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 June 30, 2019
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 1-12002
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 July 22, 2019 there were 84,452,945 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 June 30, 2019 (Unaudited) and December 31, 2018
Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
5
Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
6
Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
7
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2019 and 2018
9
Notes to Consolidated Financial Statements (Unaudited)
11
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
3.
Quantitative and Qualitative Disclosures about Market Risk
57
4.
Controls and Procedures
59
PART II - OTHER INFORMATION
Legal Proceedings
1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
5.
Other Information
6.
Exhibits
60
Signatures
61
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q (the “Report”) 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”), and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to 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.
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
June 30,
December 31,
(dollars in thousands, except per share amounts)
2019
2018
ASSETS
(Unaudited)
Investments in real estate, at cost
Operating real estate, net
$
3,269,564
3,160,851
Real estate under development
211,199
120,297
Net investments in real estate
3,480,763
3,281,148
Notes receivable, net
94,662
109,613
Investments in and advances to unconsolidated affiliates
320,477
262,410
Other assets, net
200,124
208,570
Assets of properties held for sale
6,291
—
Cash and cash equivalents
33,749
21,268
Rents receivable
61,438
62,191
Restricted cash
12,418
13,580
Total assets
4,209,922
3,958,780
LIABILITIES
Mortgage and other notes payable, net
1,025,869
1,017,288
Unsecured notes payable, net
620,207
533,257
Unsecured line of credit
39,000
Accounts payable and other liabilities
384,290
286,072
Dividends and distributions payable
25,418
24,593
Distributions in excess of income from, and investments in, unconsolidated affiliates
15,032
15,623
Total liabilities
2,109,816
1,876,833
Commitments and contingencies
EQUITY
Acadia Shareholders' Equity
Common shares, $0.001 par value, authorized 200,000,000 shares, issued and outstanding 84,452,945 and 81,557,472 shares, respectively
84
82
Additional paid-in capital
1,625,906
1,548,603
Accumulated other comprehensive (loss) income
(29,570
)
516
Distributions in excess of accumulated earnings
(115,224
(89,696
Total Acadia shareholders’ equity
1,481,196
1,459,505
Noncontrolling interests
618,910
622,442
Total equity
2,100,106
2,081,947
Total liabilities and equity
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands except per share amounts)
Revenues
Rental income
69,942
51,322
143,945
102,101
Expense reimbursements
10,598
21,806
Other
1,120
1,649
1,917
2,786
Total revenues
71,062
63,569
145,862
126,693
Operating expenses
Depreciation and amortization
30,304
29,503
60,637
58,079
General and administrative
9,034
7,907
17,357
16,377
Real estate taxes
9,852
7,031
19,455
15,990
Property operating
13,386
12,524
25,733
22,862
Impairment charge
1,400
Other operating
305
385
Total operating expenses
63,976
57,270
124,582
113,693
Gain on disposition of properties
33
2,014
Operating income
7,086
6,332
23,294
13,033
Equity in earnings of unconsolidated affiliates
3,559
5,019
5,830
6,703
Interest and other income
4,142
3,289
6,412
7,026
Interest expense
(19,759
(16,915
(37,618
(32,805
Loss from continuing operations before income taxes
(4,972
(2,275
(2,082
(6,043
Income tax (provision) benefit
(265
(219
(387
Net loss
(5,237
(2,270
(2,301
(6,430
Net loss attributable to noncontrolling interests
14,317
9,935
23,578
21,514
Net income attributable to Acadia
9,080
7,665
21,277
15,084
Basic and diluted earnings per share
0.11
0.09
0.26
0.18
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Other comprehensive (loss) income:
Unrealized (loss) income on valuation of swap agreements
(22,652
2,950
(35,958
8,603
Reclassification of realized interest on swap agreements
(535
109
(1,086
472
Other comprehensive (loss) income
(23,187
3,059
(37,044
9,075
Comprehensive (loss) income
(28,424
789
(39,345
2,645
Comprehensive loss attributable to noncontrolling interests
18,955
9,638
30,536
19,963
Comprehensive (loss) income attributable to Acadia
(9,469
10,427
(8,809
22,608
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Three Months Ended June 30, 2019 and 2018
Acadia Shareholders
(in thousands, except per share amounts)
Common
Shares
Share
Amount
Additional
Paid-in
Capital
Accumulated
Comprehensive
Income (Loss)
Distributions
in Excess of
Earnings
Total
Shareholders’
Equity
Noncontrolling
Interests
Balance at April 1, 2019
82,708
83
1,577,503
(11,021
(100,634
1,465,931
640,421
2,106,352
Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
557
(557
Issuance of Common Shares
1,697
1
47,280
47,281
Dividends/distributions declared ($0.28 per Common Share/OP Unit)
(23,670
(1,776
(25,446
Employee and trustee stock compensation, net
15
153
1,835
1,988
Noncontrolling interest distributions
(1,645
(18,549
(18,955
Reallocation of noncontrolling interests
413
(413
Balance at June 30, 2019
84,453
Balance at April 1, 2018
82,451
1,564,067
7,376
(46,856
1,524,669
639,998
2,164,667
28
481
(481
Repurchase of Common Shares
(990
(23,095
Dividends/distributions declared ($0.27 per Common Share/OP Unit)
(22,005
(1,713
(23,718
14
175
2,126
2,301
(14,945
Noncontrolling interest contributions
6,550
Comprehensive income (loss)
2,762
(9,638
2,023
(2,023
Balance at June 30, 2018
81,503
1,543,651
10,138
(61,196
1,492,675
619,874
2,112,549
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
Six Months Ended June 30, 2019 and 2018
Balance at January 1, 2019
81,557
208
3,510
(3,510
2,667
75,113
75,115
Dividends/distributions declared ($0.56 per Common Share/OP Unit)
(46,805
(3,557
(50,362
21
247
5,195
5,442
(4,882
32,191
(30,086
(30,536
(1,567
1,567
Balance at January 1, 2018
83,708
1,596,514
2,614
(32,013
1,567,199
648,440
2,215,639
64
1,123
(1,123
(2,294
(2
(55,055
(55,057
Dividends/distributions declared ($0.54 per Common Share/OP Unit)
(44,267
(3,434
(47,701
25
271
5,842
6,113
(15,640
7,524
(19,963
798
(798
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash provided by operating activities:
Distributions of operating income from unconsolidated affiliates
5,378
10,210
Equity in earnings and gains of unconsolidated affiliates
(5,830
(6,703
Stock compensation expense
Amortization of financing costs
3,903
2,743
(2,014
(33
Other, net
(6,979
(4,450
Changes in assets and liabilities:
Other liabilities
(8,499
680
Prepaid expenses and other assets
8,583
(1,883
742
(4,252
Accounts payable and accrued expenses
1,767
(5,038
Net cash provided by operating activities
62,229
49,036
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate
(138,716
(46,171
Development, construction and property improvement costs
(55,872
(41,937
Issuance of or advances on notes receivable
(3,002
Proceeds from the disposition of properties, net
12,252
25,218
Investments in and advances to unconsolidated affiliates and other
(99,592
(2,265
Return of capital from unconsolidated affiliates and other
36,423
19,512
Proceeds from notes receivable
15,250
26,000
Return of deposits for properties under contract
568
1,750
Payment of deferred leasing costs
(3,831
Net cash used in investing activities
(233,518
(22,540
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage and other notes
(122,492
(48,272
Principal payments on unsecured debt
(200,900
(519,300
Proceeds received on mortgage and other notes
131,459
119,752
Proceeds from unsecured debt
327,300
482,300
Payments for repurchase of Common Shares
Payments of finance lease obligations
(1,500
Proceeds from the sale of Common Stock, net
Capital contributions from noncontrolling interests
Distributions to noncontrolling interests
(8,424
(19,004
Dividends paid to Common Shareholders
(45,994
(44,863
Deferred financing and other costs
(4,147
(3,185
Net cash provided by (used in) financing activities
182,608
(81,079
Increase (decrease) in cash and restricted cash
11,319
(54,583
Cash of $21,268 and $74,823 and restricted cash of $13,580 and $10,846,
respectively, beginning of period
34,848
85,669
Cash of $33,749 and $17,330 and restricted cash of $12,418 and $13,756,
respectively, end of period
46,167
31,086
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental disclosure of cash flow information
Cash paid during the period for interest, net of capitalized interest of
$5,326 and $2,836 respectively
35,385
29,219
Cash paid for income taxes, net of refunds
258
Supplemental disclosure of non-cash investing and financing activities
Assumption of accounts payable and accrued expenses through acquisition of real estate
1,796
425
Right-of-use assets, finance leases obtained in exchange for finance lease liabilities
16,349
Right-of-use assets, finance leases obtained in exchange for assets under capital lease
76,965
Right-of-use assets, operating leases obtained in exchange for operating lease liabilities
57,165
Capital lease obligation exchanged for finance lease liability
71,111
Other liabilities exchanged for operating lease liabilities
946
Assumption of debt through investments in unconsolidated affiliates
4,688
Acquisition of undivided interest in a property through conversion of notes receivable
22,201
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
Organization
Acadia Realty Trust and subsidiaries (collectively, the “Company”) is a fully-integrated equity real estate investment trust (“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 June 30, 2019 and December 31, 2018, the Company controlled approximately 94% 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 of the Company (“Common Shares”). This structure is referred to as an umbrella partnership REIT or “UPREIT.”
As of June 30, 2019, the Company has ownership interests in 123 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 57 properties within its opportunity funds (the “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”). The 180 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 Company consolidates the Funds as it has (i) the power to direct the activities that most significantly impact the Funds’ economic performance, (ii) is obligated to absorb the Funds’ losses and (iii) has the right to receive benefits from the Funds that could potentially be significant.
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
Formation
Date
Operating
Partnership
Share of
Capital Called as of June 30, 2019
Unfunded
Commitment
Equity Interest
Held By
Partnership (a)
Preferred
Return
Total Distributions as of June 30, 2019 (b)
Fund II and Mervyns II (c)
6/2004
28.33
%
347.1
15.0
146.6
Fund III
5/2007
24.54
426.3
23.7
554.8
Fund IV
5/2012
23.12
425.4
104.6
147.4
Fund V
8/2016
20.10
118.3
401.7
2.0
(a)
Amount represents the current economic ownership at June 30, 2019, which could differ from the stated legal ownership based upon the cumulative preferred returns of the respective Fund.
(b)
Represents the total for the Funds, including the Operating Partnership and noncontrolling interests’ shares.
(c)
During April 2018, a distribution of $15.0 million was made to the Fund II investors, including $4.3 million to the Operating Partnership. This amount remains subject to re-contribution to Fund II until April 2021.
Basis of Presentation
Segments
At June 30, 2019, 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 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. Investments in entities for which the Company has the ability to exercise significant influence over, but does not have financial or operating control, 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.
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 2018 Annual Report on Form 10-K, as filed with the SEC on February 19, 2019.
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.
Reclassifications
Certain prior period amounts with regard to gains on dispositions of properties have been reclassified to conform to the current period presentation.
Recently Adopted Accounting Pronouncements
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, will be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the former model, with the distinction between operating, sales-type and direct-financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard, ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”). To ease the transition, the new lease accounting guidance permits companies to utilize certain practical expedients in their implementation of the new standard:
•
A package of three practical expedients that must be elected together for all leases and includes: (i) not reassessing expired or existing contracts as to whether they are or contain leases; (ii) not reassessing lease classification of existing leases and (iii) not reassessing the amount of capitalized initial direct costs for existing leases;
A practical expedient to use hindsight in determining the lease term or assessing purchase options for existing leases and in assessing impairment of right of use assets;
12
Lessees may make an accounting policy election by class of underlying asset not to separate lease components from non-lease components; and
Lessees may make an accounting policy election not to apply the recognition and measurement requirements to short-term leases.
ASU 2016-02 was modified by the following subsequently issued ASU’s (together with ASU 2016-02, “Topic 842”), many of which provided additional transition practical expedients:
ASU 2018-01, Land Easements Practical Expedient for Transition to Topic 842 added a transition practical expedient to not reassess existing or expired land easement agreements not previously accounted for as leases
ASU No. 2018-10, Codification Improvements to Topic 842, Leases. These amendments provide minor clarifications and corrections to ASU 2016-02.
ASU 2018-11, Leases (Topic 842): Targeted Improvements.
o
The amendments in this Update provide entities with an additional optional transition method to adopt ASU 2016-02. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting under this additional transition method for the comparative periods presented in the financial statements in which it adopts the new leases standard would continue to be in accordance with former GAAP (Topic 840, Leases).
The amendments in this Update also provide lessors with a practical expedient, by class of underlying asset, to make a policy election to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606). Conditions are required to elect the practical expedient, and if met, the single component will be accounted for under either under Topic 842 or Topic 606 depending on which component(s) are predominant. The lessor practical expedient to not separate non-lease components from the associated component must be elected for all existing and new leases.
ASU 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors. This ASU modifies ASU No. 2016-02 to permit lessors, as an accounting policy election, not to evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures (includes sales, use, value added, and some excise taxes and excludes real estate taxes).
ASU 2019-01, Leases (Topic 842), Codification Improvements. There are three codification updates to Topic 842 covered by this ASU: Issue 1 provides guidance on how to compute fair value of leased items for lessors who are non-dealers or manufacturers; Issue 2 relates to cash flow presentation for lessors of sales-type and direct financing leases; and Issue 3 clarifies that certain transition disclosures will only be required in annual disclosures.
Under the new leasing guidance, contract consideration shall be allocated to its lease components (such as the lease of retail properties) and non-lease components (such as maintenance). For lessors, any non-lease components will be accounted for under Topic 606 unless the entity elects the lessor practical expedient to not separate the non-lease components from the associated lease component as described above. The new guidance also includes a definition of initial direct costs that is narrower than the prior definition in former GAAP (Topic 840, Leases). Topic 842 was effective for the Company beginning January 1, 2019.
The Company adopted Topic 842 effective January 1, 2019 utilizing the new transition method described in ASU 2018-11 and has availed itself of all the available practical expedients described above except it did not use hindsight in determining the lease term or assessing purchase options for existing leases and in assessing impairment of right of use assets.
As lessor, the Company has more than 1,000 leases primarily with retail tenants and to a lesser extent with office and residential tenants. A significant majority of its leases are on a triple-net basis. The impact of adoption of ASU 2016-02 for the Company as lessor was as follows:
The Company has elected the lessor practical expedient to not separate common area maintenance from the associated lease for all existing and new leases and to account for the combined component as a single lease component. Common area maintenance is considered a non-lease component within the scope of Topic 606 and reimbursements of taxes and insurance are considered contractual payments that do not transfer a good or service to the tenant; however, such revenues related to leases, which were formerly reported as reimbursed expenses, will be reported within lease revenues in the presentation of the statement of income subsequent to the implementation of ASC 842. Prior year classifications under ASC 840 will not be adjusted.
Due to its election of available practical expedients, the Company expects that post-adoption substantially all existing leases, and new leases compared to similar existing leases, will have no change in the timing of revenue recognition.
The Company’s internal leasing costs will be expensed as incurred, as opposed to being capitalized and deferred. Commissions subsequent to successful lease execution will continue to be capitalized. After adoption, the Company will no longer capitalize internal
13
leasing costs that were previously capitalized (the Company capitalized $1.8 million of internal leasing costs during the year ended December 31, 2018).
The Company has existing easement arrangements that have not been previously identified as leases. The Company expects that its existing and similar future easement arrangements will not be classified as rental revenue but as other revenues as these arrangements do not transfer control to the counterparty.
The Company makes a policy election to continue to account for only those taxes described under ASU 2018-20 that it pays on behalf of the tenant as reimbursable costs and will not account for those taxes paid directly by the lessee which are considered lessee costs.
As lessee, the Company was party to 13 ground, office and equipment leases with future payment obligations aggregating $203.1 million at December 31, 2018. The impact of adoption of ASU 2016-02 for the Company as lessee was as follows (Note 11):
As lessee, the Company has applied the following practical expedients in the implementation ASU 2016-02: (i) to not separate non-lease components from the associated lease component as described above and (ii) to not apply the right-of-use recognition requirements to short-term leases. As such, there were no changes in the timing of recognition of expenses related to its operating leases.
The Company recognized right-of-use assets and lease liabilities of $11.9 million and $12.8 million, respectively, related to its operating leases.
The Company reclassified its existing capital lease asset of $77.0 million and capital lease liability of $71.1 million to a right-of-use asset and a lease liability, respectively, pertaining to finance leases.
Subsequent to the adoption of and in accordance with Topic 842, the Company reassessed the circumstances surrounding three of its operating ground leases and determined that it had made significant leasehold improvements and was now reasonably certain to exercise their purchase options. Accordingly, the Company reclassified the existing right-of-use assets and lease liabilities from operating leases to finance leases and adjusted the leases’ right-of-use assets and corresponding lease liabilities to $5.7 million and $5.7 million, respectively, to incorporate the present value of the purchase options, which totaled $4.7 million at January 1, 2019.
With the adoption of ASC Topic 842, the Company will first apply the guidance under ASC 842 in assessing its rents receivable: if collection of rents under specific operating leases is not probable, then the Company recognizes the lesser of that lease’s rental income on a straight-line basis or cash received, plus variable rents as earned. Once this initial assessment is completed, the Company may apply a general reserve, as provided under ASC 450-20, if applicable.
The Company did not record any cumulative effect of change in accounting principle upon the adoption of ASC Topic 842 as lessor or lessee. Consistent with the transition guidance under ASU 2018-11, all prior period disclosures remain in accordance with ASC Topic 840.
Other Accounting Topics
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. These amendments provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods therein. The Company adopted this guidance effective January 1, 2019, which had no effect on the Company’s financial statements.
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. These amendments provide clarifications and corrections to certain ASC subtopics including the following: 220-10 (Income Statement - Reporting Comprehensive Income - Overall), 470-50 (Debt - Modifications and Extinguishments), 480-10 (Distinguishing Liabilities from Equity - Overall), 718-740 (Compensation - Stock Compensation - Income Taxes), 805-740 (Business Combinations - Income Taxes), 815-10 (Derivatives and Hedging - Overall), and 820-10 (Fair Value Measurement - Overall). Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance; however, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. For those amendments that were effective January 1, 2019 or earlier, there was no material effect on the Company’s financial statements.
Recently Issued Accounting Pronouncements
In April 2019, the FASB issued ASU No. 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which provides updates and clarifications to three previously-issued ASUs: 2016-01 Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, described further below and which the Company has not yet adopted; and 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which the Company early adopted effective January 1, 2018. The updates related to ASU 2016-13 have the same transition as ASU 2016-13 and are effective for periods beginning after December 15, 2019, with adoption permitted after the issuance of ASU 2019-04. The
updates related to ASU 2017-12 are effective for the Company on January 1, 2020. The updates related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In May 2019, the FASB issued ASU No. 2019-05 Financial Instruments — Credit Losses (Topic 326) which provides relief to certain entities adopting ASU 2016-13 (discussed below). The amendments accomplish those objectives by providing entities with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, that are within the scope of Subtopic 326-20, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. ASU 2019-05 has the same transition as ASU 2016-13 and is effective for periods beginning after December 15, 2019, with adoption permitted after this update. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In November 2018, the FASB issued ASU No. 2018-19 Codification Improvements to Topic 326, Financial Instruments — Credit Losses. This ASU modifies ASU 2016-13 (discussed below). The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20, Financial Instruments – Credit Losses – Measure at Amortized Cost. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. ASU 2018-19 is effective for periods beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 is effective for periods beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. Retrospective adjustments shall be applied through a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. These amendments provide specific guidance for transactions for acquiring goods and services from nonemployees and specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2020. Early adoption is permitted but not earlier than the adoption of Topic 606. The Company does not believe that this guidance will have a material effect on its consolidated financial statements as it has not historically issued share-based payments in exchange for goods or services to be consumed within its operations.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance is effective for public companies in fiscal years beginning after December 15, 2019 with early adoption permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract to provide guidance on implementation costs incurred in a cloud computing arrangement that is a service contract. The ASU aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of such arrangements that are service contracts and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized. This ASU, which is effective for fiscal years beginning after December 15, 2019, is not expected to have a material impact on the Company’s financial statements as the Company has not incurred any significant costs associated with cloud computing arrangements.
2. Real Estate
The Company’s consolidated real estate is comprised of the following (in thousands):
Land
732,422
710,469
Buildings and improvements
2,638,585
2,594,828
Tenant improvements
170,523
151,154
Construction in progress
36,721
44,092
Properties under capital lease (Note 11)
Right-of-use assets - finance leases (Note 11)
93,796
Right-of-use assets - operating leases (Note 11)
56,279
3,728,326
3,577,508
Less: Accumulated depreciation
(458,762
(416,657
Real estate under development, at cost
16
Acquisitions and Conversions
During the six months ended June 30, 2019 and the year ended December 31, 2018, the Company acquired the following consolidated retail properties (dollars in thousands):
Property and Location
Percent
Acquired
Date of
Acquisition
Purchase
Price
2019 Acquisitions
Core
Soho Portfolio - 41, 51 and 53 Greene Street - New York, NY (a)
100%
Mar 15, 2019
Mar 27, 2019 May 29, 2019
49,569
Subtotal Core
Palm Coast Landing - Palm Coast, FL
May 6, 2019
36,644
Lincoln Commons - Lincoln, RI
June 21, 2019
54,299
Subtotal Fund V
90,943
Total 2019 Acquisitions
140,512
2018 Acquisitions and Conversions
Bedford Green Land Parcel - Bedford Hills, NY
Mar 23, 2018
1,337
Broughton Street Partners I - Savannah, GA (Conversion) (Note 4)
Oct 11, 2018
36,104
Subtotal Fund IV
Trussville Promenade - Trussville, AL
Feb 21, 2018
45,259
Elk Grove Commons - Elk Grove, CA
Jul 18, 2018
59,320
Hiram Pavilion - Hiram, GA
Oct 23, 2018
44,443
149,022
Total 2018 Acquisitions and Conversions
186,463
The Soho Portfolio is a collection of six properties located in New York, NY with an aggregate purchase price of approximately $96.0 million. The acquisitions of the remaining three properties are expected to be finalized through early 2020.
The 2019 Acquisitions and 2018 Acquisitions and Conversions were considered asset acquisitions based on accounting guidance effective as of January 1, 2018. For the six months ended June 30, 2019 and 2018, the Company capitalized $0.6 million and $0.1 million, of acquisition costs. No debt was assumed in any of the 2019 Acquisitions or 2018 Acquisitions or Conversions.
17
Purchase Price Allocations
The purchase prices for the 2019 Acquisitions and the 2018 Acquisitions and Conversions 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 six months ended June 30, 2019 and the year ended December 31, 2018 (in thousands):
Year Ended December 31,
Net Assets Acquired
35,865
38,086
92,468
129,586
Acquisition-related intangible assets (Note 6)
17,355
26,693
Acquisition-related intangible liabilities (Note 6)
(5,176
(7,902
Net assets acquired
Consideration
Cash
138,716
147,985
Liabilities assumed
2,597
Existing interest in previously unconsolidated investment
35,881
Total consideration
Dispositions
During the six months ended June 30, 2019 and the year ended December 31, 2018, the Company disposed of the following consolidated properties (in thousands):
Owner
Date Sold
Sale Price
Gain
on Sale
2019 Dispositions
3104 M Street - Washington, DC (Note 4)
Jan 24, 2019
10,500
210 Bowery - 1 Residential Condo - New York, NY
May 17, 2019
2,700
Total 2019 Dispositions
13,200
2018 Dispositions
Sherman Avenue - New York, NY
Fund II
Apr 17, 2018
Lake Montclair - Dumfries, VA
Aug 27, 2018
22,450
2,923
1861 Union Street - San Francisco, CA
Aug 29, 2018
6,000
2,184
210 Bowery - 4 Residential Condos - New York, NY
Nov 30, 2018, Dec 10, 2018, Dec 17, 2018, Dec 21, 2018
12,050
Total 2018 Dispositions
66,500
5,140
18
The aggregate rental revenue, expenses and pre-tax income reported within continuing operations for the aforementioned consolidated properties that were sold during the three months ended June 30, 2019 and year ended December 31, 2018 were as follows (in thousands):
772
53
1,564
Expenses
(180
(947
(257
(1,691
Net (income) loss attributable to noncontrolling interests
496
154
395
(161
354
1,964
301
Properties Held for Sale
At June 30, 2019, the Company had one property in Fund IV classified as held-for-sale, JFK Plaza, with total assets of $6.3 million. The property had insignificant net income for the six months ended June 30, 2019 and 2018.
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):
December 31, 2018
Six Months Ended 2019
June 30, 2019
Number of
Properties
Carrying
Value
Transfers In
Capitalized
Costs
Transfers Out
7,759
57,342
5,382
70,483
7,462
1,254
8,716
21,242
12,313
1,446
35,001
83,834
9,166
3,999
96,999
78,821
12,081
The number of properties in the table above refers to projects comprising the entire property; however, certain projects represent a portion of a property. During the six months ended June 30, 2019, the Company placed the following projects into development:
a portion of City Center (Core)
a portion of Cortlandt Crossing (Fund III)
its 1238 Wisconsin Avenue property (Core, Note 11)
a portion of 110 University Place (Fund IV, Note 11)
No projects were placed into service during the six months ended, June 30, 2019. Fund II amounts relate to the City Point Phase III project.
During the year ended December 31, 2018, the Company placed one Core development project into service. In addition to the consolidated projects noted above, the Company had one unconsolidated project in development at December 31, 2017, which it placed into service during the year ended December 31, 2018.
Construction in progress pertains to construction activity at the Company’s operating properties which are in service and continue to operate during the construction period.
19
3. Notes Receivable, Net
The Company’s notes receivable, net were generally collateralized either by the underlying properties or the borrower’s ownership interest in the entities that own the properties, and were as follows (dollars in thousands):
Number
Maturity Date
Interest Rate
Core Portfolio
56,475
Oct 2019 - Apr 2020
6.0% - 8.1%
32,881
32,582
Dec 2020
1.75%
5,306
Jul 2020
18.0%
Feb 2021
15.3%
During the six months ended June 30, 2019, the Company:
increased the balance of a Fund II note receivable by the interest accrued of $0.3 million;
redeemed its $15.25 million Fund IV investment plus accrued interest of $10.0 million;
stopped accruing interest on one loan, due to the estimated market value of the collateral. The note had $4.7 million of accrued interest at each of December 31, 2018 and June 30, 2019; and
extended the maturity for Brandywine’s note receivable to October 31, 2019.
During the year ended December 31, 2018, the Company:
exchanged $22.0 million of a Core note receivable plus accrued interest thereon of $0.3 million for an additional undivided interest in the Town Center property (Note 4);
received full payment on $26.0 million of Core notes receivable plus accrued interest of $0.2 million;
funded an additional $2.8 million to its existing $15.0 million Core note receivable and entered into an agreement to extend the maturity to April 1, 2020;
advanced an additional $0.2 million on a Fund III note receivable; and
increased the balance of a Fund II note receivable by the interest accrued of $0.8 million.
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.
Earnings from these notes and mortgages receivable are reported within the Company’s Structured Financing segment (Note 12).
20
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):
Nominal Ownership Interest
Portfolio
Property
Core:
840 N. Michigan (a)
88.43%
64,622
65,013
Renaissance Portfolio
20%
32,675
32,458
Gotham Plaza
49%
29,546
29,550
Town Center (a, b)
75.22%
98,805
99,758
Georgetown Portfolio
50%
4,808
4,653
230,456
231,432
Mervyns I & II:
KLA/Mervyn's, LLC (c)
10.5%
Fund III:
Fund III Other Portfolio
90%
Self Storage Management (d)
95%
206
223
227
Fund IV:
Broughton Street Portfolio (e)
12,579
3,236
Fund IV Other Portfolio
14,433
14,540
650 Bald Hill Road
12,557
12,880
39,569
30,656
Fund V:
Family Center at Riverdale (a)
14,514
Tri-City Plaza
36,636
51,150
Various Funds:
Due (to) from Related Parties
(1,477
(461
Other (f)
556
Investments in and advances to
unconsolidated affiliates
Crossroads (g)
Distributions in excess of income from,
and investments in, unconsolidated affiliates
Represents a tenancy-in-common interest.
During November 2017 and March 2018, as discussed below, the Company increased its ownership in Town Center.
Distributions, discussed below, have exceeded the Company’s non-recourse investment, therefore the carrying value is zero.
(d)
Represents a variable interest entity for which the Company was determined not to be the primary beneficiary.
(e)
The Company is entitled to a 15% return on its cumulative capital contribution which was $5.9 million and $3.0 million at June 30, 2019 and December 31, 2018, respectively. In addition, the Company is entitled to a 9% preferred return on a portion of its equity, which was $9.4 million and $2.8 million at June 30, 2019 and December 31, 2018, respectively.
(f)
Includes a cost-method investment in Albertson’s (Note 8), Storage Post and other investments.
(g)
Distributions have exceeded the Company’s investment; however, the Company recognizes a liability balance as it may be required to return distributions to fund future obligations of the entity.
2019 Acquisition of Unconsolidated Investments
On January 24, 2019, the Renaissance Portfolio, in which the Company owns a 20% noncontrolling interest, acquired a 7,300 square foot property in Fund III’s 3104 M Street property located in Washington, D.C. for $10.7 million (Note 2) less the assumption of the outstanding mortgage of $4.7 million.
Brandywine Portfolio, Market Square and Town Center
The Company owns an interest in an approximately one million square foot retail portfolio (the “Brandywine Portfolio” joint venture) located in Wilmington, Delaware, which includes two properties referred to as “Market Square” and “Town Center.” Prior to the second quarter of 2016, the Company had a controlling interest in the Brandywine Portfolio, and it was therefore consolidated within the Company’s financial statements. During April 2016, the arrangement with the partners of the Brandywine Portfolio was modified to change the legal ownership from a partnership to a tenancy-in-common interest, as well as to provide certain participating rights to the outside partners. As a result of these modifications, the Company de-consolidated the Brandywine Portfolio and accounted for its interest under the equity method of accounting effective May 1, 2016. Furthermore, as the owners of the Brandywine Portfolio had consistent ownership interests before and after the modification and the underlying net assets were unchanged, the Company reflected the change from consolidation to equity method based upon its historical cost. The Brandywine Portfolio and Market Square ventures do not include the property held by Brandywine Holdings, an entity consolidated by the Company.
Additionally, in April 2016, the Company repaid the outstanding balance of $140.0 million of non-recourse debt collateralized by the Brandywine Portfolio and provided a note receivable collateralized by the partners’ tenancy-in-common interest in the Brandywine Portfolio for their proportionate share of the repayment. On May 1, 2017, the Company exchanged $16.0 million of the $153.4 million notes receivable (the “Brandywine Notes Receivable”) (Note 3) plus accrued interest of $0.3 million for one of the partner’s 38.89% tenancy-in-common interests in Market Square. The Company already had a 22.22% interest in Market Square and continued to apply the equity method of accounting for its aggregate 61.11% noncontrolling interest in Market Square and its 22.22% interest in Town Center through November 16, 2017. The incremental investment in Market Square was recorded at $16.3 million and the excess of this amount over the venture’s book value associated with this interest, or $9.8 million, was being amortized over the remaining depreciable lives of the venture’s assets through November 16, 2017. On November 16, 2017, the Company exchanged an additional $16.0 million of Brandywine Notes Receivable plus accrued interest of $0.6 million for the remaining 38.89% interest in Market Square, thereby obtaining a 100% controlling interest in the property. The exchange was deemed to be a business combination and as a result, the property was consolidated and a gain on change of control of $5.6 million was recorded (Note 2).
On November 16, 2017, the Company exchanged $60.7 million of the Brandywine Notes Receivable plus accrued interest of $0.9 million for one of the partner’s 38.89% tenancy-in-common interests in Town Center. The incremental investment in Town Center was recorded at $61.6 million and the excess of this amount over the venture’s book value associated with this interest, or $34.5 million, is being amortized over the remaining depreciable lives of the venture’s assets. The Company previously had a 22.22% interest in Town Center which then became 61.11% following the November 2017 transaction.
On March 28, 2018, the Company exchanged $22.0 million of its Brandywine Notes Receivable plus accrued interest of $0.3 million for one of the partner’s 14.11% tenancy-in-common interests in Town Center. The incremental investment in Town Center was recorded at $ 22.3 million and the excess of this amount over the venture’s book value associated with this interest, or $12.7 million, is being amortized over the remaining depreciable lives of the venture’s assets. The Company continues to apply the equity method of accounting for its aggregate 75.22% noncontrolling interest in Town Center after the March 2018 transaction.
At June 30, 2019, $38.7 million of the Brandywine Note Receivable remains outstanding (Note 3), which is collateralized by the remaining 24.78% undivided interest in Town Center.
22
Fund Investments
2019 Acquisitions of Unconsolidated Investments
On March 19, 2019, Fund V acquired an interest in a venture which invested in a 428,000 square-foot property located in Riverdale, Utah referred to as “Family Center at Riverdale” for $48.5 million. The Company accounts for its interest in the Family Center at Riverdale under the equity method of accounting as it does not control but exercises significant influence over the investment.
On April 30, 2019, Fund V acquired an interest in a venture which invested in a 300,000 square-foot property located in Vernon, Connecticut referred to as “Tri-City Plaza” for $36.7 million. The Company accounts for its interest in Tri-City Plaza under the equity method of accounting as it does not control but exercises significant influence over the investment.
Broughton Street Portfolio
During 2014, Fund IV acquired 50% interests in two joint ventures referred to as “BSP I” and “BSP II” with the same venture partner to acquire and operate a total of 23 properties in Savannah, Georgia referred to as the “Broughton Street Portfolio.” Since that time, as described below, the ventures have sold eight of the properties and terminated the master leases on two of the properties. In October 2018, the venture partner relinquished its interest in BSP I resulting in Fund IV becoming the 100% owner of the BSP I venture, which holds 11 consolidated properties (Note 2). Fund IV accounted for this transaction as an asset purchase at fair value whereby its existing preferred and common interests were deemed consideration for the properties and no gain or loss was recognized. At June 30, 2019, the Broughton Street portfolio had 13 remaining properties, two of which are unconsolidated and are held within the BSP II venture.
Storage Post
On June 29, 2019, Fund III’s Storage Post venture, which is a cost-method investment with no carrying value, distributed $1.6 million of which the Operating Partnership’s share was $0.4 million. On May 15, 2018, the Storage Post venture, distributed $3.2 million of which the Operating Partnership’s share was $0.8 million.
2018 Dispositions of Unconsolidated Investments
On January 18, 2018, Fund IV’s Broughton Street Portfolio venture sold two properties for aggregate proceeds of $8.0 million, resulting in a net loss of $0.4 million at the property level of which the Fund’s share and the Operating Partnership’s proportionate share of the loss was zero, due to Fund IV’s preferred return.
On June 29, 2018, Fund IV’s Broughton Street Portfolio venture terminated its master leases on two of its properties resulting in a net loss of $1.0 million at the property level for which the Operating Partnership’s share was less than $0.1 million.
On August 29, 2018, Fund IV’s Broughton Street Portfolio venture sold a property for proceeds of $2.1 million, resulting in a net loss of $0.3 million at the property level, of which the Operating Partnership’s share was less than $0.1 million.
Fees from Unconsolidated Affiliates
The Company earned property management, construction, development, legal and leasing fees from its investments in unconsolidated partnerships totaling $0.3 million for each of the three months ended June 30, 2019 and 2018 and $0.5 million for each of the six months ended June 30, 2019 and June 30, 2018, which is included in other revenues in the consolidated financial statements.
In addition, the Company paid to certain unaffiliated partners of its joint ventures, $0.3 million and $0.4 million for the three months ended June 30, 2019 and 2018, and $0.7 million and $0.9 million for the six months ended June 30, 2019 and 2018, respectively, for leasing commissions, development, management, construction and overhead fees.
23
Summarized Financial Information of Unconsolidated Affiliates
The following combined and condensed Balance Sheets and Statements of Income, in each period, summarize the financial information of the Company’s investments in unconsolidated affiliates (in thousands):
Combined and Condensed Balance Sheets
Assets:
Rental property, net
599,595
488,000
Investment in unconsolidated affiliates
6,853
Other assets
73,773
91,497
680,221
586,350
Liabilities and partners’ equity:
Mortgage notes payable
459,484
408,967
57,919
54,675
Partners’ equity
162,818
122,708
Total liabilities and partners’ equity
Company's share of accumulated equity
202,320
141,384
Basis differential
102,637
104,084
Deferred fees, net of portion related to the Company's interest
1,965
1,780
Amounts 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
305,445
246,787
Company's share of distributions in excess of income from and
investments in unconsolidated affiliates
Combined and Condensed Statements of Income
22,740
19,603
42,713
39,759
Operating and other expenses
(5,236
(5,531
(10,342
(11,453
(5,639
(5,250
(10,415
(10,125
(5,795
(5,801
(10,587
(11,856
Loss on disposition of properties
(992
(1,410
Net income attributable to unconsolidated affiliates
6,070
2,029
11,369
4,915
Company’s share of equity in net income of unconsolidated affiliates
4,282
5,895
7,277
8,260
Basis differential amortization
(723
(876
(1,447
(1,557
Company’s equity in earnings of unconsolidated affiliates
24
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)
117,074
115,939
Deferred charges, net (a)
29,804
28,619
Prepaid expenses
16,529
18,422
Other receivables
12,046
5,058
Accrued interest receivable
9,308
17,046
Deposits
4,091
4,611
Due from seller
4,000
Deferred tax assets
2,050
2,032
Derivative financial instruments (Note 8)
1,057
7,018
Due from related parties
612
1,802
Corporate assets
1,776
1,953
Income taxes receivable
1,777
2,070
(a) Deferred Charges, Net:
Deferred leasing and other costs
48,729
45,011
Deferred financing costs related to line of credit
8,970
8,960
57,699
53,971
Accumulated amortization
(27,895
(25,352
Deferred charges, net
Accounts Payable and Other Liabilities:
89,388
95,045
Capital lease obligations (Note 11)
Lease liability - finance leases, net (Note 11)
87,784
Lease liability - operating leases, net (Note 11)
57,397
72,892
65,215
Deferred income
27,582
34,052
Tenant security deposits, escrow and other
11,759
10,588
37,354
7,304
Income taxes payable
134
2,738
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 and other liabilities (Note 5) on the consolidated balance sheet and summarized as follows (in thousands):
Gross Carrying
Amortization
Net Carrying
Amortizable Intangible Assets
In-place lease intangible assets
234,479
(122,067
112,412
216,021
(105,972
110,049
Above-market rent
17,991
(13,329
4,662
18,169
(12,279
5,890
252,470
(135,396
234,190
(118,251
Amortizable Intangible Liabilities
Below-market rent
(157,657
68,818
(88,839
(152,188
57,721
(94,467
Above-market ground lease
(671
122
(549
93
(578
(158,328
68,940
(89,388
(152,859
57,814
(95,045
During the six months ended June 30, 2019, the Company acquired in-place lease intangible assets of $17.1 million, above-market rents of $0.2 million, and below-market rents of $5.2 million with weighted-average useful lives of 6.3, 10.3, and 21.4 years, respectively.
During the year ended December 31, 2018, the Company acquired in-place lease intangible assets of $24.2 million, above-market rents of $2.5 million, and below-market rents of $7.9 million with weighted-average useful lives of 5.2, 5.1, and 20.5 years, respectively.
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 income. Amortization of above-market ground leases are recorded as a reduction to rent expense in the consolidated statements of income.
The scheduled amortization of acquired lease intangible assets and assumed liabilities as of June 30, 2019 is as follows (in thousands):
Years Ending December 31,
Net Increase in
Lease Revenues
Increase to
Reduction of
Rent Expense
Net (Expense) Income
2019 (Remainder)
2,805
(15,140
29
(12,306
2020
8,011
(24,067
58
(15,998
2021
7,512
(17,514
(9,944
2022
7,141
(12,551
(5,352
2023
7,134
(9,919
(2,727
Thereafter
51,574
(33,221
288
18,641
84,177
(112,412
549
(27,686
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%-6.00%
Feb 2024 - Apr 2035
177,250
178,271
Core Variable Rate - Swapped (a)
3.41%-5.67%
Jan 2023 - Nov 2028
33,074
82,583
Total Core Mortgages Payable
210,324
260,854
Fund II Fixed Rate
1.00%-4.75%
May 2020 - Aug 2042
205,263
205,262
Fund II Variable Rate
LIBOR+1.39%-LIBOR+3.00%
March 2022
23,598
Fund II Variable Rate - Swapped (a)
4.27%
Nov 2021
19,201
19,325
Total Fund II Mortgages Payable
248,062
224,587
Fund III Variable Rate
LIBOR+2.65%-LIBOR+4.65%
Prime+0.50%-LIBOR+4.65%
Jun 2020 - Jul 2020
91,211
90,096
Fund IV Fixed Rate
3.40%-4.50%
Oct 2025 - Jun 2026
8,190
8,189
Fund IV Variable Rate
LIBOR+1.60%-LIBOR+3.40%
LIBOR+1.60%-LIBOR+3.95%
July 2019 - Apr 2022
176,270
233,065
Fund IV Variable Rate - Swapped (a)
3.67%-4.81%
3.67%-4.23%
Mar 2020 - Dec 2022
93,214
71,841
Total Fund IV Mortgages Payable
277,674
313,095
Fund V Variable Rate
LIBOR+2.15%-LIBOR+2.25%
LIBOR+2.25%
Oct 2020 - Jan 2021
51,506
Fund V Variable Rate - Swapped (a)
4.01%-4.78%
4.61%-4.78%
Feb 2021 - Mar 2024
156,900
86,570
Total Fund V Mortgage Payable
208,406
138,076
Net unamortized debt issuance costs
(10,510
(10,173
Unamortized premium
702
753
Total Mortgages Payable
Unsecured Notes Payable
Core Term Loans
LIBOR+1.25%
Mar 2023
383
Core Variable Rate Unsecured
Term Loans - Swapped (a)
2.49%-5.02%
2.54%-3.59%
350,000
349,617
Total Core Unsecured Notes
Payable
Fund II Unsecured Notes Payable
LIBOR+1.65%
LIBOR+1.40%
Sep 2020
40,000
Fund IV Term Loan/Subscription Facility
LIBOR+1.65%-LIBOR+2.00%
LIBOR+1.65%-LIBOR+2.75%
Dec 2019 - June 2021
87,625
40,825
Fund V Subscription Facility
LIBOR+1.60%
May 2020
143,400
102,800
(818
(368
Total Unsecured Notes Payable
Unsecured Line of Credit
Core Unsecured Line of Credit
Core Unsecured Line of Credit - Swapped (a)
Mar 2022
Total Unsecured Line of Credit
Total Debt - Fixed Rate (b)(c)
1,198,592
1,001,658
Total Debt - Variable Rate (d)
497,110
558,675
Total Debt
1,695,702
1,560,333
(11,328
(10,541
Total Indebtedness
1,685,076
1,550,545
At June 30, 2019, the stated rates ranged from LIBOR + 1.50% to LIBOR +1.90% for Core variable-rate debt; LIBOR + 1.39% for Fund II variable-rate debt; LIBOR + 2.65% to LIBOR + 4.65% for Fund III variable-rate debt; LIBOR + 1.60% to LIBOR +3.40% for Fund IV variable-rate debt; LIBOR + 2.15% to LIBOR + 2.25% for Fund V variable-rate debt; LIBOR + 1.25% for Core variable-rate unsecured term loans; and LIBOR + 1.35% for Core variable-rate unsecured lines of credit.
Includes $691.4 million and $609.9 million, respectively, of variable-rate debt that has been fixed with interest rate swap agreements as of the periods presented.
Fixed-rate debt at June 30, 2019 includes $165.5 million of swaps that are not designated to specific debt instruments.
Includes $157.5 million and $143.8 million, respectively, of variable-rate debt that is subject to interest cap agreements.
27
Credit Facility
On February 20, 2018, the Company entered into a $500.0 million senior unsecured credit facility (the “Credit Facility”), comprised of a $150.0 million senior unsecured revolving credit facility (the “Revolver”) which bears interest at LIBOR + 1.35%, and a $350.0 million senior unsecured term loan (the “Term Loan”) which bears interest at LIBOR + 1.25%. The Credit Facility refinanced the Company’s existing $300.0 million credit facility (comprised of the $150.0 million Core unsecured revolving line of credit and the $150.0 million term loan), $150.0 million in Core unsecured term loans and repaid a $40.4 million mortgage secured by its 664 North Michigan Property. The Revolver and Term Loans mature on March 31, 2022 and March 31, 2023, respectively.
During the six months ended June 30, 2019:
The Company obtained four new Fund mortgages totaling $118.3 million with a weighted-average interest rate of LIBOR + 1.64% collateralized by four properties and maturing in 2022 through 2024. The Company also refinanced a Fund IV loan in the amount of $23.8 million, of which $18.9 million had been drawn at June 30, 2019, and which bears interest at a rate of LIBOR + 1.75% and matures in 2022.
The Company drew down $5.9 million on a Fund III construction loan.
Fund III mortgage, which had a balance of $4.7 million and an interest rate of Prime + 0.5%, was assumed by the purchasing venture in a property sale (Note 2). The Company also repaid a Fund IV loan in full, which had a balance of $38.2 million and an interest rate of LIBOR + 2.35%.
The Company modified one Core loan to provide for a temporary prepayment of $49.0 million which is required to be re-borrowed within six months in order to avoid a pre-payment fee. The Company also modified two Fund IV loans to increase the commitment of BSP Venture I’s mortgage by $9.4 million; and to decrease the 717 North Michigan Avenue mortgage balance by $9.9 million, decrease future availability by $3.9 million and reduce the interest rate to LIBOR + 3.10%.
The Company entered into interest rate swap contracts to effectively fix the variable portion of the interest rates of four of the new obligations with a notional value of $91.5 million at a weighted average interest rate of 2.74%.
The Company made scheduled principal payments of $3.2 million.
At June 30, 2019 and December 31, 2018, the Company’s mortgages were collateralized by 44 and 43 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. A portion of the Company’s variable-rate mortgage debt has been effectively fixed through certain cash flow hedge transactions (Note 8).
The mortgage loan related to Brandywine Holdings in the Company’s Core Portfolio, which was originated in June 2006 and had an original principal amount of $26.3 million, was in default and subject to litigation at June 30, 2019 and December 31, 2018. This loan bears interest at 6.00%, excluding default interest of 5%, and is collateralized by a property, in which the Company holds a 22% controlling interest. In April 2017, the lender on this mortgage initiated a lawsuit against the Company for the full balance of the principal, accrued interest as well as penalties and fees. The Company believes it has valid defenses and intends to vigorously defend itself.
Unsecured notes payable for which total availability was $15.2 million and $62.3 million at June 30, 2019 and December 31, 2018, respectively, are comprised of the following:
As discussed above, the Core unsecured term loans totaling $300.0 million were refinanced in February 2018, into one $350.0 million term loan with an interest rate of LIBOR+ 1.25% and maturing in March 2023. The outstanding balance of the Core term loans was $350.0 million at June 30, 2019 and December 31, 2018. During the six months ended June 30, 2019, the Company entered into an interest rate swap contract to effectively fix the variable portion of the interest rate with a notional value of $156.0 million at a weighted-average interest rate of 2.43%, which may be used to swap the Company’s unhedged, unsecured, LIBOR-based variable-rate debt. The Company previously entered into swap agreements fixing the rates of the remaining Core term loans.
Fund II has a $40.0 million term loan secured by the real estate assets of City Point Phase II and guaranteed by the Company and the Operating Partnership. The outstanding balance of the Fund II term loan was $40.0 million at June 30, 2019 and December 31, 2018. Total availability was $0.0 million at June 30, 2019 and December 31, 2018.
At Fund IV there is a $80.2 million bridge facility and a $27.0 million subscription line, which were modified from their previous limits of $41.8 million and $15.0 million, respectively, during the second quarter of 2019. The outstanding balance of the Fund IV bridge
facility was $79.2 million at June 30, 2019 and $40.8 million at December 31, 2018. Total availability was $1.0 million at each of June 30, 2019 and December 31, 2018. The outstanding balance of the Fund IV subscription line was $8.4 million at June 30, 2019 and $0 at December 31, 2018. Total available credit was $7.6 million at both June 30, 2019 and December 31, 2018, reflecting letters of credit of $11.0 million and $7.4 million, respectively.
Fund V has a $150.0 million subscription line collateralized by Fund V’s unfunded capital commitments and guaranteed by the Operating Partnership. The outstanding balance and total available credit of the Fund V subscription line was $143.4 million and $6.6 million, respectively at June 30, 2019. The outstanding balance and total available credit of the Fund V subscription line was $102.8 million and $47.2 million, respectively at December 31, 2018.
Unsecured Revolving Line of Credit
As discussed above, the Core unsecured revolving line of credit was refinanced in February 2018. The Company had a total of $90.7 million and $137.7 million, respectively, available under its $150.0 million Core unsecured revolving lines of credit reflecting borrowings of $39.0 million and $0 million, respectively, and letters of credit of $20.3 million and $12.3 million at June 30, 2019 and December 31, 2018, respectively. At June 30, 2019 and December 31, 2018, all of the Core unsecured revolving line of credit was swapped to a fixed rate.
Scheduled Debt Principal Payments
The scheduled principal repayments of the Company’s consolidated indebtedness, as of June 30, 2019 are as follows (in thousands):
Year Ending December 31,
165,255
573,416
217,873
134,070
412,305
192,783
Total indebtedness
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. For significant Level 3 items, the Company has also provided the unobservable inputs along with their weighted-average ranges.
Money Market Funds — The Company has money market funds, which are included in Cash and cash equivalents in the consolidated financial statements, are comprised of government securities and/or U.S. Treasury bills. These funds were classified as Level 1 as we used quoted prices from active markets to determine their fair values.
Derivative Assets — The Company has derivative assets, which are included in Other assets, net in the consolidated financial statements, 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 in the consolidated financial statements, 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.
The Company did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during the six months ended June 30, 2019 or 2018.
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
4,504
Derivative financial instruments
Liabilities
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.
Items Measured at Fair Value on a Nonrecurring Basis (Including Impairment Charges)
During 2018, the Company began selling the residential units of its 210 Bowery property in Fund IV. As the projected aggregate selling prices net of selling costs were in line with the carrying amount of the property through the first quarter 2019, no gain or loss has been recognized on the units sold to date and no impairment was previously deemed necessary. During the second quarter 2019, an amendment to the offering memorandum at this property was executed which reduced the selling price of the remaining three units. Accordingly, the Company recognized a $1.4 million impairment charge, inclusive of an amount attributable to a noncontrolling interest of $1.1 million, to adjust the carrying value to the estimated selling price less estimated costs to sell.
The Company did not record any impairment charges during the six months ended June 30, 2018.
30
Derivative Financial Instruments
The Company had the following interest rate swaps and caps for the periods presented (dollars in thousands):
Strike Rate
Fair Value
Derivative
Instrument
Aggregate Notional Amount
Effective Date
Low
High
Balance Sheet
Location
Interest Rate Swaps
424,074
Dec 2012-July 2020
Mar 2022-July 2030
1.71
3.77
Other Liabilities (a)
(31,570
(6,332
163,500
Oct 2014 - July 2016
Nov 2019-June 2021
1.24
1.70
Other Assets
1,025
6,022
587,574
(30,545
(310
Interest Rate Swap
Oct 2014
2.88
Other Liabilities
(150
108
Interest Rate Cap
23,300
Mar 2019
3.50
42,501
(141
58,000
Dec 2016
Jan 2020
3.00
23,100
Mar 2017
Mar 2020
1.82
851
70,114
Mar 2017 - May 2019
Apr 2022 - Dec 2022
1.97
4.00
(878
Interest Rate Caps
108,900
July 2016 - Nov 2016
Aug 2019 - Dec 2019
202,114
(855
859
Jan 2018-Mar 2019
Feb 2021-Mar 2024
2.27
(4,756
(972
(951
Total asset derivatives
Total liability derivatives
(37,354
(7,304
Includes two swaps with an aggregate fair value of ($10.6) million and ($2.9) million at June 30, 2019 and December 31, 2018, respectively, which were acquired during July 2018 and are not effective until July 2020.
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 $3.4 million included in accumulated other comprehensive (loss) income related to derivatives will be reclassified to interest expense within the next twelve months. As of June 30, 2019 and December 31, 2018, 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.
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.
31
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.
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
Estimated
Notes Receivable (a)
93,532
107,370
Mortgage and Other Notes Payable (a)
1,035,677
1,040,198
1,026,708
1,021,075
Investment in non-traded equity securities (b)
23,208
Unsecured notes payable and Unsecured line of credit (c)
660,025
660,734
533,625
533,954
The Company determined the estimated fair value of these financial instruments using a discounted cash flow model with rates that take into account the credit of the borrower or tenant, where applicable, and interest rate risk. The Company also considered the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the borrower, the time until maturity and the current market interest rate environment.
Represents Fund II’s cost-method investment in Albertson’s supermarkets (Note 4).
The Company determined the estimated fair value of the unsecured notes payable and unsecured line of credit using quoted market prices in an open market with limited trading volume where available. In cases where there was no trading volume, the Company determined the estimated fair value using a discounted cash flow model using a rate that reflects the average yield of similar market participants.
The Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable and certain financial instruments included in other assets and other liabilities had fair values that approximated their carrying values at June 30, 2019.
9. Commitments and Contingencies
The Company is involved in various matters of litigation arising in the normal course of business. While the Company is unable to predict with certainty the amounts involved, the Company’s management and counsel are of the opinion that, when such litigation is resolved, the Company’s resulting liability, if any, will not have a significant effect on the Company’s consolidated financial position, results of operations, or liquidity. The Company's policy is to accrue legal expenses as they are incurred.
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 $52.1 million and $55.5 million as of June 30, 2019 and December 31, 2018, respectively.
At June 30, 2019 and December 31, 2018, the Company had letters of credit outstanding of $31.3 million and $19.7 million, respectively. 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.
32
10. Shareholders’ Equity, Noncontrolling Interests and Other Comprehensive Income
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 six months ended June 30, 2019:
The Company withheld 2,468 Restricted Shares to pay the employees’ statutory minimum income taxes due on the value of the portion of their Restricted Shares that vested.
The Company recognized Common Share and Common OP Unit-based compensation totaling $3.7 million in connection with Restricted Shares and Units (Note 13) for the six months ended June 30, 2019 compared to $4.3 million for the six months ended June 30, 2018.
In addition to the share repurchase activity discussed below, the Company completed the following transactions in its common shares during the year ended December 31, 2018:
The Company withheld 3,288 Restricted Shares to pay the employees’ statutory minimum income taxes due on the value of the portion of their Restricted Shares that vested.
The Company recognized Common Share and Common OP Unit-based compensation totaling $8.4 million in connection with Restricted Shares and Units (Note 13).
ATM Program
The Company has an at-the-market (“ATM”) equity issuance program which provides the Company an efficient and low-cost vehicle for raising public equity to fund its capital needs. During the three months ended June 30, 2019, the Company sold 1,696,516 shares under its ATM program for gross proceeds of $48.0 million, or $47.3 million net of issuance costs, at a weighted-average gross price per share of $28.29. During the six months ended June 30, 2019, the Company sold 2,667,351 shares under its ATM program for gross proceeds of $76.2 million, or $75.1 million net of issuance costs, at a weighted-average gross price per share of $28.58. In the second quarter, the Company entered into a new $250.0 million ATM program that replaced its existing program and also included an optional “forward purchase” component.
Share Repurchase Program
During 2018, the Company’s board of trustees 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 repurchased 2,294,235 shares for $55.1 million, inclusive of $0.1 million of fees, during the year ended December 31, 2018. During the six months ended June 30, 2019 the Company made no repurchases under the share repurchase program, under which $144.9 million currently remains available.
Dividends and Distributions
The following table sets forth the dividends declared and/or paid during the six months ended June 30, 2019:
Date Declared
Amount Per Share
Record Date
Payment Date
November 15, 2018
0.28
January 15, 2019
February 28, 2019
March 29, 2019
April 15, 2019
May 9, 2019
June 28, 2019
July 15, 2019
Accumulated Other Comprehensive Income
The following tables set forth the activity in accumulated other comprehensive income for the three and six months ended June 30, 2019 and 2018 (in thousands):
Gains or Losses
on Derivative
Instruments
Other comprehensive loss before reclassifications
Net current period other comprehensive loss
Net current period other comprehensive loss attributable to noncontrolling
interests
4,638
Other comprehensive income before reclassifications
Net current period other comprehensive income
Net current period other comprehensive income attributable to noncontrolling
(297
6,958
(1,551
34
Noncontrolling Interests
The following tables summarize the change in the noncontrolling interests for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
Interests in
Partially-Owned
Affiliates (b)
105,044
535,377
Distributions declared of $0.28 per Common OP Unit
Net income (loss) for the three months ended June 30, 2019
722
(15,039
(14,317
Conversion of 33,289 Common OP Units to Common Shares by limited partners of the Operating Partnership
Other comprehensive loss - unrealized loss on valuation of swap agreements
(1,127
(3,464
(4,591
Reclassification of realized interest expense on swap agreements
(23
(24
(47
Employee Long-term Incentive Plan Unit Awards
Reallocation of noncontrolling interests (c)
103,705
515,205
106,395
533,603
Distributions declared of $0.27 per Common OP Unit
Net income (loss) for the three months ended June 30, 2018
633
(10,568
(9,935
Conversion of 28,512 Common OP Units to Common Shares by limited partners of the Operating Partnership
Other comprehensive income - unrealized gain on valuation of swap agreements
44
198
90
99
105,100
514,774
35
104,223
518,219
Distributions declared of $0.56 per Common OP Unit
Net income (loss) for the six months ended June 30, 2019
1,653
(25,231
(23,578
Conversion of 207,818 Common OP Units to Common Shares by limited partners of the Operating Partnership
(1,822
(5,068
(6,890
(44
(68
102,921
545,519
Distributions declared of $0.54 per Common OP Unit
Net income (loss) for the six months ended June 30, 2018
1,245
(22,759
(21,514
Conversion of 64,638 Common OP Units to Common Shares by limited partners of the Operating Partnership
428
930
1,358
174
193
Noncontrolling interests in the Operating Partnership are comprised of (i) the limited partners’ 3,320,325 and 3,331,440 Common OP Units at June 30, 2019 and June 30, 2018; (ii) 188 Series A Preferred OP Units at June 30, 2019 and June 30, 2018; (iii) 136,593 Series C Preferred OP Units at June 30, 2019 and June 30, 2018; and (iv) 2,715,679 and 2,606,221 LTIP units at June 30, 2019 and June 30, 2018, respectively, as discussed in Share Incentive Plan (Note 13). Distributions declared for Preferred OP Units are reflected in net income (loss) in the table above.
Noncontrolling interests in partially-owned affiliates comprise third-party interests in Funds II, III, IV and V, and Mervyns II, and six other subsidiaries.
Adjustment reflects the difference between the fair value of the consideration received or paid and the book value of the Common Shares, Common OP Units, Preferred OP Units, and LTIP Units involving changes in ownership.
Preferred OP Units
There were no issuances of Preferred OP Units during the six months ended June 30, 2019.
36
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 June 30, 2019, 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 June 30, 2019, 5,000 Series C Preferred OP Units were converted into 17,165 Common OP Units and then into Common Shares.
11. Leases
As Lessor
The Company implemented ASC Topic 842, Leases, effective January 1, 2019 (Note 1). As lessor, there were no accounting adjustments required, however, the presentation of the Company’s lease revenues in 2019 includes amounts previously reported as reimbursed expenses. There was no cumulative effect adjustment to retained earnings required upon adoption of the new standard. In addition, the Company began expensing internal leasing costs, which have historically been capitalized.
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 (see below) that expire at various dates through June 20, 2066, with renewal options. Space in the shopping centers is 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 three and six months ended June 30, 2019, the Company earned $13.2 million and $26.6 million, respectively, in variable lease revenues, primarily for real estate taxes and common area maintenance charges, which are included in lease revenues in the consolidated statements of income.
As Lessee
As lessee, upon implementation of ASC Topic 842, the Company recorded right-of-use assets and corresponding lease liabilities of $11.9 million and $12.8 million, respectively, for nine existing operating leases (for ground, office and equipment leases) and $82.6 million and $76.6 million, respectively, for four finance leases related to ground rentals including an existing capital lease which represented $77.0 million and $71.1 million, respectively, of the total. Three finance leases were recorded post-implementation upon assessment of triggering events whereby the Company’s cumulative leasehold investment made it reasonably certain that the Company would exercise its purchase options.
During the three months ended June 30, 2019, the Company entered into two new master leases, one of which is a finance lease, (1238 Wisconsin Avenue, acquired on May 2, 2019) and one of which was an operating lease (110 University Place, acquired on May 1, 2019 by Fund IV for $10.5 million) and recorded a right-of-use asset – finance lease of $11.2 million and a right of use asset - operating lease of $45.3 million and a corresponding lease liability – finance lease of $10.7 million and a lease liability - operating lease of $45.3 million.
37
Lease Cost
(Not applicable)
Finance lease cost:
Amortization of right-of-use assets
542
1,038
Interest on lease liabilities
934
Subtotal
1,476
2,815
Operating lease cost
1,107
1,643
Variable lease cost
Total lease cost
2,608
4,515
Weighted-average remaining lease term - finance leases (years)
45.4
Weighted-average remaining lease term - operating leases (years)
33.8
Weighted-average discount rate - finance leases
4.5
Weighted-average discount rate - operating leases
5.8
Right-of-use assets are included in Operating real estate (Note 2) in the consolidated balance sheet. Lease liabilities are included in Accounts payable and other liabilities in the consolidated balance sheet (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 income. 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 income.
Lease Disclosures Related to Prior Periods
The Company leased land at six of its shopping centers, which were accounted for as operating leases through December 31, 2018 which generally provided the Company with renewal options. Ground rent expense was $0.8 million (including capitalized ground rent at a property under development of $0.3 million) for the six months ended June 30, 2018. The leases terminate at various dates between 2020 and 2066. These leases provide the Company with options to renew for additional terms aggregating up to 25 to 71 years. The Company also leases space for its corporate office. Office rent expense under this lease was $0.5 million for the six months ended June 30, 2018.
During 2016, the Company entered into a 49-year master lease, which was accounted for as a capital lease through December 31, 2018 and was later reclassified as a finance lease upon implementation of ASC 842 as described above. During the six months ended June 30, 2018, payments for this lease totaled $1.3 million. The property under the capital lease is included in Note 2.
38
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 June 30, 2019, are summarized as follows (in thousands):
Minimum Rental
Payments (a, b)
94,448
3,606
193,637
7,139
176,109
7,073
156,178
7,082
137,655
7,075
598,691
334,761
1,356,718
366,736
A ground lease expiring during 2078 provides the Company with an option to purchase the underlying land during 2031. If the Company does not exercise the option, the rents that will be due are based on future values and as such are not determinable at this time. Accordingly, the above table does not include rents for this lease beyond 2031.
Minimum rental payments include $222.6 million of interest related to finance leases.
During the three and six months ended June 30, 2019 and 2018, no single tenant or property collectively comprised more than 10% of the Company’s consolidated total revenues.
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 June 30, 2019
Funds
Structured
Financing
Unallocated
43,212
27,850
(15,092
(15,212
(30,304
Property operating expenses, other operating and real estate taxes
(12,217
(23,238
General and administrative expenses
(9,034
(1,400
Operating income (loss)
15,903
217
327
1,586
2,229
3,254
(6,839
(12,920
Income tax provision
Net income (loss)
12,645
(10,812
(9,299
13,892
13,070
3,080
39
For the Three Months Ended June 30, 2018
40,539
23,030
(14,927
(14,576
(29,503
(9,350
(19,860
(7,907
15,102
(863
1,726
3,293
(7,001
(9,914
Income tax benefit
9,827
(7,484
200
9,735
10,027
2,251
As of or for the Six Months Ended June 30, 2019
89,899
55,963
(30,770
(29,867
(60,637
(24,211
(20,977
(45,188
(17,357
34,918
5,733
4,499
5,524
306
(13,532
(24,086
27,237
(16,461
(17,576
23,193
27,622
6,732
Real estate at cost
2,154,630
1,784,895
3,939,525
2,267,022
1,848,238
Cash paid for acquisition of real estate
49,402
89,314
Cash paid for development and property improvement costs
26,876
28,996
55,872
40
As of or for the Six Months Ended June 30, 2018
82,166
44,527
(30,425
(27,654
(58,079
(21,405
(17,832
(39,237
(16,377
30,336
(926
3,152
3,551
(13,502
(19,303
19,986
(16,678
(16,764
128
21,386
20,114
4,708
2,047,672
1,500,371
3,548,043
2,236,405
1,535,154
109,209
3,880,768
1,343
44,828
46,171
15,293
26,644
41,937
13. Share Incentive and Other Compensation
Share Incentive Plan
The Second Amended and Restated 2006 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 June 30, 2019 a total of 692,409 shares remained available to be issued under the Share Incentive Plan.
Restricted Shares and LTIP Units
During the six months ended June 30, 2019, the Company issued 330,718 LTIP Units and 8,041 Restricted Share Units to employees of the Company pursuant to the Share Incentive Plan. These awards were measured at their fair value on the grant date, based on a valuation provided by an independent third-party appraiser incorporating the following factors:
A portion of these annual equity awards is granted in performance-based Restricted Share Units or LTIP Units that may be earned based on the Company’s attainment of specified relative total shareholder returns (“Relative TSR”) hurdles.
In the event the Relative TSR percentile falls between the 25th percentile and the 50th percentile, Relative TSR vesting percentage is determined using a straight-line linear interpolation between 50% and 100% and in the event that the Relative TSR percentile falls between the 50th percentile and 75th percentile, the Relative TSR vesting percentage is determined using a straight-line linear interpolation between 100% and 200%.
Two-thirds (2/3) of the performance-based LTIP Units will vest based on the Company’s total shareholder return (“TSR”) for the three-year forward-looking performance period ending December 31, 2021 relative to the constituents of the SNL U.S. REIT Retail Shopping Center Index and one-third (1/3) on the Company’s TSR for the three-year forward-looking performance period as compared to the constituents of the SNL U.S. REIT Retail Index (both on a non-weighted basis).
If the Company’s performance fails to achieve the aforementioned hurdles at the culmination of the three -year performance period, all performance-based shares will be forfeited. Any earned performance-based shares vest 60% at the end of the performance period, with the remaining 40% of shares vesting ratably over the next two years.
41
For valuation of the 2019 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 (19.60%) and risk-free interest rates (2.5%).
The total value of the above Restricted Share Units and LTIP Units as of the grant date was $ 11.1 million. Total long-term incentive compensation expense, including the expense related to the Share Incentive Plan, was $1.8 million, $3.7 million, $2.2 million and $4.3 million for the three and six months ended June 30, 2019 and 2018, respectively and is recorded in General and Administrative on the Consolidated Statements of Income.
In addition, members of the Board of Trustees (the “Board”) have been issued shares and units under the Share Incentive Plan. During 2019, the Company issued 18,009 LTIP Units and 17,318 Restricted Shares to Trustees of the Company in connection with Trustee fees. Vesting with respect to 6,463 of the LTIP Units and 3,996 of the Restricted Shares will be on the first anniversary of the date of issuance and 11,546 of the LTIP Units and 13,322 of the Restricted Shares vest over three years with 33% vesting on each of the next three anniversaries of the issuance date. 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 $0.7 million and $0.6 million for the six months ended June 30, 2019 and 2018.
In 2009, the Company adopted the Long-Term Investment 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, 22.8% of the potential Promote payments from Fund IV to the Operating Partnership and 2.2% 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 and Fund V were determined to have no intrinsic value as of June 30, 2019.
No compensation expense was recognized for the six months ended June 30, 2019 and 2018, respectively, related to the Program in connection with Fund III, Fund IV or Fund V.
A summary of the status of the Company’s unvested Restricted Shares and LTIP Units is presented below:
Unvested Restricted Shares and LTIP Units
Restricted
Weighted
Grant-Date
LTIP Units
Unvested at January 1, 2018
41,327
26.92
910,099
28.28
Granted
22,817
23.65
425,880
26.80
Vested
(25,261
30.79
(431,827
29.72
Forfeited
(428
27.25
(12,266
28.57
Unvested at December 31, 2018
38,455
22.44
891,886
26.87
25,359
28.56
348,726
32.78
(21,424
27.12
(290,753
29.30
(3,609
27.57
Unvested at June 30, 2019
42,390
23.73
946,250
28.30
The weighted-average grant date fair value for Restricted Shares and LTIP Units granted for the six months ended June 30, 2019 and the year ended December 31, 2018 were $32.50 and $26.64, respectively. As of June 30, 2019, there was $20.5 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 1.9 years. The total fair value of Restricted Shares that vested for the six months ended June 30, 2019 and the year ended December 31, 2018, was $0.6 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 six months ended June 30, 2019 and the year ended December 31, 2018, was $8.5 million and $12.8 million, respectively.
42
Other Plans
On a combined basis, the Company incurred a total of $0.2 million related to the following employee benefit plans for each of the six months ended June 30, 2019 and 2018:
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 the $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 1,352 and 2,174 Common Shares were purchased by employees under the Purchase Plan for the six months ended June 30, 2019 and 2018, respectively.
Deferred Share Plan
During 2006, the Company adopted a Trustee Deferral and Distribution Election, 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 $19,000, for the year ending December 31, 2019.
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 (“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.
43
(dollars in thousands)
Numerator:
Less: net income attributable to participating securities
(27
(99
(91
Income from continuing operations net of income attributable to participating securities
9,053
7,618
21,178
14,993
Denominator:
Weighted average shares for basic earnings per share
83,703,886
81,755,702
82,872,977
82,590,256
Effect of dilutive securities:
Employee unvested restricted shares
1,968
Denominator for diluted earnings per share
82,592,224
Basic and diluted earnings per Common Share from continuing operations attributable to Acadia
Anti-Dilutive Shares Excluded from Denominator:
Series A Preferred OP Units
188
Series A Preferred OP Units - Common share equivalent
25,067
Series C Preferred OP Units
136,593
Series C Preferred OP Units - Common share equivalent
474,278
Restricted shares
40,821
38,831
15. Subsequent Events
Fund Equity
Effective in July 2019, Funds III, IV and V called $10.1 million, $12.7 million and $57.8 million, respectively, of capital for which the Company’s total share was $17.0 million.
Disposition
On July 24, 2019, the Company sold its Fund IV JFK Plaza property for $7.8 million (Note 2) and repaid the associated debt obligation of $4.3 million.
On July 15, 2019, the Company modified the terms of one of its Fund IV mortgages and paid down the balance by $4.8 million.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
As of June 30, 2019, we own or have an ownership interest in 180 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 June 30, 2019 is as follows:
Number of Properties
Operating Properties
Development or
Redevelopment
GLA
Occupancy
Core Portfolio:
Chicago Metro
695,898
87.8
New York Metro
330,907
92.2
San Francisco Metro
148,832
100.0
Washington DC Metro
323,189
93.6
Boston Metro
55,276
Suburban
4,258,176
93.8
Total Core Portfolio
117
5,812,278
93.2
Acadia Share of Total Core Portfolio
5,191,538
Fund Portfolio:
469,518
64.7
173,638
78.4
2,664,552
85.5
3,453,924
95.2
Total Fund Portfolio
54
6,761,632
88.9
Acadia Share of Total Fund Portfolio
1,447,390
88.3
Total Core and Funds
171
12,573,910
90.9
Acadia Share of Total Core and Funds
6,638,928
92.4
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. We focus on the following fundamentals to achieve this objective:
Own and operate a Core Portfolio of high-quality retail properties located primarily in high-barrier-to-entry, densely-populated metropolitan areas and create value through accretive development and re-tenanting activities coupled with the acquisition of high-quality assets that have the long-term potential to outperform the asset class as part of our Core asset recycling and acquisition initiative.
Generate additional external growth through an opportunistic yet disciplined acquisition program within our Funds. We target transactions with high inherent opportunity for the creation of additional value through:
value-add investments in street retail properties, located in established and “next generation” submarkets, with re-tenanting or repositioning opportunities,
opportunistic acquisitions of well-located real-estate anchored by distressed retailers, and
other opportunistic acquisitions which may include high-yield acquisitions and purchases of distressed debt.
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.
Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth.
SIGNIFICANT DEVELOPMENTS DURING THE SIX MONTHS ENDED JUNE 30, 2019
Investments
During the six months ended June 30, 2019, within our Core portfolio we invested in five properties as follows:
On January 24, 2019, our unconsolidated Renaissance Portfolio venture acquired Fund III’s 3104 M Street property located in Washington, D.C. for $10.7 million (Note 4) as discussed further below.
On March 15, March 27, and May 29, 2019, we acquired three retail condominiums located in the Soho section of New York City for a total of $49.6 million as part of a collection of six properties referred to as the “Soho Portfolio” with an aggregate purchase price of approximately $96.0 million (Note 2). The acquisitions of the remaining three properties are expected to be finalized through early 2020. No assurance can be given that we will successfully close on the remaining acquisitions under contract, which are subject to customary closing conditions.
On May 2, 2019, we entered into a ground lease (Note 11) on a development property in Washington, D.C. referred to as “1238 Wisconsin Avenue.”
During the six months ended June 30, 2019, within our Fund portfolio we invested in five properties as follows (Note 2):
On March 19, 2019, Fund V acquired an interest in an unconsolidated (Note 4) suburban shopping center in Riverdale, Utah for $48.5 million referred to as “Family Center at Riverdale.”
On April 30, 2019, Fund V acquired an interest in an unconsolidated (Note 4) suburban shopping center in Vernon, Connecticut for $36.7 million referred to as “Tri-City Plaza.”
On May 1, 2019, Fund IV acquired a leasehold interest (Note 11) in a retail and parking condominium in a building in New York, New York for $10.5 million referred to as “110 University Place.”
On May 6, 2019, Fund V acquired a suburban shopping center (Note 2) in Palm Coast, Florida for $36.6 million referred to as “Palm Coast Landing.”
On June 21, 2019, Fund V acquired a suburban shopping center (Note 2) in Lincoln, Rhode Island for $54.3 million referred to as “Lincoln Commons.”
Dispositions of Real Estate
During the six months ended June 30, 2019, we sold one property from our Fund Portfolio for $10.5 million as follows:
On January 24, 2019, a venture in which Fund III holds an 80% interest (Note 2) sold its consolidated 3104 M Street property located in Washington, D.C. to an unconsolidated venture (Note 4) in which the Core Portfolio holds a 20% interest for $10.5 million. Fund III’s share of the gain was $2.0 million and our share was $0.4 million, net of noncontrolling interests. The acquiring venture assumed the property’s mortgage in the amount of $4.7 million.
In addition, during the second quarter of 2019, Fund IV entered into an agreement to sell its JFK Plaza property (Note 2).
Financings
During the six months ended June 30, 2019, we obtained aggregate new financing of $137.2 million including (Note 7):
An aggregate of $70.3 million in financings with two new mortgages for Fund V.
An aggregate of $21.9 million in financings, with one new mortgage of $3.0 million and a refinancing of an $18.9 million mortgage for Fund IV.
A $45.0 million loan for Fund II, of which $23.6 million was drawn at June 30, 2019.
46
Structured Financing
During the six months ended June 30, 2019, the Company redeemed its $15.3 million Fund IV Structured Financing investment (Note 3).
Equity Issuance
During the three months ended June 30, 2019, the Company sold 1,696,516 shares under its ATM program (Note 10) for gross proceeds of $48.0 million, or $47.3 million net of issuance costs, at a weighted-average gross price per share of $28.29. During the six months ended June 30, 2019, the Company sold 2,667,351 shares under its ATM program for gross proceeds of $76.2 million, or $75.1 million net of issuance costs, at a weighted-average gross price per share of $28.58.
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 June 30, 2019 to the Three Months Ended June 30, 2018
The results of operations by reportable segment for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 are summarized in the table below (in millions, totals may not add due to rounding):
Three Months Ended
June 30, 2018
Increase (Decrease)
SF
43.2
27.9
71.1
40.5
23.0
63.6
2.7
4.9
7.5
(15.1
(15.2
(30.3
(14.9
(14.6
(29.5
0.2
0.6
0.8
Property operating expenses, other
operating and real estate taxes
(12.2
(11.0
(23.2
(10.5
(9.4
(19.9
1.7
1.6
3.3
(9.0
(7.9
1.1
(1.4
1.4
15.9
7.1
15.1
(0.9
6.3
0.3
2.2
4.1
(1.1
3.6
5.0
(3.0
(6.8
(12.9
(19.8
(7.0
(9.9
(16.9
(0.2
3.0
2.9
(0.3
12.6
(10.8
(5.2
9.8
(7.5
(2.3
2.8
(3.3
(2.9
Net loss attributable
to noncontrolling interests
0
13.9
14.3
9.7
9.9
(4.2
(4.4
13.1
3.1
9.1
10.0
2.3
7.7
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 increased $3.1 million for the three months ended June 30, 2019 compared to the prior year period as a result of the changes further described below.
Revenues for our Core Portfolio increased $2.7 million for the three months ended June 30, 2019 compared to the prior year period due primarily to $1.7 million from increased real estate tax recovery related to a reduced real estate tax reassessment in 2018 at City Center along with $1.0 million of settlement income from bankrupt tenants in 2019.
Property operating expenses, other operating and real estate taxes for our Core Portfolio increased $1.7 million for the three months ended June 30, 2019 compared to the prior year period primarily due to a reduced real estate tax assessment at City Center in 2018.
Equity in earnings of unconsolidated affiliates for our Core Portfolio increased $1.6 million for the three months ended June 30, 2019 compared to the prior year period primarily due to the write-off of a below-market lease related to a tenant that vacated in 2019.
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 increased $0.8 million for the three months ended June 30, 2019 compared to the prior year period as a result of the changes described below.
47
Revenues for the Funds increased $4.9 million for the three months ended June 30, 2019 compared to the prior year period primarily due to Fund property acquisitions in 2019 and 2018.
Property operating expenses, other operating and real estate taxes for the Funds increased $1.6 million for the three months ended June 30, 2019 compared to the prior year period primarily due to a $1.7 million increase from Fund property acquisitions in 2019 and 2018.
The $1.4 million impairment charge in 2019 relates to residential condos at 210 Bowery (Note 8).
Interest and other income for the Funds increased $1.6 million for the three months ended June 30, 2019 compared to the prior year period primarily due to an incentive fee earned by Fund III’s Storage Post investment.
Equity in earnings of unconsolidated affiliates for our Funds decreased $3.0 million primarily due to a distribution from Fund III’s Storage Post venture in 2018 (Note 4).
Interest expense for the Funds increased $3.0 million for the three months ended June 30, 2019 compared to the prior year period due to a $2.1 million increase related to higher average outstanding borrowings in 2019, a $1.2 million increase related to higher average interest rates during 2019 and $1.0 million from higher loan cost amortization in 2019. These increases were partially offset by $1.3 million of additional interest capitalized in 2019.
Net loss attributable to noncontrolling interests for the Funds increased $4.2 million for the three months ended June 30, 2019 compared to the prior year period based on the noncontrolling interests’ share of the variances discussed above. Income attributable to noncontrolling interests in the Funds includes asset management fees earned by the Company of $4.4 million and $4.6 million for the three months ended June 30, 2019 and 2018, respectively.
The results of operations for our Structured Financing segment are depicted in the table above under the headings labeled “SF.” Interest income for the Structured Financing portfolio decreased $1.1 million for the three months ended June 30, 2019 compared to the prior year period primarily due to a conversion of a portion of two notes receivable into increased ownership in the real estate in 2019 (Note 4).
The Company does not allocate general and administrative expense 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 expense increased $1.1 million for the six months ended June 30, 2019 compared to the prior year period due to internal leasing salaries no longer being capitalized in 2019.
Comparison of Results for the Six Months Ended June 30, 2019 to the Six Months Ended June 30, 2018
The results of operations by reportable segment for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 are summarized in the table below (in millions, totals may not add due to rounding):
Six Months Ended
89.9
56.0
145.9
82.2
44.5
126.7
11.5
19.2
(30.8
(29.9
(60.6
(30.4
(27.7
(58.1
0.4
2.5
(24.2
(21.0
(45.2
(21.4
(17.8
(39.2
3.2
6.0
(17.4
(16.4
1.0
34.9
5.7
23.3
30.3
13.0
4.6
6.6
10.3
6.4
7.0
(2.5
(0.6
Equity in earnings of unconsolidated
affiliates
5.5
6.7
(13.5
(24.1
(37.6
(19.3
(32.8
4.8
(0.4
27.2
(16.5
20.0
(16.7
(6.4
7.2
23.2
23.6
0.1
21.4
21.5
(1.8
(2.1
27.6
21.3
20.1
4.7
6.2
48
Segment net income attributable to Acadia for our Core Portfolio increased $7.5 million for the six months ended June 30, 2019 compared to the prior year period as a result of the changes further described below.
Revenues for our Core Portfolio increased $7.7 million for the six months ended June 30, 2019 compared to the prior year period primarily due to $5.8 million from the write-off of a below market lease related to a tenant that vacated in 2019, a $1.7 million from increased real estate tax recovery related to a reduced tax reassessment in 2018 at City Center, and $1.0 million of settlement income from bankrupt tenants.
Property operating expenses, other operating and real estate taxes for our Core Portfolio increased $2.8 million for the six months ended June 30, 2019 compared to the prior year period primarily due to $1.7 million from a reduced real estate tax assessment at City Center in 2018 and $1.1 million from increased real estate taxes in the portfolio.
Equity in earnings of unconsolidated affiliates for our Core Portfolio increased $2.3 million for the six months ended June 30, 2019 compared to the prior year period due to $1.3 million from lease up at various joint ventures along with $1.0 million from the conversion of a portion of a note receivable into increased ownership in real estate.
Segment net income attributable to Acadia for the Funds increased $2.0 million for the six months ended June 30, 2019 compared to the prior year period as a result of the changes described below.
Revenues for the Funds increased $11.5 million for the six months ended June 30, 2019 compared to the prior year period due to $6.0 million from Fund property acquisitions in 2019 and 2018, $3.6 million from lease up at City Point and 938 W North, $1.5 million from the consolidation of the Broughton Street Portfolio and $1.3 million from Cortlandt Crossing being placed in service.
Depreciation and amortization for the Funds increased $2.2 million for the six months ended June 30, 2019 compared to the prior year period due to Fund property acquisitions in 2019 and 2018.
Property operating expenses, other operating and real estate taxes for the Funds increased $3.2 million for the six months ended June 30, 2019 compared to the prior year period due to Fund property acquisitions in 2019 and 2018.
Gain on disposition of properties for the Funds increased $2.0 million for the six months ended June 30, 2019 compared to the prior year period due to the sale of 3104 M Street in Fund III during 2019 (Note 2, Note 4).
Interest and other income for the Funds increased $1.6 million for the six months ended June 30, 2019 compared to the prior year period primarily due to an incentive fee earned by Fund III’s Storage Post investment.
Equity in earnings of unconsolidated affiliates for the Funds decreased $3.3 million for the six months ended June 30, 2019 compared to the prior year period due to a distribution from Fund III’s Storage Post venture in 2018 (Note 4).
Interest expense for the Funds increased $4.8 million for the six months ended June 30, 2019 compared to the prior year period due to a $3.6 million increase related to higher average outstanding borrowings in 2019, a $1.4 million increase related to higher average interest rates during 2019 and $1.1 million from higher loan cost amortization in 2019. These increases were partially offset by $1.3 million more interest capitalized in 2019.
Net loss attributable to noncontrolling interests for the Funds decreased $1.8 million for the six months ended June 30, 2019 compared to the prior year period based on the noncontrolling interests’ share of the variances discussed above. Income attributable to noncontrolling interests in the Funds includes asset management fees earned by the Company of $8.9 million and $9.0 million for the six months ended June 30, 2019 and 2018, respectively.
49
Interest income for the Structured Financing portfolio decreased $2.5 million for the six months ended June 30, 2019 compared to the prior year period due to the conversion of a portion of two notes receivable into increased ownership in the real estate (Note 4).
Unallocated general and administrative expense increased $1.0 million for the six months ended June 30, 2019 compared to the prior year period due to internal leasing salaries no longer being capitalized in 2019.
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 income
Add back:
Less:
Above/below market rent, straight-line rent and other adjustments
(3,331
(5,577
(12,629
(11,104
Consolidated NOI
44,493
38,132
88,045
76,352
Noncontrolling interest in consolidated NOI
(12,084
(8,804
(25,062
(17,431
Less: Operating Partnership's interest in Fund NOI included above
(3,309
(2,304
(6,813
(4,461
Add: Operating Partnership's share of unconsolidated joint ventures NOI (a)
6,670
6,428
13,265
12,076
NOI - Core Portfolio
35,770
33,452
69,435
66,536
Does not include the Operating Partnership’s share of NOI from unconsolidated joint ventures within the Funds.
50
Same-Property NOI includes Core Portfolio properties that we owned for both the current and prior periods presented, but excludes those properties which 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
(4,713
(3,824
(7,691
(7,559
Same-Property NOI
31,057
29,628
61,744
58,977
Percent change from prior year period
Components of Same-Property NOI:
Same-Property Revenues
42,441
40,403
84,527
80,106
Same-Property Operating Expenses
(11,384
(10,775
(22,783
(21,129
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 three months ended June 30, 2019. 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 June 30, 2019
Six Months Ended June 30, 2019
Core Portfolio New and Renewal Leases
Cash Basis
Straight-
Line Basis
Number of new and renewal leases executed
GLA commencing
115,442
237,913
New base rent
15.56
15.83
10.78
10.97
Expiring base rent
14.72
14.68
10.28
10.14
Percent growth in base rent
7.8
8.2
Average cost per square foot (a)
2.19
2.30
Weighted average lease term (years)
5.9
5.4
The average cost per square foot includes tenant improvement costs, leasing commissions and tenant allowances.
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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 depreciable 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 generally accepted accounting principles (“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. A reconciliation of net income attributable to Acadia to FFO follows (dollars in thousands, except per share amounts):
(dollars in thousands except per share data)
Depreciation of real estate and amortization of leasing costs (net of
noncontrolling interests' share)
21,722
21,586
43,721
42,671
Impairment charge (net of noncontrolling interests' share)
321
Gain on disposition of properties (net of noncontrolling interests’ share)
(384
Income attributable to Common OP Unit holders
587
498
1,382
975
Distributions - Preferred OP Units
135
270
Funds from operations attributable to Common Shareholders and
Common OP Unit holders
31,845
29,884
66,587
59,000
Funds From Operations per Share - Diluted
Basic weighted-average shares outstanding, GAAP earnings
Weighted-average OP Units outstanding
5,123,765
4,966,272
5,168,698
4,966,213
Basic weighted-average shares outstanding, FFO
88,827,651
86,721,974
88,041,675
87,556,469
Assumed conversion of Preferred OP Units to common shares
499,345
Assumed conversion of LTIP units and restricted share units to
common shares
202,714
263,954
215,937
Diluted weighted-average number of Common Shares and Common
OP Units outstanding, FFO
89,529,710
87,485,273
88,743,734
88,271,751
Diluted Funds from operations, per Common Share and Common OP Unit
0.36
0.34
0.75
0.67
52
LIQUIDITY AND CAPITAL RESOURCES
Uses of Liquidity and Cash Requirements
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.
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 six months ended June 30, 2019, we paid dividends and distributions on our Common Shares, Common OP Units and Preferred OP Units totaling $49.5 million.
Investments in Real Estate
During the six months ended June 30, 2019, within our Core portfolio we invested in four new properties and one existing property and within our Fund portfolio we invested in five new properties as follows:
On January 24, 2019, our unconsolidated Renaissance portfolio venture acquired Fund III’s 3104 M Street property located in Washington, D.C. for $10.7 million (Note 4).
On March 19, 2019, Fund V acquired an interest in an unconsolidated suburban shopping center (Note 4) in Riverdale, Utah for $48.5 million.
On May 2, 2019, we entered into a ground lease (Note 11) on a development property in Washington, D.C.
On April 30, 2019, Fund V acquired an interest in an unconsolidated (Note 4) suburban shopping center in Vernon, Connecticut for $36.7 million.
On May 1, 2019, Fund IV acquired a leasehold interest (Note 11) in a retail and parking condominium in a building in New York, New York for $10.5 million.
On May 6, 2019, Fund V acquired a suburban shopping center (Note 2) in Palm Coast, Florida for $36.6 million.
On June 21, 2019, Fund V acquired a suburban shopping center (Note 2) in Lincoln, Rhode Island for $54.3 million.
Capital Commitments
During the six months ended June 30, 2019, we made capital contributions aggregating $8.3 million to our Funds. At June 30, 2019, our share of the remaining capital commitments to our Funds aggregated $110.7 million as follows:
$5.8 million to Fund III. Fund III was launched in May 2007 with total committed capital of $450.0 million, of which our original share was $89.6 million. During 2015, we acquired an additional interest, which had an original capital commitment of $20.9 million.
$24.2 million to Fund IV. Fund IV was launched in May 2012 with total committed capital of $530.0 million, of which our original share was $122.5 million.
$80.7 million to Fund V. Fund V was launched in August 2016 with total committed capital of $520.0 million, of which our initial share is $104.5 million.
During April 2018, a distribution was made to the Fund II investors, including $4.3 million to the Operating Partnership, which amount remains subject to re-contribution to Fund II until April 2021.
Development Activities
During the six months ended June 30, 2019, capitalized costs associated with development activities totaled $12.1 million. At June 30, 2019, we had a total of nine consolidated properties under development and redevelopment and the estimated total cost to complete these projects through 2020 was $146.5 million to $183.8 million and our estimated share was approximately $65.8 million to $83.2 million.
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
Total Debt - Variable Rate
As of June 30, 2019, our consolidated outstanding mortgage and notes payable aggregated $1,695.7 million, excluding unamortized premium of $0.7 million and unamortized loan costs of $11.3 million, and were collateralized by 44 properties and related tenant leases. Interest rates on our outstanding indebtedness ranged from 1.00% to 6.00% with maturities that ranged from July 14, 2019, to August 23, 2042. Taking into consideration $691.4 million of notional principal under variable to fixed-rate swap agreements currently in effect, $1,198.6 million of the portfolio debt, or 70.7%, was fixed at a 3.53% weighted-average interest rate and $497.1 million, or 29.3% was floating at a 4.78% weighted average interest rate as of June 30, 2019. Our variable-rate debt includes $157.5 million of debt subject to interest rate caps.
There is $162.3 million of debt maturing in 2019 at a weighted-average interest rate of 5.60%; there is $3.0 million of scheduled principal amortization due in 2019; and our share of scheduled remaining 2019 principal payments and maturities on our unconsolidated debt was $0.5 million at June 30, 2019. In addition, $573.4 million of our total consolidated debt and $10.2 million of our pro-rata share of unconsolidated debt will come due in 2020. As it relates to the maturing debt in 2019 and 2020, 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 at acceptable terms.
A mortgage loan in the Company’s Core Portfolio for $26.3 million was in default and subject to litigation at June 30, 2019 and December 31, 2018 (Note 7).
During the six months ended June 30, 2019, we made no repurchases under the share repurchase program (Note 10), under which $144.9 million currently remains available.
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 June 30, 2019 totaled $33.7 million. Our remaining sources of liquidity are described further below.
We have an ATM equity issuance program (Note 10) which provides us an efficient and low-cost vehicle for raising public equity to fund our capital needs. Through this program, we have been able to effectively “match-fund” the required equity for our Core Portfolio and Fund acquisitions through the issuance of Common Shares over extended periods employing a price averaging strategy. In addition, from time to time, we have issued and intend to continue to 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 three months ended June 30, 2019, the Company sold 1,696,516 shares under its ATM program for
gross proceeds of $48.0 million, or $47.3 million net of issuance costs, at a weighted-average gross price per share of $28.29. During the six months ended June 30, 2019, the Company sold 2,667,351 shares under its ATM program for gross proceeds of $76.2 million, or $75.1 million net of issuance costs, at a weighted-average gross price per share of $28.58.
Fund Capital
During the six months ended June 30, 2019, Funds III, IV and V called capital contributions of $2.4 million, $4.7 million and $33.2 million, respectively, of which our aggregate share was $8.3 million. At June 30, 2019, unfunded capital commitments from noncontrolling interests within our Funds III, IV and V were $17.9 million, $80.4 million and $321.0 million, respectively.
Asset Sales
As previously discussed, during the six months ended June 30, 2019, within our Fund portfolio, Fund III sold one consolidated property for $10.5 million to an unconsolidated Core portfolio venture and Fund IV sold one condominium unit at a consolidated property (Note 2, Note 4).
Structured Financing Repayments
During the six months ended June 30, 2019, Fund IV received full payment of $15.3 million plus accrued interest of $10.0 million on its Structured Financing investment. Notes receivable aggregating $38.7 million are scheduled to be redeemed or converted during the remainder of 2019.
Financing and Debt
As of June 30, 2019, we had $105.9 million of additional capacity under existing Core and Fund revolving debt facilities. In addition, at that date within our Core and Fund portfolios, we had 75 unleveraged consolidated properties with an aggregate carrying value of approximately $1.5 billion and one unleveraged unconsolidated property for which our share of the carrying value was $101.1 million, although there can be no assurance that we would be able to obtain financing for these properties at favorable terms, if at all.
HISTORICAL CASH FLOW
The following table compares the historical cash flow for the six months ended June 30, 2019 with the cash flow for the six months ended June 30, 2018 (in millions):
Variance
62.2
49.0
13.2
(233.5
(22.5
(211.0
182.6
(81.1
263.7
11.3
(54.6
65.9
Operating Activities
Our operating activities provided $13.2 million more cash during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, primarily due to the collection of accrued interest on a note receivable.
Investing Activities
During the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, our investing activities used $211.0 million more cash, primarily due to (i) $93.7 million more cash used in acquisition of properties, (ii) $97.3 million more cash used in investments in unconsolidated affiliates, (iii) $10.8 million less cash received from repayments of notes receivable, (iv) $13.9 million more cash used in development, construction and property improvement costs and (v) $13.0 million less cash received from disposition of properties. These uses of cash were partially offset by $16.9 million more cash received from return of capital from unconsolidated affiliates.
Financing Activities
Our financing activities provided $263.7 million more cash during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, primarily from (i) $100.9 million more cash provided from net borrowings (ii) $75.1 million more cash received from the sale of
55
Common Shares, (iii) $55.1 million less cash used to repurchase Common Shares, (iv) an increase of $25.6 million of cash provided from contributions from noncontrolling interests, and (v) $10.6 million less cash used in distributions to noncontrolling interests.
CONTRACTUAL OBLIGATIONS
The following table summarizes: (i) principal and interest obligations under mortgage and other notes, (ii) rents due under non-cancelable operating and capital leases, which includes ground leases at seven of our properties and the lease for our corporate office and (iii) construction commitments as of June 30, 2019 (in millions):
Payments Due by Period
Contractual Obligations
Less than
1 Year
1 to 3
Years
3 to 5
More than
5 Years
Principal obligations on debt
1,695.7
658.1
424.9
456.6
156.1
Interest obligations on debt
238.3
79.9
87.4
38.4
32.6
Lease obligations (a)
366.7
14.2
14.1
334.8
Construction commitments (b)
52.1
2,352.8
793.7
526.5
509.1
523.5
A ground lease expiring during 2078 provides the Company with an option to purchase the underlying land during 2031. If we do not exercise the option, the rents that will be due are based on future values and as such are not determinable at this time. Accordingly, the above table does not include rents for this lease beyond 2020.
In conjunction with the development of our Core Portfolio and Fund properties, we have entered into construction commitments with general contractors. We intend to fund these requirements with existing liquidity.
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.
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
Ownership
Percentage
Pro-rata Share of
Mortgage Debt
650 Bald Hill
20.8
3.5
5.08
Apr 2020
Eden Square (a)
22.8
5.6
4.58
Jun 2020
Promenade at Manassas (b)
4.18
Dec 2021
3104 M Street
0.9
6.00
Family Center at Riverdale (c)
18.0
4.13
May 2022
Gotham Plaza (d)
9.6
4.03
Jun 2023
32.0
Aug 2023
Crossroads
32.1
3.94
Oct 2024
840 N. Michigan
88.4
65.0
4.36
Feb 2025
50.0
4.72
Dec 2027
168.6
Our unconsolidated affiliate is a party to two interest rate LIBOR caps. One of the interest rate LIBOR caps effectively fixes the interest rate at 3.00%. The second interest rate LIBOR cap effectively fixes the interest rate at 3.85%.
Our unconsolidated affiliate is a party to an interest rate LIBOR swap, which effectively fixes the all-in interest rate at 4.57%.
Our unconsolidated affiliate is a party to an interest rate LIBOR swap, which effectively fixes the all-in interest rate at 3.68%.
Our unconsolidated affiliate is a party to an interest rate LIBOR swap, which effectively fixes the all-in interest rate at 5.09%.
56
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 2018 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 June 30, 2019
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 June 30, 2019, we had total mortgage and other notes payable of $1,695.7 million, excluding the unamortized premium of $0.7 million and unamortized debt issuance costs of $11.3 million, of which $1,198.6 million, or 70.7% was fixed-rate, inclusive of debt with rates fixed through the use of derivative financial instruments, and $497.1 million, or 29.3%, was variable-rate based upon LIBOR or Prime rates plus certain spreads. As of June 30, 2019, we were party to 37 interest rate swap and four interest rate cap agreements to hedge our exposure to changes in interest rates with respect to $691.4 million and $157.5 million of LIBOR-based variable-rate debt, respectively.
The following table sets forth information as of June 30, 2019 concerning our long-term debt obligations, including principal cash flows by scheduled maturity and weighted average interest rates of maturing amounts (dollars in millions):
Core Consolidated Mortgage and Other Debt
Year
Scheduled
Maturities
Weighted-Average
26.3
3.4
39.0
42.5
3.8
367.8
370.7
3.7
15.4
136.2
151.6
30.0
569.3
599.3
Fund Consolidated Mortgage and Other Debt
136.0
137.4
2.4
567.8
570.2
212.8
214.5
4.4
1.5
90.1
91.6
0.7
40.9
41.6
3.9
13.5
41.1
2.6
35.3
1,061.1
1,096.4
Mortgage Debt in Unconsolidated Partnerships (at our Pro-Rata Share)
0.5
0.0
10.2
6.8
7.9
1.2
40.6
99.8
101.4
4.3
6.5
162.1
In 2019, $165.3 million of our total consolidated debt and $0.5 million of our pro-rata share of unconsolidated outstanding debt will become due. In addition, $573.4 million of our total consolidated debt and $10.2 million of our pro-rata share of unconsolidated debt will become due in 2020. 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 rate, our interest expense would increase by approximately $7.5 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 $1.8 million. Interest expense on our variable-rate debt of $497.1 million, net of variable to fixed-rate swap agreements currently in effect, as of June 30, 2019, would increase $5.0 million if LIBOR increased by 100 basis points. After giving effect to noncontrolling interests, our share of this increase would be $1.0 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.
Based on our outstanding debt balances as of June 30, 2019, the fair value of our total consolidated outstanding debt would decrease by approximately $12.5 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 $14.3 million.
As of June 30, 2019, and December 31, 2018, we had consolidated notes receivable of $94.7 million and $109.6 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 June 30, 2019, the fair value of our total outstanding notes receivable would decrease by approximately $0.7 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 $0.7 million.
Summarized Information as of December 31, 2018
As of December 31, 2018, we had total mortgage and other notes payable of $1,560.3 million, excluding the unamortized premium of $0.8 million and unamortized debt issuance costs of $10.5 million, of which $1,001.7 million, or 64.2% was fixed-rate, inclusive of debt with rates fixed through the use of derivative financial instruments, and $558.7 million, or 35.8%, was variable-rate based upon LIBOR or Prime rates plus certain spreads. As of December 31, 2018, we were party to 29 interest rate swap and three interest rate cap agreements to hedge our exposure to changes in interest rates with respect to $609.9 million and $143.8 million of LIBOR-based variable-rate debt, respectively.
Interest expense on our variable-rate debt of $558.7 million as of December 31, 2018, would have increased $5.6 million if LIBOR increased by 100 basis points. Based on our outstanding debt balances as of December 31, 2018, the fair value of our total outstanding debt would have decreased by approximately $13.5 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 $14.7 million.
Changes in Market Risk Exposures from December 31, 2018 to June 30, 2019
Our interest rate risk exposure from December 31, 2018, to June 30, 2019, has decreased on an absolute basis, as the $558.7 million of variable-rate debt as of December 31, 2018, has decreased to $497.1 million as of June 30, 2019. As a percentage of our overall debt, our interest rate risk exposure has decreased as our variable-rate debt accounted for 35.8% of our consolidated debt as of December 31, 2018 compared to 29.3% as of June 30, 2019.
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 June 30, 2019, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of June 30, 2019, at a reasonable level of assurance.
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.
PART II – OTHER INFORMATION
LEGAL PROCEEDINGS.
We are involved in various matters of litigation arising in the normal course of business. While we are unable to predict with certainty the outcome of any particular matter. Management is of the opinion that, when such litigation is resolved, our resulting exposure to loss contingencies, if any, will not have a significant effect on our consolidated financial position, results of operations, or liquidity.
ITEM 1A.
RISK FACTORS.
The most significant risk factors applicable to us are described in Item 1A. of our 2018 Annual Report on Form 10-K. There have been no material changes to those previously-disclosed risk factors.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
DEFAULTS UPON SENIOR SECURITIES.
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
10.1
First Amendment dated April 2, 2019 to Acadia Realty Limited Partnership Credit Agreement dated February 20, 2018
Incorporated by reference to the copy thereof filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2019.
Second Amended and Restated Limited Partnership Agreement dated July 23, 2019
Filed herewith
31.1
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
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
32.2
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
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Document
101.DEF
XBRL Taxonomy Extension Definitions Document
101.LAB
XBRL Taxonomy Extension Labels Document
101.PRE
XBRL Taxonomy Extension Presentation Document
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, 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
Senior Vice President and
Chief Financial Officer
/s/ Richard Hartmann
Richard Hartmann
Chief Accounting Officer
Dated: July 25, 2019