245
94,871
(76,374
Above-market ground lease
(671
311
(360
267
(404
(181,873
101,329
(80,544
(171,916
95,138
(76,778
25
Amortization of in-place lease intangible assets is recorded in depreciation and amortization expense and amortization of above-market rent and below-market rent is recorded as a reduction to and increase to rental income, respectively, in the consolidated statements of operations. Amortization of above-market ground leases are recorded as a reduction to rent expense in the consolidated statements of operations.
The scheduled amortization of acquired lease intangible assets and assumed liabilities as of September 30, 2022 is as follows (in thousands):
Years Ending December 31,
Net Increase inLease Revenues
Increase toAmortization
Reduction ofRent Expense
Net (Expense) Income
2022 (Remainder)
1,688
(9,484
(7,781
2023
6,397
(31,875
58
(25,420
2024
6,209
(23,616
(17,349
2025
5,792
(17,184
(11,334
2026
5,440
(12,920
(7,422
Thereafter
47,370
(8,253
113
39,230
72,896
(103,332
360
(30,076
26
7. Debt
A summary of the Company’s consolidated indebtedness is as follows (dollars in thousands):
Interest Rate at
Carrying Value at
Maturity Date at
Mortgages Payable
Core Fixed Rate
3.88%-5.89%
Feb 2024 - Apr 2035
$144,326
$145,464
Core Variable Rate - Swapped (a)
3.41%-4.54%
Jun 2026 - Nov 2028
60,390
72,957
Total Core Mortgages Payable
204,716
218,421
Fund II Variable Rate
SOFR+2.61%
LIBOR+2.75% - PRIME+2.00%
Aug 2025
132,259
255,978
Fund III Variable Rate
SOFR+3.35%
LIBOR+2.75%
Jul 2023
34,728
Fund IV Fixed Rate
4.50%
Oct 2025
1,120
Fund IV Variable Rate
LIBOR+1.75%-LIBOR+3.65%
LIBOR+1.60%-LIBOR+3.65%
Oct 2022 - Jun 2026
151,735
221,832
Fund IV Variable Rate - Swapped (a)
3.48%-4.61%
23,316
Total Fund IV Mortgages and Other Notes Payable
152,855
246,268
Fund V Fixed Rate
3.35%
May 2023
Fund V Variable Rate
LIBOR + 1.85% - SOFR + 2.76%
Jun 2023 - Nov 2026
58,136
58,878
Fund V Variable Rate - Swapped (a)
2.51%-5.11%
2.43%-4.78%
Jan 2023 - Apr 2025
337,481
297,731
Total Fund V Mortgages Payable
427,418
388,410
Net unamortized debt issuance costs
(8,352)
(3,958)
Unamortized premium
369
446
Total Mortgages Payable
$945,235
$1,140,293
Unsecured Notes Payable
Core Variable Rate Unsecured Term Loans - Swapped (a)
3.65%-5.32%
Jun 2026 - Jul 2029
$650,000
$400,000
Fund II Unsecured Notes Payable
LIBOR+2.25%
40,000
Fund IV Subscription Facility
SOFR+2.01%
Dec 2022
5,000
Fund V Subscription Facility
SOFR+1.86%
LIBOR+1.90%
49,726
118,028
(5,416)
(3,988)
Total Unsecured Notes Payable
$694,310
$559,040
Unsecured Line of Credit
Core Unsecured Line of Credit - Variable Rate
LIBOR + 1.40%
Jun 2025
$62,050
$46,491
Core Unsecured Line of Credit -Swapped (a)
116,237
66,414
Total Unsecured Line of Credit
$178,287
$112,905
Total Debt - Fixed Rate (b)
$1,341,355
$1,038,803
Total Debt - Variable Rate (c)
489,876
780,935
Total Debt
1,831,231
1,819,738
(13,768)
(7,946)
Total Indebtedness
$1,817,832
$1,812,238
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Credit Facilities
The Company has a $700.0 million senior unsecured credit facility, as amended (the “Credit Facility”), comprised of a $300.0 million senior unsecured revolving credit facility (the “Revolver”) which bears interest at LIBOR + 1.40%, and a $400.0 million senior unsecured term loan (the “Term Loan”) which bears interest at LIBOR + 1.55%. The Revolver matures on June 29, 2025, subject to two six-month extension options, and the Term Loan matures on June 29, 2026. The Credit Facility provides for an accordion feature, which allows for one or more increases in the revolving credit facility or term loan facility, for a maximum aggregate principal amount not to exceed $900.0 million. The Revolver and Term Loan were swapped to fixed rates at September 30, 2022.
On April 6, 2022, the Company entered into a term loan (the "$175.0 Million Term Loan"). The $175.0 Million Term Loan bears interest at SOFR plus 1.5% and matures on April 6, 2027. In addition, during the second quarter of 2022, the Company entered into swaps totaling $150.0 million (Note 8) to fix SOFR at an average rate of 2.5% for borrowings under the $175.0 Million Term Loan. The proceeds of the $175.0 Million Term Loan were used to pay down the Revolver. On July 29, 2022, the Company entered into an additional term loan (the "$75.0 Million Term Loan"). The $75.0 Million Term Loan bears interest at SOFR plus 2.05% and matures on July 29, 2029. The proceeds of the $75.0 Million Term Loan were used to pay down the Revolver. During the third quarter, the Company entered into seven swap agreements with an aggregate notional amount of $175.0 million to fix SOFR at an average rate of 2.5% to hedge its variable interest rate exposure.
Mortgages and Other Notes Payable
During the nine months ended September 30, 2022, the Company (amounts represent balances at the time of transactions):
During the year ended December 31, 2021, the Company (amounts represent balances at the time of transactions):
28
At September 30, 2022 and December 31, 2021, the Company’s mortgages were collateralized by 34 and 37 properties, respectively, and the related tenant leases. Certain loans are cross-collateralized and contain cross-default provisions. The loan agreements contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with affirmative and negative covenants, including the maintenance of debt service coverage and leverage ratios. The Operating Partnership has guaranteed up to $50.0 million of the Fund IV Bridge loan. The Company was not in default on any of its loan agreements at September 30, 2022. A portion of the Company’s variable-rate mortgage debt has been effectively fixed through certain cash flow hedge transactions (Note 8).
Unsecured notes payable for which total availability was $85.3 million and $16.3 million at September 30, 2022 and December 31, 2021, respectively, are comprised of the following:
Unsecured Revolving Line of Credit
At September 30, 2022 and December 31, 2021, the Company had a total of $121.7 million and $183.1 million available under its Revolver, reflecting borrowings of $178.3 million and $112.9 million and letters of credit of $0.0 and $4.0 million, respectively. At September 30, 2022 and December 31, 2021, $116.2 million and $66.4 million, respectively, of outstanding borrowings under its Revolver were swapped to a fixed rate.
29
Scheduled Debt Principal Payments
The scheduled principal repayments, without regard to available extension options (described further below), of the Company’s consolidated indebtedness, as of September 30, 2022 are as follows (in thousands):
Year Ending December 31,
85,273
302,526
211,448
417,902
445,818
368,264
(13,768
Total indebtedness
1,817,832
The table above does not reflect available extension options (subject to customary conditions) on consolidated debt with balances as of September 30, 2022 of $57.9 million contractually due in the remainder of 2022 and $41.1 million contractually due in 2023; most for which the Company has available options to extend by up to 12 months and for some an additional 12 months thereafter. However, there can be no assurance that the Company will be able to successfully execute any or all of its available extension options.
See Note 4 for information about liabilities of the Company’s unconsolidated affiliates.
8. Financial Instruments and Fair Value Measurements
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps and interest rate swaps; and Level 3, for financial instruments or other assets/liabilities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring the Company to develop its own assumptions.
Items Measured at Fair Value on a Recurring Basis
The methods and assumptions described below were used to estimate the fair value of each class of financial instrument.
Money Market Funds — The Company has money market funds, which at times have zero balances and are included in Cash and cash equivalents in the consolidated balance sheets, and are comprised of government securities and/or U.S. Treasury bills. These funds were classified as Level 1 which include quoted prices from active markets to determine their fair values.
Equity Investments –Albertsons became publicly traded during 2020 (Note 4). Upon Albertsons’ IPO, the Company’s Investment in Albertsons has a readily determinable market value (traded on an exchange) and is being accounted for as a Level 1 investment.
Derivative Assets — The Company has derivative assets, which are included in Other assets, net on the consolidated balance sheets, and are comprised of interest rate swaps and caps. The derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. See “Derivative Financial Instruments,” below.
Derivative Liabilities — The Company has derivative liabilities, which are included in Accounts payable and other liabilities on the consolidated balance sheets, and are comprised of interest rate swaps. These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 because they are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. See “Derivative Financial Instruments,” below.
30
The Company did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during the nine months ended September 30, 2022 or December 31, 2021.
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis (in thousands):
Level 1
Level 2
Level 3
Assets
Money market funds
Derivative financial instruments
Investment in Albertsons (Note 4)
Liabilities
(6
(45,027
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
31
Items Measured at Fair Value on a Nonrecurring Basis
Impairment Charges
During 2022, the Company reduced its holding period and intended use, and projected operating income at certain properties. During 2021, the Company was impacted by the COVID-19 Pandemic, which caused the Company to reduce its forecasted operating income at certain properties. As a result, several impairments were recorded. Impairment charges for the periods presented are as follows (in thousands):
Impairment Charge
Triggering Event
Level 3 Inputs
Effective Date
Acadia's Share
2022 Impairment Charges
146 Geary Street,San Francisco, CA
Reduced projected operating income
Projections of: holding period, net operating income, cap rate, incremental costs
Sept 30, 2022
12,435
2,875
717 N. Michigan Avenue,Chicago, IL
Reduced holding period and intended use
Offering price
20,876
4,827
Total 2022 Impairment Charges
7,702
2021 Impairment Charges
210 Bowery commercial unit,New York, NY
Sept 30, 2021
3,016
27 E. 61st StreetNew York, NY
6,909
1,597
Total 2021 Impairment Charges
2,294
32
Derivative Financial Instruments
The Company had the following interest rate swaps and caps for the periods presented (dollars in thousands):
Strike Rate
Fair Value
DerivativeInstrument
Aggregate Notional Amount
Low
High
Balance SheetLocation
September 30,2022
December 31,2021
Interest Rate Swaps
10,237
Dec 2012
3.77
Other Liabilities
(40,650
Interest Rate Swap
816,390
Mar 2015 - Aug 2022
Mar 2023 - Jul 2030
1.71
3.05
Other Assets
45,045
826,627
45,039
Interest Rate Caps
Jul 2022
3.50
196
Mar 2017 - Jan 2019
Apr 2022
1.97
2.61
(167
71,338
Dec 2020 - Jul 2021
Dec 2022-Jul 2023
3.00
179
(160
Jun 2018 - Apr 2022
Oct 2022 - Apr 2025
0.91
2.88
11,158
(4,210
Total asset derivatives
Total liability derivatives
All of the Company’s derivative instruments have been designated as cash flow hedges and hedge the future cash outflows on variable-rate debt (Note 7). It is estimated that approximately $19.3 million included in Accumulated other comprehensive income related to derivatives will be reclassified to interest expense within the next twelve months. As of September 30, 2022 and December 31, 2021, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated hedges.
During the first quarter of 2021, the Company terminated two interest rate swaps with forward effective dates with an aggregate notional value of $100.0 million for cash proceeds of $3.4 million. As the hedged forecasted transaction is still expected, amounts deferred in Accumulated other comprehensive loss will be amortized into earnings as a reduction of interest expense over the original term of the swaps beginning in 2022.
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and, from time to time, through the use of derivative financial instruments. The Company enters into derivative financial instruments to manage exposures that result in the receipt or payment of future known and uncertain cash amounts, the values of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
The Company is exposed to credit risk in the event of non-performance by the counterparties to the swaps if the derivative position has a positive balance. The Company believes it mitigates its credit risk by entering into swaps with major financial institutions. The Company continually monitors and actively manages interest costs on its variable-rate debt portfolio and may enter into additional interest rate swap positions or other derivative interest rate instruments based on market conditions.
Credit Risk-Related Contingent Features
The Company has agreements with each of its swap counterparties that contain a provision whereby if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its swaps, resulting in an acceleration of payment under the swaps.
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Other Financial Instruments
The Company’s other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands, inclusive of amounts attributable to noncontrolling interests where applicable):
Level
CarryingAmount
EstimatedFair Value
Notes Receivable (a)
123,439
154,093
City Point Loan (a)
65,809
Mortgage and Other Notes Payable (a)
953,218
913,758
1,143,805
1,125,571
Investment in non-traded equity securities (b)
3,839
5,790
3,656
Unsecured notes payable and Unsecured line of credit (c)
878,013
869,530
675,933
680,171
The Company’s cash and cash equivalents, restricted cash, rents receivable, accounts payable and certain financial instruments included in other assets and other liabilities had fair values that approximated their carrying values due to their short maturity profiles at September 30, 2022.
9. Commitments and Contingencies
The Company is involved in various matters of litigation arising out of, or incidental to, its business. While the Company is unable to predict with certainty the outcome of any particular matter, management does not expect, when such litigation is resolved, that the Company’s resulting exposure to loss contingencies, if any, will have a material adverse effect on its consolidated financial position.
Commitments and Guaranties
In conjunction with the development and expansion of various properties, the Company has entered into agreements with general contractors for the construction or development of properties aggregating approximately $37.2 million and $38.1 million as of September 30, 2022 and December 31, 2021, respectively.
At September 30, 2022 and December 31, 2021, the Company had Core and Fund letters of credit outstanding of $7.0 million and $19.7 million, respectively (Note 7). The Company has not recorded any obligation associated with these letters of credit. The majority of the letters of credit are collateral for existing indebtedness and other obligations of the Company.
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10. Shareholders’ Equity, Noncontrolling Interests and Other Comprehensive Loss
Common Shares and Units
In addition to the ATM Program activity discussed below, the Company completed the following transactions in its Common Shares during the nine months ended September 30, 2022:
In addition to the ATM Program activity discussed below, the Company completed the following transactions in its Common Shares during the year ended December 31, 2021:
ATM Program
The Company has an at-the-market equity issuance program (“ATM Program”) that provides the Company an efficient vehicle for raising public equity capital to fund its needs. The Company entered into its current $250.0 million ATM Program, which includes an optional “forward purchase” component, in the first quarter of 2022. The Company sold 5,525,419 Common Shares under its ATM Program during the nine months ended September 30, 2022 generating $123.9 million of gross proceeds and $119.5 million of net proceeds after related issuance costs at a weighted-average price per share of $22.43 and $21.65, respectively. No such sales were made during the three months ended September 30, 2022. The Company did not sell or issue any Common Shares on a forward basis for the nine months ended September 30, 2022 or the year ended December 31, 2021 and at September 30, 2022 had approximately $222.3 million of availability under the ATM program.
Share Repurchase Program
During 2018, the Company’s board of trustees (the “Board”) approved a new share repurchase program, which authorizes management, at its discretion, to repurchase up to $200.0 million of its outstanding Common Shares. The program does not obligate the Company to repurchase any specific number of Common Shares and may be discontinued or extended at any time. The Company did not repurchase any shares during the nine months ended September 30, 2022 or 2021. Under the share repurchase program $122.6 million remains available as of September 30, 2022.
35
Dividends and Distributions
The following table sets forth the distributions declared and/or paid during the periods presented:
Date Declared
Amount Per Share
Record Date
Payment Date
March 15, 2021
0.15
March 31, 2021
April 15, 2021
May 5, 2021
June 30, 2021
July 15, 2021
August 5, 2021
September 30, 2021
October 15, 2021
November 3, 2021
January 14, 2022
February 15, 2022
0.18
March 31, 2022
April 14, 2022
May 4, 2022
June 30, 2022
July 15, 2022
August 10, 2022
October 14, 2022
Accumulated Other Comprehensive Income (Loss)
The following tables set forth the activity in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Gains or Losseson DerivativeInstruments
Other comprehensive income before reclassifications - swap agreements
Net current period other comprehensive income
Net current period other comprehensive loss attributable to redeemable noncontrolling interests
Net current period other comprehensive income attributable to noncontrolling interests
(7,188
(1,784
36
(21,779
(8,829
Noncontrolling Interests
The following tables summarize the change in the noncontrolling interests for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands):
NoncontrollingInterests inOperatingPartnership (a)
NoncontrollingInterests inPartially-OwnedAffiliates (b)
Redeemable Noncontrolling Interests (c)
103,068
567,538
-
Distributions declared of $0.18 per Common OP Unit and distributions on Preferred OP Units
Net loss for the three months ended September 30, 2022
(2,958
(27,503
(30,461
Conversion of 20,000 Common OP Units to Common Shares by limited partners of the Operating Partnership
Other comprehensive income - unrealized gain on valuation of swap agreements
2,145
4,877
7,022
Reclassification of realized interest expense on swap agreements
161
166
Acquisition of noncontrolling interest (d)
Employee Long-term Incentive Plan Unit Awards
Reclassification of redeemable noncontrolling interests(e)
Reallocation of noncontrolling interests (f)
103,292
403,009
95,088
524,010
Distributions declared of $0.15 per Common OP Unit and distributions on Preferred OP Units
Net income for the three months ended September 30, 2021
872
18,193
19,065
Conversion of 18,000 Common OP Units to Common Shares by limited partners of the Operating Partnership
Cancellation of OP units(g)
Other comprehensive loss - unrealized gain (loss) on valuation of swap agreements
227
(258
(31
53
1,762
1,815
94,786
543,098
38
94,120
534,202
Distributions declared of $0.54 per Common OP Unit and distributions on Preferred OP Units
Net loss for the nine months ended September 30, 2022
(1,686
(16,967
(18,653
Conversion of 71,307 Common OP Units to Common Shares by limited partners of the Operating Partnership
4,780
13,840
18,620
80
3,079
3,159
89,431
519,734
Distributions declared of $0.45 per Common OP Unit
Net income for the nine months ended September 30, 2021
1,738
9,948
11,686
Conversion of 43,973 Common OP Units to Common Shares by limited partners of the Operating Partnership
1,723
1,630
3,353
159
5,317
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Preferred OP Units
There were no issuances of Preferred OP Units during the nine months ended September 30, 2022 or the year ended December 31, 2021.
In 1999, the Operating Partnership issued 1,580 Series A Preferred OP Units in connection with the acquisition of a property, which have a stated value of $1,000 per unit, and are entitled to a preferred quarterly distribution of the greater of (i) $22.50 (9% annually) per Series A Preferred OP Unit or (ii) the quarterly distribution attributable to a Series A Preferred OP Unit if such unit was converted into a Common OP Unit. Through September 30, 2022, 1,392 Series A Preferred OP Units were converted into 185,600 Common OP Units and then into Common Shares. The 188 remaining Series A Preferred OP Units are currently convertible into Common OP Units based on the stated value divided by $7.50. Either the Company or the holders can currently call for the conversion of the Series A Preferred OP Units at the lesser of $7.50 or the market price of the Common Shares as of the conversion date.
During 2016, the Operating Partnership issued 442,478 Common OP Units and 141,593 Series C Preferred OP Units to a third party to acquire Gotham Plaza (Note 4). The Series C Preferred OP Units have a value of $100.00 per unit and are entitled to a preferred quarterly distribution of $0.9375 per unit and are convertible into Common OP Units at a rate based on the share price at the time of conversion. If the share price is below $28.80 on the conversion date, each Series C Preferred OP Unit will be convertible into 3.4722 Common OP Units. If the share price is between $28.80 and $35.20 on the conversion date, each Series C Preferred OP Unit will be convertible into a number of Common OP Units equal to $100.00 divided by the closing share price. If the share price is above $35.20 on the conversion date, each Series C Preferred OP Unit will be convertible into 2.8409 Common OP Units. The Series C Preferred OP Units have a mandatory conversion date of December 31, 2025, at which time all units that have not been converted will automatically be converted into Common OP Units based on the same calculations. Through September 30, 2022, 15,000 Series C Preferred OP Units were converted into 51,887 Common OP Units and then into Common Shares.
Redeemable Noncontrolling Interests
Williamsburg Portfolio
In connection with the Williamsburg Portfolio acquisition in February 2022 (Note 2), the Company evaluated the Williamsburg Noncontrolling Interest ("NCI"), which represents the venture partner's one-time right to put its 50.01% interest in the property to the Company for redemption at fair value at a future date. As it was unlikely as of the acquisition date that the venture partner would receive any consideration on redemption due to the Company’s preferential returns, the amount of the senior debt that would accrue and the estimated fair value of the property, the initial fair value of the Williamsburg NCI was determined to be zero. The Company is required to periodically evaluate the NCI and adjust it to fair value, should it become likely that the venture partner would receive consideration for exercising its put right. At September 30, 2022, the Company determined that the fair value of the Williamsburg NCI was zero.
In August 2022, the Company provided a loan, through a separate lending subsidiary, to other Fund II investors in City Point, through a separate borrower subsidiary, to fund the investors' pro rata contribution necessary to complete the refinancing of the City Point debt (Note 7), of which $65.9 million was funded at closing ("City Point Loan"). The City Point Loan has a five-year term which matures on August 1, 2027, and is collateralized by the investors' equity in City Point ("City Point NCI"). Because the City Point Loan was granted in return for a capital contribution from the investors, and is collateralized by the City Point NCI, the City Point Loan, net of a $0.5 million allowance for credit loss, and accrued interest are presented as a reduction of the City Point NCI balance. The borrower subsidiary of the City Point Loan was determined to be a variable interest entity ("VIE") for which the Company is not the primary beneficiary. The maximum loss in the VIE is limited to the amount of the City Point Loan.
In connection with the City Point Loan, each partner has a one-time right to put its City Point NCI to the Company for redemption in exchange for the settlement of its proportion of the City Point Loan amount plus either (i) a fixed cash amount or (ii) a cash amount equal to the value of fixed number of common shares of the Company on the trading day prior to the election, at a future point in time beginning in August 2023 ("redemption value"). As a result of granting these redemption rights, the City Point NCI, net of the City Point Loan, has been reclassified and presented as redeemable noncontrolling interests on the Company's consolidated balance sheets. Given the carrying value of the City Point NCI at the time of the transaction exceeded the maximum redemption value, the Company did not recognize any initial adjustment to accrete the City Point NCI to the redemption value. The Company is required to periodically evaluate the maximum redemption amount of the NCI interest and recognize an increase in the carrying value of the City Point NCI if the redemption value exceeds the then current carrying value. At September 30, 2022, the Company determined that the carrying value exceeded the maximum redemption value and no adjustment was required.
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11. Leases
As Lessor
The Company is engaged in the operation of shopping centers and other retail properties that are either owned or, with respect to certain shopping centers, operated under long-term ground leases that expire at various dates through June 20, 2066, with renewal options (as discussed further below). Space in the shopping centers are leased to tenants pursuant to agreements that provide for terms ranging generally from one month to sixty years and generally provide for additional rents based on certain operating expenses as well as tenants’ sales volumes. During the nine months ended September 30, 2022 and 2021, the Company earned $44.3 million and $42.1 million, respectively in variable lease revenues, primarily for real estate taxes and common area maintenance charges, which are included in rental income in the consolidated statements of operations.
Reserve Analysis
The activity for the reserves related to billed rents and straight-line rents (including those under specific operating leases where the collection of rents is assessed to be not probable) is as follows:
Balance atBeginning ofPeriod
Provision (Recovery), Net
Adjustmentsto ValuationAccounts
Write-Offs
Balance atEnd of Period
Allowance for credit loss - billed rents
23,586
(4,383
18,424
Straight-line rent reserves
14,885
(1,347
13,459
Total - rents receivable
38,471
(858
(5,730
31,883
Tenant Settlement
On September 24, 2021, the Company entered into a conditional settlement agreement with its former tenant ("Former Tenant") and lease guarantor at one of its Core properties for the payment by Former Tenant and guarantor of a minimum of $5.4 million in accordance with a payment schedule set forth and subject to the terms in the conditional settlement agreement. The payments relate to the Former Tenant’s default under the lease and its subsequent termination by the Company. Given the inherent uncertainties involving collectability, the Company has deferred any amounts not received in its consolidated financial statements and such amounts will be recognized when realized. Through September 30, 2022 the Company had received a total of $2.4 million, of which $0 and $2.4 million was recognized as credit loss recoveries and included in Rental income on the statement of operations during the three and nine months ended September 30, 2022, respectively.
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As Lessee
During the nine months ended September 30, 2022, there were no leasing transactions where the Company acted as lessee.
Additional disclosures regarding the Company’s leases as lessee are as follows:
Lease Cost
Finance lease cost:
Amortization of right-of-use assets
226
677
Interest on lease liabilities
103
97
305
289
Subtotal
329
323
982
966
Operating lease cost
1,334
4,004
5,850
Variable lease cost
63
57
Total lease cost
1,684
1,680
5,049
6,873
Weighted-average remaining lease term - finance leases (years)
32.1
32.8
Weighted-average remaining lease term - operating leases (years)
13.6
14.2
Weighted-average discount rate - finance leases
6.3
Weighted-average discount rate - operating leases
5.1
Right-of-use assets – finance leases are included in Operating real estate (Note 2) in the consolidated balance sheets. Lease liabilities – finance leases are included in Accounts payable and other liabilities in the consolidated balance sheets (Note 5). Operating lease cost comprises amortization of right-of-use assets for operating properties (related to ground rents) or amortization of right-of-use assets for office and corporate assets and is included in Property operating expense or General and administrative expense, respectively, in the consolidated statements of operations. Finance lease cost comprises amortization of right-of-use assets for certain ground leases, which is included in Property operating expense, as well as interest on lease liabilities, which is included in Interest expense in the consolidated statements of operations.
42
Lease Obligations
The scheduled future minimum (i) rental revenues from rental properties under the terms of non-cancelable tenant leases greater than one year (assuming no new or renegotiated leases or option extensions for such premises) and (ii) rental payments under the terms of all non-cancelable operating and finance leases in which the Company is the lessee, principally for office space, land and equipment, as of September 30, 2022, are summarized as follows (in thousands):
Minimum Rental Payments
Minimum RentalRevenues (a)
Operating Leases (b)
Finance Leases (b)
53,052
1,343
225,554
5,389
210,504
5,414
179,257
5,329
152,019
5,173
638,628
24,437
12,549
1,459,014
47,085
Interest
(10,928
(5,632
During the three and nine months ended September 30, 2022 and 2021, no single tenant or property collectively comprised more than 10% of the Company’s consolidated total revenues.
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12. Segment Reporting
The Company has three reportable segments: Core Portfolio, Funds and Structured Financing. The Company’s Core Portfolio consists primarily of high-quality retail properties located primarily in high-barrier-to-entry, densely-populated metropolitan areas with a long-term investment horizon. The Company’s Funds hold primarily retail real estate in which the Company co-invests with high-quality institutional investors. The Company’s Structured Financing segment consists of earnings and expenses related to notes and mortgages receivable which are held within the Core Portfolio or the Funds (Note 3). Fees earned by the Company as the general partner or managing member of the Funds are eliminated in the Company’s consolidated financial statements and are not presented in the Company’s segments.
The following tables set forth certain segment information for the Company (in thousands):
For the Three Months Ended September 30, 2022
CorePortfolio
Funds
StructuredFinancing
Unallocated
50,076
29,870
(18,811
(14,933
(33,744
Property operating expenses and real estate taxes
(14,808
(10,751
(25,559
General and administrative expenses
(10,170
(33,311
Operating income (loss)
16,457
(20,240
Realized and unrealized holding losses on investments and other
(7,257
(605
Equity in losses of unconsolidated affiliates
(49,806
(773
(10,428
(10,734
Income tax benefit
Net loss
(43,777
(39,004
3,389
(10,153
Net loss attributable to noncontrolling interests
2,884
27,577
Net loss attributable to Acadia
(40,893
(8,234
For the Three Months Ended September 30, 2021 (As Restated)
45,942
25,954
(17,678
(12,386
(30,064
(13,911
(9,560
(23,471
(9,910
(9,925
14,353
(5,917
Realized and unrealized holding gains (losses) on investments and other
47,643
(1,150
(485
857
(7,322
(9,292
Income tax provision
Net income
6,546
33,291
1,204
(9,969
(912
(18,153
5,634
15,138
As of or for the Nine Months Ended September 30, 2022
151,650
94,062
(56,547
(45,881
(102,428
(44,379
(31,005
(75,384
(32,768
Operating income
50,724
33,781
(19,073
(505
(47,402
1,233
(26,543
(31,766
(22,058
(15,825
9,385
(32,775
1,398
17,255
(20,660
4,623
Real estate at cost (a)
2,614,103
1,651,319
4,265,422
2,636,041
1,603,491
Cash paid for acquisition of real estate
Cash paid for development and property improvement costs
22,325
14,538
36,863
As of or for the Nine Months Ended September 30, 2021 As Restated
134,292
78,848
(51,898
(39,346
(91,244
(41,773
(30,963
(72,736
(29,555
5,909
45,233
4,523
57,031
(3,571
(944
4,097
(21,863
(28,439
22,426
37,212
2,537
(29,954
(1,926
(9,760
20,500
27,452
2,328,208
1,737,786
4,065,994
2,201,871
1,827,565
154,849
4,184,285
63,425
11,601
14,334
25,935
45
13. Share Incentive and Other Compensation
Share Incentive Plan
The 2020 Share Incentive Plan (the “Share Incentive Plan”) authorizes the Company to issue options, Restricted Shares, LTIP Units and other securities (collectively “Awards”) to, among others, the Company’s officers, trustees and employees. At September 30, 2022 a total of 1,551,407 shares remained available to be issued under the Share Incentive Plan.
Restricted Shares and LTIP Units - Employees
During the nine months ended September 30, 2022, and the year ended December 31, 2021, the Company issued 600,672 and 636,646 LTIP Units and 13,178 and 11,244 restricted share units (“Restricted Share Units”), respectively, to employees of the Company pursuant to the Share Incentive Plan. These awards were measured at their fair value on the grant date, incorporating the following factors:
For valuation of the 2022 and 2021 Performance Shares, a Monte Carlo simulation was used to estimate the fair values based on probability of satisfying the market conditions and the projected share prices at the time of payments, discounted to the valuation dates over the three-year performance periods. The assumptions include volatility (49.0% and 48.0%) and risk-free interest rates of (1.7% and 0.2%) for 2022 and 2021, respectively. The total value of the 2022 and 2021 Performance Shares will be expensed over the vesting period regardless of the Company’s performance.
The total value of the above Restricted Share Units and LTIP Units as of the grant date was $13.0 million during the nine months ended September 30, 2022 and $12.6 million during the year ended December 31, 2021. Total long-term incentive compensation expense, including the expense related to the Share Incentive Plan, was $1.9 million and $2.3 million for the three months ended September 30, 2022 and 2021, and $5.1 million and $7.1 million for the nine months ended September 30, 2022 and 2021, respectively and is recorded in General and administrative expense in the consolidated statements of operations.
Restricted Shares and LTIP Units - Board of Trustees
In addition, members of the Board have been issued shares and units under the Share Incentive Plan. During the nine months ended September 30, 2022, the Company issued 28,555 LTIP Units and 29,935 Restricted Share Units as compensation to the Trustees of the Company. A portion of the LTIP Units and Restricted Share Units vest over three years with 33% vesting May 9, 2023 and the remaining amount vesting ratably on May 9, 2024 and May 9, 2025. The remaining awards vest on May 9, 2023. The Restricted Shares do not carry voting rights or other rights of Common Shares until vesting and may not be transferred, assigned or pledged until the recipients have a vested non-forfeitable right to such shares. Dividends are not paid currently on unvested Restricted Shares, but are paid cumulatively from the issuance date through the applicable vesting date of such Restricted Shares. Total trustee fee expense, including the expense related to the Share Incentive Plan, was $1.2 million for each of the nine months ended September 30, 2022 and 2021, respectively, and is recorded in General and Administrative expense in the consolidated statements of operations.
46
Long-Term Incentive Alignment Program
In 2009, the Company adopted the Long-Term Incentive Alignment Program (the “Program”) pursuant to which the Company may grant awards to employees, entitling them to receive up to 25% of any potential future payments of Promote to the Operating Partnership from Funds III, IV and V. The Company has granted such awards to employees representing 25% of the potential Promote payments from Fund III to the Operating Partnership, 23.1% of the potential Promote payments from Fund IV to the Operating Partnership and 10.7% of the potential Promote payments from Fund V to the Operating Partnership. Payments to senior executives under the Program require further Board approval at the time any potential payments are due pursuant to these grants. Compensation relating to these awards will be recognized in each reporting period in which Board approval is granted.
As payments to other employees are not subject to further Board approval, compensation relating to these awards will be recorded based on the estimated fair value at each reporting period in accordance with ASC Topic 718, Compensation– Stock Compensation. The awards in connection with Fund IV were determined to have no intrinsic value as of September 30, 2022 or December 31, 2021.
The Company recognized $0.4 million and $0.1 million of compensation expense for Funds III and V, respectively for the nine months ended September 30, 2022 related to the Program in connection with the resignation of an employee. No compensation expense was recognized for the year ended December 31, 2021 related to the Program.
A summary of the status of the Company’s unvested Restricted Shares and LTIP Units is presented below:
Unvested Restricted Shares and LTIP Units
CommonRestrictedShares
WeightedGrant-DateFair Value
LTIP Units
Unvested at December 31, 2020
89,911
15.42
1,122,889
24.38
Granted
43,078
19.94
666,967
19.48
Vested
(43,084
16.85
(283,024
26.66
Forfeited
(159
36.22
(91,637
Unvested at December 31, 2021
89,746
16.87
1,415,195
20.85
43,113
21.36
629,227
21.16
(38,194
(308,608
22.88
(1,930
31.82
(278,332
31.16
Unvested at September 30, 2022
92,735
17.31
1,457,482
18.59
The weighted-average grant date fair value for Restricted Shares and LTIP Units granted for the nine months ended September 30, 2022 and the year ended December 31, 2021 were $21.17 and $19.51, respectively. As of September 30, 2022, there was $18.2 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Share Incentive Plan. That cost is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of Restricted Shares that vested during the nine months ended September 30, 2022 and the year ended December 31, 2021, was $0.8 million and $0.8 million, respectively. The total fair value of LTIP Units that vested (LTIP units vest primarily during the first quarter) during the nine months ended September 30, 2022 and the year ended December 31, 2021, was $7.1 million and $7.5 million, respectively.
Other Plans
On a combined basis, the Company incurred a total of $0.4 million and $0.3 million of compensation expense related to the following employee benefit plans for the nine months ended September 30, 2022 and 2021, respectively.
Employee Share Purchase Plan
The Acadia Realty Trust Employee Share Purchase Plan (the “Purchase Plan”), allows eligible employees of the Company to purchase Common Shares through payroll deductions. The Purchase Plan provides for employees to purchase Common Shares on a quarterly basis at a 15% discount to the closing price of the Company’s Common Shares on either the first day or the last day of the quarter, whichever is lower. A participant may not purchase more than $25,000 in Common Shares per year. Compensation expense will be recognized by the Company to the extent of the above discount to the closing price of the Common Shares with respect to the applicable quarter. A total of 6,188 and 6,111 Common Shares were purchased by employees under the Purchase Plan for the nine months ended September 30, 2022 and 2021, respectively.
47
Deferred Share Plan
The Company maintains a Trustee Deferral and Distribution Election program, under which the participating Trustees earn deferred compensation.
Employee 401(k) Plan
The Company maintains a 401(k) plan for employees under which the Company currently matches 50% of a plan participant’s contribution up to 6% of the employee’s annual salary. A plan participant may contribute up to a maximum of 15% of their compensation, up to $20,500, for the year ending December 31, 2022.
48
14. Earnings Per Common Share
Basic earnings per Common Share is computed by dividing net income attributable to Common Shareholders by the weighted-average Common Shares outstanding (Note 10). During the periods presented, the Company had unvested LTIP Units which provide for non-forfeitable rights to dividend equivalent payments. Accordingly, these unvested LTIP Units are considered participating securities and are included in the computation of basic earnings per Common Share pursuant to the two-class method.
Diluted earnings per Common Share reflects the potential dilution of the conversion of obligations and the assumed exercises of securities including the effects of Restricted Share Units issued under the Company’s Share Incentive Plans (Note 13). The effect of such shares is excluded from the calculation of earnings per share when anti-dilutive as indicated in the table below.
The effect of the conversion of Common OP Units is not reflected in the computation of basic and diluted earnings per share, as they are exchangeable for Common Shares on a one-for-one basis. The income allocable to such units is allocated on this same basis and reflected as noncontrolling interests in the accompanying consolidated financial statements. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings per share.
Numerator:
Less: net income attributable to participating securities
(198
(156
(468
(Loss) income from continuing operations net of income attributable to participating securities for basic (loss) earnings per share
(56,089
11,851
20,067
Impact of City Point Loan share conversion option (a)
(1,804
(Loss) income from continuing operations net of income attributable to participating securities for diluted (loss) earnings per share
(57,893
(41,231
Denominator:
Weighted average shares for basic earnings per share
94,980,333
88,480,844
94,757,678
87,217,422
Effect of dilutive securities:
Series A Preferred OP Units
Employee unvested restricted shares
City Point Loan common stock conversion option (Note 10) (a)
270,635
91,203
Denominator for diluted earnings per share
95,250,968
94,848,881
Basic (loss) earnings per Common Share from continuing operations attributable to Acadia
Diluted (loss) earnings per Common Share from continuing operations attributable to Acadia
Anti-Dilutive Shares Excluded from Denominator:
188
Series A Preferred OP Units - Common share equivalent
25,067
Series C Preferred OP Units
126,593
Series C Preferred OP Units - Common share equivalent
439,556
Restricted shares
69,832
70,827
49
15. Subsequent Events
On October 7, the Company sold a land parcel in its Henderson Avenue Portfolio in Dallas, Texas, for $3.0 million.
On October 13, 2022, Fund IV disposed of an unconsolidated property for $46.1 million.
Financing Activities
On October 31, 2022, Fund IV extended a mortgage on a property with an outstanding balance of $25.5 million to mature on April 28, 2023, pursuant to an existing extension option.
50
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
As of September 30, 2022, we own or have an ownership interest in 202 properties held through our Core Portfolio and Funds. Our Core Portfolio consists of those properties either 100% owned, or partially owned through joint venture interests, by the Operating Partnership or its subsidiaries, not including those properties owned through our Funds. These properties primarily consist of street and urban retail, and dense suburban shopping centers. Our Funds are investment vehicles through which our Operating Partnership and outside institutional investors invest in primarily opportunistic and value-add retail real estate. Currently, we have active investments in four Funds. A summary of our wholly-owned and partially-owned retail properties and their physical occupancies at September 30, 2022 is as follows:
Number of Properties
Operating Properties
Development orRedevelopment
Operating
GLA
Occupancy
Core Portfolio:
Chicago Metro
693,999
85.0
New York Metro
394,032
89.9
Los Angeles Metro
23,757
100.0
San Francisco Metro
0.0
Dallas Metro
121,715
90.2
Washington DC Metro
343,086
77.9
Boston Metro
55,276
Suburban
4,004,480
91.0
Total Core Portfolio
143
5,636,345
89.5
Acadia Share of Total Core Portfolio
5,265,384
91.2
Fund Portfolio:
541,070
51.7
4,637
91.6
978,152
6,726,859
Total Fund Portfolio
8,250,718
87.8
Acadia Share of Total Fund Portfolio
1,820,858
83.8
Total Core and Funds
192
13,887,063
88.5
Acadia Share of Total Core and Funds
7,086,242
89.3
The majority of our operating income is derived from rental revenues from operating properties, including expense recoveries from tenants, offset by operating and overhead expenses.
Our primary business objective is to acquire and manage commercial retail properties that will provide cash for distributions to shareholders while also creating the potential for capital appreciation to enhance investor returns. Generally, we focus on the following fundamentals to achieve this objective:
Some of these investments historically have also included, and may in the future include, joint ventures with private equity investors for the purpose of making investments in operating retailers with significant embedded value in their real estate assets.
SIGNIFICANT DEVELOPMENTS DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2022
Investments
During the nine months ended September 30, 2022, we made four new consolidated investments in our Core Portfolio and Fund V acquired three unconsolidated properties totaling $425.0 million, as described below (Note 2, Note 4):
On June 27, 2022, we made an $18.5 million investment in Fund II and Mervyns II increasing our ownership in each by 11.67% to 40.00%. On August 1, 2022, we made an additional $5.8 million investment in City Point and increased our ownership in Fund II by 21.67% to 61.67% (Note1).
In addition and as discussed below, Fund III obtained the venture partner's interest in its 640 Broadway investment through a foreclosure proceeding and subsequently consolidated the property (Note 2, Note 4).
52
Dispositions of Real Estate
During the nine months ended September 30, 2022, we disposed of five consolidated Fund properties, one land parcel and one unconsolidated investment as follows:
We recognized aggregate gains of $49.9 million on the sales of the above properties, excluding the gain recognized on the sale of our unconsolidated interest in Self Storage Management, during the nine months ended September 30, 2022, of which our share is $16.2 million.
Financing Activity
During the nine months ended September 30, 2022, we (Note 7):
Structured Financing Investments
In January 2022, as discussed above, Fund III foreclosed upon its $5.3 million note receivable, which had previously been in default. In addition, one Core Portfolio loan receivable remains in default at September 30, 2022. In May and July 2022, the Company received full payment on a $16.0 million and a $13.5 million first mortgage loan, respectively (Note 3). In August 2022, the Company originated a loan to other Fund II investors ("City Point Loan") of $65.9 million (Note 10).
Equity Sales
We sold 5,525,419 of our Common Shares during the nine months ended September 30, 2022 for net proceeds of $119.5 million through our ATM Program (Note 10). No such sales were made during the three months ended September 30, 2022.
RESULTS OF OPERATIONS
See Note 12 in the Notes to Consolidated Financial Statements for an overview of our three reportable segments.
Comparison of Results for the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021
The results of operations by reportable segment for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 are summarized in the table below (in millions, totals may not add due to rounding):
Three Months Ended
Increase (Decrease)
SF
50.1
29.9
79.9
45.9
26.0
71.9
4.2
3.9
8.0
(18.8
(14.9
(33.7
(17.7
(12.4
(30.1
1.1
2.5
3.6
(14.8
(10.8
(25.6
(13.9
(9.6
(23.5
0.9
1.2
2.1
(10.2
(9.9
0.3
(33.3
23.4
8.9
16.5
(20.2
(14.0
14.4
(5.9
(1.5
(14.3
(12.5
4.0
2.4
1.6
(7.3
(0.6
(7.9
47.6
(1.2
46.5
(54.9
0.6
(54.4
(49.8
(0.8
(50.6
(0.5
0.4
(49.3
(1.7
(51.0
(10.4
(10.7
(21.2
(9.3
(16.6
3.1
1.4
4.6
(0.1
0.1
(43.8
(39.0
3.4
(89.5
6.5
33.3
31.1
(50.3
(72.3
2.2
(120.6
3.2
2.9
27.6
30.5
(0.9
(18.2
(19.1
3.8
45.8
49.6
(40.9
(8.2
(55.9
5.6
15.1
12.0
(46.5
(23.3
(67.9
Core Portfolio
The results of operations for our Core Portfolio segment are depicted in the table above under the headings labeled “Core.” Segment net income attributable to Acadia for our Core Portfolio decreased $46.5 million for the three months ended September 30, 2022 compared to the prior year period as a result of the changes further described below.
Revenues for our Core Portfolio increased $4.2 million for the three months ended September 30, 2022 compared to the prior year period primarily due to (i) a $4.2 million increase from Core Portfolio property acquisitions in 2021 and 2022, (ii) $1.3 million from lease up within the Core Portfolio, and (iii) $0.8 million from the write off of a tenant's below market lease. These increases were offset by a $2.2 million credit loss benefit related to the collection of previously reserved tenant accounts in 2021.
Depreciation and amortization for our Core Portfolio increased $1.1 million for the three months ended September 30, 2022 compared to the prior year period primarily due to Core Portfolio property acquisitions in 2021 and 2022.
Equity in (losses) earnings of unconsolidated affiliates for our Core Portfolio decreased $49.3 million for the three months ended September 30, 2022 compared to the prior year period primarily due to an impairment charge for 840 N. Michigan Avenue in 2022 (Note 8).
Interest expense for our Core Portfolio increased $3.1 million for the three months ended September 30, 2022 compared to the prior year period primarily due to higher average outstanding borrowings and higher average interest rates in 2022.
Net loss (income) attributable to noncontrolling interests for our Core Portfolio increased $3.8 million for the three months ended September 30, 2022 compared to the prior year period based on the noncontrolling interests’ share of the variances discussed above.
Funds (all amounts below are consolidated amounts and are not representative of our proportionate share)
The results of operations for our Funds segment are depicted in the table above under the headings labeled “Funds.” Segment net income attributable to Acadia for the Funds decreased $23.3 million for the three months ended September 30, 2022 compared to the prior year period as a result of the changes described below.
Revenues for the Funds increased $3.9 million for the three months ended September 30, 2022 compared to the prior year period primarily due to (i) $4.7 million from Fund property acquisitions in 2021 (Note 2), and (ii) $1.7 million from lease up within the Funds. These increases were partially offset by a $3.0 million decrease from Fund property dispositions in 2021 and 2022.
Depreciation and amortization for the Funds increased $2.5 million for the three months ended September 30, 2022 compared to the prior year period primarily due to Fund property acquisitions in 2021.
Property operating expenses and real estate taxes for the Funds increased $1.2 million for the three months ended September 30, 2022 compared to the prior year period primarily due to consolidated Fund property acquisitions in 2021.
Impairment charges for the Funds increased $23.4 million for the three months ended September 30, 2022 compared to the prior year period (Note 8). Impairment charges totaling $33.3 million during 2022 for the Funds relate to 146 Geary Street and 717 N. Michigan Avenue in Fund IV. Impairment charges totaling $9.9 million for the Funds in 2021 relate to 27 East 61st and 210 Bowery in Fund IV.
Gain on disposition of properties for the Funds increased $8.9 million for the three months ended September 30, 2022 compared to the prior year period due to the sale of Wake Forest Crossing at Fund IV in 2022 (Note 2).
Realized and unrealized holding gains (losses) on investments and other for the Funds decreased $54.9 million for the three months ended September 30, 2022 compared to the prior year period, due to a decrease in the mark-to-market adjustment on the Investment in Albertsons.
Equity in (losses) earnings of unconsolidated affiliates for the Funds decreased $1.7 million for the three months ended September 30, 2022 compared to the prior year period primarily due to new unconsolidated Fund acquisitions in 2022.
Interest expense for the Funds increased $1.4 million for the three months ended September 30, 2022 compared to the prior year period primarily due to $2.3 million from higher average interest rates offset by $1.1 million from lower average outstanding borrowings in 2022.
Net loss attributable to redeemable noncontrolling interests for the Funds increased $3.2 million for the three months ended September 30, 2022 compared to the prior year period due to the City Point Loan in 2022 (Note 10).
Net loss (income) attributable to noncontrolling interests for the Funds increased $45.8 million for the three months ended September 30, 2022 compared to the prior year period based on the noncontrolling interests’ share of the variances discussed above. Net loss attributable to noncontrolling interests in the Funds includes asset management fees earned by the Company of $2.3 million and $2.6 million for the three months ended September 30, 2022 and 2021, respectively.
Structured Financing
Interest and other income for the Structured Financing portfolio increased $1.6 million for the three months ended September 30, 2022 compared to the prior year period due to new loans issued during 2021 and 2022.
The Company does not allocate general and administrative expenses and income taxes to its reportable segments. These unallocated amounts are depicted in the table above under the headings labeled “Total.”
55
Comparison of Results for the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021
The results of operations by reportable segment for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 are summarized in the table below (in millions, totals may not add due to rounding):
Nine Months Ended
151.7
94.1
245.7
134.3
78.8
213.1
17.4
15.3
32.6
(56.5
(45.9
(102.4
(51.9
(39.3
(91.2
6.6
11.2
(44.4
(31.0
(75.4
(41.8
(72.7
2.6
2.7
(32.8
(29.6
(23.4
49.9
5.9
10.5
(4.6
44.0
39.4
50.7
33.8
45.2
4.5
20.2
5.5
29.3
31.5
9.9
6.1
(18.4
57.0
(3.6
53.5
(76.1
(71.9
(47.4
(46.2
4.1
(2.9
(49.4
(26.5
(31.8
(58.3
(21.9
(28.4
(0.4
(22.1
(15.8
9.4
(61.3
22.4
37.2
32.2
(44.5
(53.0
6.9
(93.5
17.3
18.7
(1.9
(9.8
(11.7
3.3
27.1
30.4
(20.7
(39.4
20.5
27.5
(41.2
(22.9
(59.9
The results of operations for our Core Portfolio segment are depicted in the table above under the headings labeled “Core.” Segment net income attributable to Acadia for our Core Portfolio decreased $41.2 million for the nine months ended September 30, 2022 compared to the prior year period as a result of the changes further described below.
Revenues for our Core Portfolio increased $17.4 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to (i) $10.2 million from Core Portfolio property acquisitions in 2021 and 2022, (ii) $2.2 million from lease up within the Core Portfolio, (iii) $1.8 million from the write off of two tenant's below market leases, (iv) $1.5 million collection of cash for a fully reserved tenant, (v) $1.1 million from tenant termination income, and (vi) $0.9 million from the conversion of tenants from cash to accrual basis. These increases were offset by a $0.9 million credit loss benefit related to the collection or previously reserved tenants accounts in 2021.
Depreciation and amortization for our Core Portfolio increased $4.6 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to Core Portfolio property acquisitions in 2021 and 2022.
Property operating expenses and real estate taxes for our Core Portfolio increased $2.6 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to Core Portfolio property acquisitions in 2021 and 2022.
The gain (loss) on disposition of properties for our Core Portfolio of $4.6 million for the nine months ended September 30, 2021 relates to the sale of 60 Orange Street (Note 2).
Realized and unrealized holding gains (losses) on investments and other for our Core Portfolio includes $1.2 million for the nine months ended September 30, 2022 related to the bargain purchase gain on the acquisition of the Williamsburg Collection (Note 2).
Equity in (losses) earnings of unconsolidated affiliates for our Core Portfolio decreased $46.5 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to a $50.8 million impairment charge at 840 N. Michigan Avenue (Note 8), offset by a $2.2 million decrease in credit loss reserves in 2022 at unconsolidated properties related to the COVID-19 Pandemic as well as $1.3 million for the acceleration of a below market lease for a tenant in 2022.
Interest expense for our Core Portfolio increased $4.6 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to $2.9 million from higher average outstanding borrowings in 2022, and by $1.7 million higher average interest rates in 2022.
56
Net loss (income) attributable to noncontrolling interests for our Core Portfolio increased $3.3 million for the nine months ended September 30, 2022 compared to the prior year period based on the noncontrolling interests’ share of the variances discussed above.
The results of operations for our Funds segment are depicted in the table above under the headings labeled “Funds.” Segment net income attributable to Acadia for the Funds decreased $22.9 million for the nine months ended September 30, 2022 compared to the prior year period as a result of the changes described below.
Revenues for the Funds increased $15.3 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to (i) $13.4 million from consolidated Fund property acquisitions in 2021 (Note 2), (ii) $4.6 million from development projects placed in service during 2021, and (iii) a $2.3 million decrease in credit loss reserves in 2022 related to the COVID-19 Pandemic (Note 11). These increases were offset by a $6.0 million decrease from consolidated Fund property dispositions in 2021 and 2022.
Depreciation and amortization for the Funds increased $6.6 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to Fund property acquisitions in 2021.
Impairment charges for the Funds increased $23.4 million for the nine months ended September 30, 2022 compared to the prior year period (Note 8). Impairment charges totaling $33.3 million during 2022 for the Funds relate to 146 Geary Street and 717 N. Michigan Avenue in Fund IV. Impairment charges totaling $9.9 million for the Funds in 2021 related to 27 East 61st and 210 Bowery in Fund IV.
Gain on disposition of properties for the Funds increased $44.0 million for the nine months ended September 30, 2022 compared to the prior year period due to the sales of Cortlandt Crossing at Fund III, Wake Forest Crossing, Lincoln Place, Mayfair and Dauphin at Fund IV and a New Towne outparcel at Fund V in 2022 compared to dispositions of 654 Broadway at Fund III and the NE Grocer Portfolio and 110 University at Fund IV in 2021 (Note 2, Note 11).
Realized and unrealized holding gains (losses) on investments and other for the Funds decreased $76.1 million for the nine months ended September 30, 2022 compared to the prior year period, due to a $77.7 million change in the mark-to-market adjustment on the Investment in Albertsons offset by $ 1.5 million related to the Company's proportionate share of the gain on sale of Fund III's interest in Self Storage Management (Note 4).
Equity in (losses) earnings of unconsolidated affiliates for the Funds decreased $2.9 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to the gain on sale related to two land parcels at Riverdale Family Center in Fund V in 2021 (Note 4).
Interest expense for the Funds increased $3.4 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to $2.0 million from higher average outstanding borrowings in 2022 and $1.0 million from higher average rates in 2022.
Net loss attributable to redeemable noncontrolling interests for the Funds increased $3.2 million for the nine months ended September 30, 2022 compared to the prior year period due to the City Point Loan in 2022 (Note 10).
Net loss (income) attributable to noncontrolling interests for the Funds increased $27.1 million for the nine months ended September 30, 2022 compared to the prior year period based on the noncontrolling interests’ share of the variances discussed above. Net loss attributable to noncontrolling interests in the Funds includes asset management fees earned by the Company of $7.2 million and $8.6 million for the nine months ended September 30, 2022 and 2021, respectively.
The results of operations for our Structured Financing segment are depicted in the table above under the headings labeled “SF.” Interest and other income for the Structured Financing portfolio increased $3.8 million for the nine months ended September 30, 2022 compared to the prior year period primarily due to new notes issued in 2021 and 2022. Realized and unrealized holding gains (losses) on investments and other for the Structured Financing Portfolio increased $3.1 million for the nine months ended September 30, 2022 compared to the prior year due to a decrease in the allowance for credit loss.
The Company does not allocate general and administrative expenses and income taxes to its reportable segments. These unallocated amounts are depicted in the table above under the headings labeled “Total.” Unallocated general and administrative expenses increased $3.2 million for the
nine months ended September 30, 2022 compared to the prior year period due to $2.0 million related to acquisition costs (Note 2) and $1.2 million from an increase in salaries and headcount.
SUPPLEMENTAL FINANCIAL MEASURES
Net Property Operating Income
The following discussion of net property operating income (“NOI”) and rent spreads on new and renewal leases includes the activity from both our consolidated and our pro-rata share of unconsolidated properties within our Core Portfolio. Our Funds invest primarily in properties that typically require significant leasing and development. Given that the Funds are finite-life investment vehicles, these properties are sold following stabilization. For these reasons, we believe NOI and rent spreads are not meaningful measures for our Fund investments.
NOI represents property revenues less property expenses. We consider NOI and rent spreads on new and renewal leases for our Core Portfolio to be appropriate supplemental disclosures of portfolio operating performance due to their widespread acceptance and use within the REIT investor and analyst communities. NOI and rent spreads on new and renewal leases are presented to assist investors in analyzing our property performance, however, our method of calculating these may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.
A reconciliation of consolidated operating income to net operating income - Core Portfolio follows (in thousands):
Consolidated operating (loss) income (a)
Add back:
Less:
Above/below-market rent, straight-line rent and other adjustments
(4,680
(4,810
(16,943
(13,742
(8,885
(49,916
Consolidated NOI
49,707
43,615
153,385
126,662
Redeemable noncontrolling interest in consolidated NOI
(537
Noncontrolling interest in consolidated NOI
(13,669
(11,714
(44,767
(33,437
Less: Operating Partnership's interest in Fund NOI included above
(4,009
(2,983
(11,917
(8,517
Add: Operating Partnership's share of unconsolidated joint ventures NOI
3,542
2,961
10,882
10,025
NOI - Core Portfolio
35,034
31,879
107,046
94,733
(a) Does not include the Operating Partnership’s share of NOI from unconsolidated joint ventures within the Funds.
Same-Property NOI includes Core Portfolio properties that we owned for both the current and prior periods presented, but excludes those properties that we acquired, sold or expected to sell, and developed during these periods. The following table summarizes Same-Property NOI for our Core Portfolio (in thousands):
Core Portfolio NOI
Less properties excluded from Same-Property NOI
(6,014
(4,357
(17,241
(10,471
Same-Property NOI
29,020
89,805
84,262
Percent change from prior year period
5.4
Components of Same-Property NOI:
Same-Property Revenues
41,746
40,268
128,784
122,875
Same-Property Operating Expenses
(12,726
(12,746
(38,979
(38,613
Rent Spreads on Core Portfolio New and Renewal Leases
The following table summarizes rent spreads on both a cash basis and straight-line basis for new and renewal leases based on leases executed within our Core Portfolio for the periods presented. Cash basis represents a comparison of rent most recently paid on the previous lease as compared to the initial rent paid on the new lease. Straight-line basis represents a comparison of rents as adjusted for contractual escalations, abated rent and lease incentives for the same comparable leases.
Three Months Ended September 30, 2022
Core Portfolio New and Renewal Leases
Cash Basis
Straight-Line Basis
Number of new and renewal leases executed
59
GLA commencing
181,007
560,861
New base rent
38.01
39.88
37.00
38.28
Expiring base rent
31.37
31.31
33.31
32.79
Percent growth in base rent
21.2
27.4
11.1
16.8
Average cost per square foot (a)
8.31
18.44
Weighted average lease term (years)
4.7
(a) The average cost per square foot includes tenant improvement costs, leasing commissions and tenant allowances.
Funds from Operations
We consider funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is presented to assist investors in analyzing our performance. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (losses) from sales of depreciated property, depreciation and amortization, and impairment of real estate. Our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating our performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, we define FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated property and impairment of depreciable real estate, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Also consistent with NAREIT’s definition of FFO, the Company has elected to include gains and losses incidental to its main business (including those related to its RCP investments, such as Albertsons) in FFO. A reconciliation of net (loss) income attributable to Acadia to FFO follows (dollars in thousands, except per share amounts):
Depreciation of real estate and amortization of leasing costs (net of noncontrolling interests' share)
27,097
23,111
78,007
69,995
Impairment charges (net of noncontrolling interests' share)
58,481
Gain on disposition of properties (net of noncontrolling interests' share)
(2,055
(11,892
(4,163
Income (loss) attributable to Common OP Unit holders
(3,083
749
(2,057
1,371
Distributions - Preferred OP Units
123
Funds from operations attributable to Common Shareholders and Common OP Unit holders - Basic
24,672
38,284
83,481
90,401
Less: Impact of City Point share conversion (a)
(906
Funds from operations attributable to Common Shareholders and Common OP Unit holders - Diluted
23,766
82,575
Funds From Operations per Share - Diluted
Basic weighted-average shares outstanding, GAAP earnings
Weighted-average OP Units outstanding
5,307,160
5,122,016
5,311,460
5,125,394
Basic weighted-average shares and OP Units outstanding, FFO
100,287,493
93,602,860
100,069,138
92,342,816
Assumed conversion of Preferred OP Units to Common Shares
464,623
Assumed conversion of LTIP units and Restricted Share Units to Common Shares
15,671
Diluted weighted-average number of Common Shares and Common OP Units outstanding, FFO
100,312,560
94,083,154
100,533,761
92,807,439
Diluted Funds from operations, per Common Share and Common OP Unit
0.24
0.41
0.82
0.97
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LIQUIDITY AND CAPITAL RESOURCES
Uses of Liquidity and Cash Requirements
Generally, our principal uses of liquidity are (i) distributions to our shareholders and OP unit holders, (ii) investments, which include the funding of our capital committed to the Funds and property acquisitions and development/re-tenanting activities within our Core Portfolio, (iii) distributions to our Fund investors, (iv) debt service and loan repayments and (v) share repurchases.
Distributions
In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income to our shareholders. During the nine months ended September 30, 2022, we paid dividends and distributions on our Common Shares and Preferred OP Units totaling $55.1 million.
During the nine months ended September 30, 2022, we made four new consolidated investments in our Core Portfolio and Fund V acquired three unconsolidated properties totaling $425.0 million as described below (Note 2, Note 4):
On June 27, 2022, we made an $18.5 million investment in Fund II and Mervyns II increasing our ownership in each by 11.67% to 40.00%. On August 1, 2022, we made an additional $5.8 million investment in Fund II and increased our ownership by 21.67% to 61.67% (Note 1).
During the nine months ended September 30, 2022, we originated a loan to other Fund II investors of $65.9 million (Note 10).
Capital Commitments
During the nine months ended September 30, 2022, we made capital contributions aggregating $131.7 million to our Funds. Moreover, we made an additional $24.3 million investment in Fund II and Mervyns II, increasing our ownership from 28.33% in each to 61.67% and 40.00%, respectively (Note 1). At September 30, 2022, our share of the remaining capital commitments to our Funds aggregated $44.8 million as follows:
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Development Activities
During the nine months ended September 30, 2022, capitalized costs associated with development activities totaled $4.5 million (Note 2). At September 30, 2022, we had a total of nine consolidated and one unconsolidated project under development or redevelopment, for which the estimated total cost to complete these projects through 2025 was $57.7 million to $74.9 million, and our estimated share was approximately $35.5 million to $45.0 million. Substantially all remaining development and redevelopment costs are discretionary, which could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in Part I, Item 1A. Risk Factors of our 10-K.
Debt
A summary of our consolidated debt, which includes the full amount of Fund related obligations and excludes our pro rata share of debt at our unconsolidated subsidiaries, is as follows (in thousands):
Total Debt - Fixed and Effectively Fixed Rate
1,341,355
1,038,803
Total Debt - Variable Rate
(7,946
1,812,238
As of September 30, 2022, our consolidated indebtedness aggregated $1,831.2 million, excluding unamortized premium of $0.4 million and net unamortized loan costs of $13.8 million, and were collateralized by 34 properties and related tenant leases. Stated interest rates on our outstanding indebtedness ranged from LIBOR + 1.40% to Prime + 2.00% with maturities that ranged from October 31, 2022 to April 15, 2035, without regard to available extension options. Taking into consideration $1,164.1 million of notional principal under variable to fixed-rate swap agreements currently in effect, $1,341.4 million of the portfolio debt, or 73.2%, was fixed at a 4.06% weighted-average interest rate and $489.9 million, or 26.8% was floating at a 4.61% weighted average interest rate as of September 30, 2022. Our variable-rate debt includes $107.3 million of debt subject to interest rate caps.
Without regard to available extension options, at September 30, 2022 there was $83.3 million of debt maturing in 2022 at a weighted-average interest rate of 5.57%; there was $2.0 million of scheduled principal amortization due in the remainder of 2022; and our share of scheduled remaining 2022 principal payments and maturities on our unconsolidated debt was $6.6 million. In addition, $302.5 million of our total consolidated debt and $51.5 million of our pro-rata share of unconsolidated debt will come due in 2023. As it relates to the aforementioned maturing debt in 2022 and 2023, we have options to extend consolidated debt aggregating $57.9 million and $41.1 million at September 30, 2022, respectively; however, there can be no assurance that the Company will be able to successfully execute any or all of its available extension options. For the remaining indebtedness, we may not have sufficient cash on hand to repay such indebtedness, and, therefore, we expect to refinance at least a portion of this indebtedness or select other alternatives based on market conditions as these loans mature; however, there can be no assurance that we will be able to obtain financing on acceptable terms or at all. Our ability to obtain financing could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in Part I, Item 1A. Risk Factors of our 10-K.
We maintain a share repurchase program under which $122.6 million remains available as of September 30, 2022 (Note 10). We did not repurchase any shares under this program during the nine months ended September 30, 2022.
Sources of Liquidity
Our primary sources of capital for funding our liquidity needs include (i) the issuance of both public equity and OP Units, (ii) the issuance of both secured and unsecured debt, (iii) unfunded capital commitments from noncontrolling interests within our Funds, (iv) future sales of existing properties, (v) repayments of structured financing investments, and (vi) cash on hand and future cash flow from operating activities. Our cash on hand in our consolidated subsidiaries at September 30, 2022 totaled $18.1 million. Our remaining sources of liquidity are described further below.
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We have an ATM Program (Note 10) which provides us an efficient and low-cost vehicle for raising public equity to fund our capital needs. In addition, from time to time, we have issued and may issue, equity in follow-on offerings separate from our ATM Program. Net proceeds raised through our ATM Program and follow-on offerings are primarily used for acquisitions, both for our Core Portfolio and our pro-rata share of Fund acquisitions, and for general corporate purposes. During the nine months ended September 30, 2022 we sold 5,525,419 of our Common Shares for net proceeds of $119.5 million at a weighted-average price per share of $21.65 through our ATM Program. No such sales were made during the three months ended September 30, 2022.
Fund Capital
During the nine months ended September 30, 2022, Funds II and V called for capital contributions of $175.8 million and $121.7 million, respectively, of which our aggregate share was $131.7 million. At September 30, 2022, unfunded capital commitments from noncontrolling interests within Funds II, III, IV and V were zero, $1.4 million, $32.2 million and $137.5 million, respectively.
Asset Sales and Other Transactions
We recognized aggregate gains of $49.9 million on the sales of the above properties during the nine months ended September 30, 2022, of which our share was $16.2 million.
Structured Financing Repayments
During the nine months ended September 30, 2022 Fund III foreclosed on one Structured Financing loan in the amount of $10.0 million including accrued interest. We also have one Structured Financing investment in the amount of $21.6 million, including accrued interest that previously matured and has not been repaid. In May and July 2022, we received full payment on a $16.0 million and $13.5 million first mortgage loan, respectively (Note 3).
Financing and Debt
As of September 30, 2022, we had $207.0 million of additional capacity under existing Core Portfolio and Fund revolving debt facilities. In addition, at that date within our Core and Fund portfolios, we had 94 unleveraged consolidated properties with an aggregate carrying value of approximately $1.8 billion, although there can be no assurance that we would be able to obtain financing for these properties at favorable terms, if at all.
Inflation and Economic Condition Considerations
In the past year, microeconomic and macroeconomic conditions, including the fallout from the COVID-19 pandemic, the war in Ukraine, supply-chain disruptions, and the recessionary outlook of the current financial markets, has increased volatility in the market and has caused a surge in
already increasing inflation and interest rates. We manage our properties in a cost-conscious manner to minimize recurring operational expenses and utilize multi-year contracts to alleviate the impact of inflation on our business and our tenants. Most of our leases require tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. These provisions are designed to partially mitigate the impact of inflation; however, current inflation levels are much greater than the contractual rent increases we obtain from our tenant base. The rate hikes enacted by the Federal Reserve have had a significant impact on interest rate indexes such as LIBOR, SOFR and the Prime Rate. As of September 30, 2022, approximately 73% of our outstanding debt is fixed rate with the remaining 27% indexed to LIBOR, SOFR or Prime plus an applicable margin per the loan agreement. As of September 30, 2022, we were counter-party to 42 interest rate swap agreements and three interest rate cap agreements, all of which qualify for and are designated as hedging instruments, which helps to alleviate the impact of rising interest rates on our operations. While we have not experienced any material negative impacts at this time, we are actively managing our business to respond to the ongoing economic and social impact from such events. See “Risk Factors” in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
HISTORICAL CASH FLOW
The following table compares the historical cash flow for the nine months ended September 30, 2022 with the cash flow for the nine months ended September 30, 2021 (in millions, totals may not add due to rounding):
Variance
100.5
71.4
29.1
(144.9
(81.6
(63.3
7.9
39.7
(2.3
Operating Activities
Our operating activities provided $29.1 million more cash during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to Core and Fund property acquisitions and an increase in cash receipts from tenants.
Investing Activities
During the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, our investing activities used $63.3 million more cash, primarily due to (i) $178.8 million more cash used to acquire properties in 2022, (ii) $141.4 million more cash used for investments in and advances to unconsolidated affiliates, (iii) $10.9 million more cash used for development, construction and property improvement costs and (iv) $4.5 million of cash used for acquisition of investment interests in 2022. These uses of cash were partially offset by (i) $131.5 million more cash received from the disposition of properties, (ii) $58.0 million less cash used in the issuance of notes receivable, (iii) $51.6 million more cash received from return of capital from unconsolidated affiliates and other, and (iv) $29.5 million more cash received from proceeds from notes receivable.
Our financing activities provided $39.7 million more cash during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily from (i) $82.8 million more cash provided from contributions from noncontrolling interests and (ii) $73.6 million more cash provided by the sale of Common Shares. These sources of cash were partially offset by (i) $77.7 million more cash used for the acquisition of and distributions to noncontrolling interests, (ii) $21.3 million more cash used in dividends paid to common shareholders and (iii) 15.8 million less cash provided by net borrowings.
OFF-BALANCE SHEET ARRANGEMENTS
We have the following investments made through joint ventures for the purpose of investing in operating properties. We account for these investments using the equity method of accounting. As such, our financial statements reflect our investment and our share of income and loss from, but not the individual assets and liabilities, of these joint ventures.
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See Note 4 in the Notes to Consolidated Financial Statements, for a discussion of our unconsolidated investments. The Operating Partnership’s pro-rata share of unconsolidated non-recourse debt related to those investments is as follows (dollars in millions):
Operating Partnership
Investment
OwnershipPercentage
Pro-rata Share ofMortgage Debt
Effective Interest Rate (a)
Family Center at Riverdale (b)
18.0
4.4
3.68
Promenade at Manassas (c)
22.8
6.2
4.57
Eden Square
4.82
Mar 2023
49.0
8.8
5.09
Jun 2023
20.0
32.0
3.81
Aug 2023
3104 M Street
0.8
6.25
Jan 2024
Crossroads
30.0
3.94
Oct 2024
Tri-City Plaza (c)
18.1
7.0
3.01
Frederick Crossing (c)
3.26
Dec 2024
Paramus Plaza (b)
11.6
4.83
Frederick County Square (c)
4.00
Jan 2025
840 N. Michigan Avenue
88.4
65.0
4.36
Feb 2025
Wood Ridge Plaza (b)
5.8
6.38
Mar 2025
20.8
3.75
Jun 2026
La Frontera
10.0
5.08
Jun 2027
Georgetown Portfolio
50.0
7.6
4.72
Dec 2027
197.7
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2021 Annual Report on Form 10-K.
Recently Issued and Adopted Accounting Pronouncements
Reference is made to Note 1 for information about recently issued accounting pronouncements.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information as of September 30, 2022
Our primary market risk exposure is to changes in interest rates related to our mortgage and other debt. See Note 7 in the Notes to Consolidated Financial Statements, for certain quantitative details related to our mortgage and other debt.
Currently, we manage our exposure to fluctuations in interest rates primarily through the use of fixed-rate debt and interest rate swap and cap agreements. As of September 30, 2022, we had total mortgage and other notes payable of $1,831.2 million, excluding the unamortized premium of $0.4 million and net unamortized debt issuance costs of $13.8 million, of which $1,341.4 million, or 73.2% was fixed-rate, inclusive of debt with rates fixed through the use of derivative financial instruments, and $489.9 million, or 26.8%, was variable-rate based upon LIBOR, SOFR or Prime rates plus certain spreads. As of September 30, 2022, we were party to 35 interest rate swaps and three interest rate cap agreements to hedge our exposure to changes in interest rates with respect to $1,164.1 million and $107.3 million of variable-rate debt, respectively.
The following table sets forth information as of September 30, 2022 concerning our long-term debt obligations, including principal cash flows by scheduled maturity (without regard to available extension options) and weighted average effective interest rates of maturing amounts (dollars in millions):
Core Consolidated Mortgage and Other Debt
Year
ScheduledAmortization
Maturities
Weighted-AverageInterest Rate
2.3
7.3
238.3
240.7
409.3
411.8
361.5
368.1
1,016.4
1,032.9
Fund Consolidated Mortgage and Other Debt
83.3
84.7
296.0
300.2
199.5
202.1
0.2
177.0
177.2
34.0
34.1
5.2
8.5
789.8
798.3
Mortgage Debt in Unconsolidated Partnerships (at our Pro-Rata Share)
1.5
51.5
1.3
43.7
45.0
74.6
75.0
3.0
16.0
16.3
4.9
193.5
Without regard to available extension options, in the remainder of 2022, $85.3 million of our total consolidated debt and $6.6 million of our pro-rata share of unconsolidated outstanding debt will become due. In addition, $302.5 million of our total consolidated debt and $51.5 million of our pro-rata share of unconsolidated debt will become due in 2023. As it relates to the aforementioned maturing debt in 2022 and 2023, we have options to extend consolidated debt aggregating $57.9 million and $41.1 million, respectively; however, there can be no assurance that the Company will be able successfully execute any or all of its available extension options. As we intend on refinancing some or all of such debt at the then-existing market interest rates, which may be greater than the current interest rates, our interest expense would increase by approximately $4.5 million annually if the interest rate on the refinanced debt increased by 100 basis points. After giving effect to noncontrolling interests, our share of this increase would be $2.6 million. Interest expense on our variable-rate debt of $489.9 million, net of variable to fixed-rate swap agreements currently in effect, as of September 30, 2022, would increase $4.9 million if corresponding rate indices increased by 100 basis points. After giving effect to noncontrolling interests, our share of this increase would be $2.0 million. We may seek additional variable-rate financing if and when pricing and other commercial and financial terms warrant. As such, we would consider hedging against the interest rate risk related to such additional variable-rate debt through interest rate swaps and protection agreements, or other means.
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Based on our outstanding debt balances as of September 30, 2022, the fair value of our total consolidated outstanding debt would decrease by approximately $5.8 million if interest rates increase by 1%. Conversely, if interest rates decrease by 1%, the fair value of our total outstanding debt would increase by approximately $6.8 million.
As of September 30, 2022, and December 31, 2021, we had consolidated notes receivable of $124.0 million and $153.9 million, respectively. We determined the estimated fair value of our notes receivable by discounting future cash receipts utilizing a discount rate equivalent to the rate at which similar notes receivable would be originated under conditions then existing.
Based on our outstanding notes receivable balances as of September 30, 2022, the fair value of our total outstanding notes receivable would decrease by approximately $1.3 million if interest rates increase by 1%. Conversely, if interest rates decrease by 1%, the fair value of our total outstanding notes receivable would increase by approximately $1.3 million.
Summarized Information as of December 31, 2021
As of December 31, 2021, we had total mortgage and other notes payable of $1,819.7 million, excluding the unamortized premium of $0.4 million and unamortized debt issuance costs of $7.9 million, of which $1,038.8 million, or 57.1% was fixed-rate, inclusive of debt with rates fixed through the use of derivative financial instruments, and $780.9 million, or 42.9%, was variable-rate based upon LIBOR, SOFR or Prime rates plus certain spreads. As of December 31, 2021, we were party to 28 interest rate swap and three interest rate cap agreements to hedge our exposure to changes in interest rates with respect to $860.4 million and $110.5 million of variable-rate debt, respectively.
Interest expense on our variable-rate debt of $780.9 million as of December 31, 2021, would have increased $7.8 million if corresponding rate indices increased by 100 basis points. Based on our outstanding debt balances as of December 31, 2021, the fair value of our total outstanding debt would have decreased by approximately $8.4 million if interest rates increased by 1%. Conversely, if interest rates decreased by 1%, the fair value of our total outstanding debt would have increased by approximately $16.0 million.
Changes in Market Risk Exposures from December 31, 2021 to September 30, 2022
Our interest rate risk exposure from December 31, 2021, to September 30, 2022, has decreased on an absolute basis, as the $780.9 million of variable-rate debt as of December 31, 2021, has decreased to $489.9 million as of September 30, 2022. As a percentage of our overall debt, our interest rate risk exposure has decreased as our variable-rate debt accounted for 42.9% of our consolidated debt as of December 31, 2021 compared to 26.8% as of September 30, 2022.
ITEM 4.CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Exchange Act, is recorded, processed, summarized, and reported within the required time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls. Our chief executive officer and chief financial officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were not effective as of September 30, 2022 due to the material weakness in our internal control over financial reporting described below.
Previously Reported Material Weakness
As disclosed in Item 9A. “Controls and Procedures” of our Form 10-K, we previously identified a material weakness in our internal control over
financial reporting related to an error in accounting treatment at the time of formation related to the improper consolidation of two Fund investments that are less-than-wholly-owned through the Company’s opportunity funds.
Management is in the process of remediating the material weakness and believes that the consolidated financial statements, and related notes thereto included in this Quarterly Report on Form 10-Q fairly present, in all material aspects, the Company’s financial condition, results of operations and cash flows for the periods presented.
Remediation
We have commenced measures to remediate the identified material weakness. We performed additional procedures to assess the population of less-than-wholly-owned investments at year end and are implementing additional controls in this area. Until the material weakness is remediated, we will continue to perform additional analysis and other post-closing procedures to ensure that our consolidated financial statements are prepared in accordance with U.S. GAAP. The material weakness will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS.
From time to time, we are a party to various legal proceedings, claims or regulatory inquiries and investigations arising out of, or incident to, our ordinary course of business. While we are unable to predict with certainty the outcome of any particular matter, management does not expect, when such matters are resolved, that our resulting exposure to loss contingencies, if any, will have a material adverse effect on our consolidated financial position.
ITEM 1A.RISK FACTORS.
Except to the extent additional factual information disclosed elsewhere in this Report relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.
ITEM 4.MINE SAFETY DISCLOSURES.
ITEM 5.OTHER INFORMATION.
ITEM 6.EXHIBITS.
The following is an index to all exhibits including (i) those filed with this Quarterly Report on Form 10-Q and (ii) those incorporated by reference herein:
Exhibit No.
Method of Filing
Certification of Chief Executive Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Certification of Chief Financial Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Document
101.DEF
Inline XBRL Taxonomy Extension Definitions Document
101.LAB
Inline XBRL Taxonomy Extension Labels Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
(Registrant)
By:
/s/ Kenneth F. Bernstein
Kenneth F. Bernstein
Chief Executive Officer,
President and Trustee
/s/ John Gottfried
John Gottfried
Executive Vice President and
Chief Financial Officer
/s/ Richard Hartmann
Richard Hartmann
Senior Vice President and
Chief Accounting Officer
Dated: November 4, 2022